AMERICAN JOURNAL OF TRANSPORTATION
3/23/2012
Storm Signals: Mega-Boxship Orders and Low Freight Rates Send Out Global WarningsIt looks like rough weather ahead for containership operators as slots are added with tepid demand. At the recent Trans Pacific Maritime Conference (TPM) inLong Beach, delegates wrestled with the volatile mix of big ships and small returns.
BY STAS MARGARONIS, AJOT
The announcement that Maersk is ordering a fleet of 18,000 teu (twenty foot unit) container ships at a time of growing overcapacity and declining ocean freight rates is raising concerns that there will soon be fewer ocean carriers, fewer US ports serving those carriers, and fewer 6,000 teu container ships.
In 2011, Maersk announced that it plans to order twenty ‘Triple E’ class 18,000 teu container ships, but not exercise an option for ten more, because:
“Maersk Line expects demand on the Asia toEuropetrade to increase 5-8% per year during 2011-2015. By introducing the Triple-E vessels from 2013, Maersk Line will be able to meet the increasing demand as well as maintain its market share. The first 10 vessels will be delivered 2013 and 2014; the second 10 vessels are scheduled for delivery in 2014 and 2015.
Triple E Class
Called the ‘Triple-E’ class for the three main purposes behind their creation — economy of scale, energy efficiency and environmentally improved — the ships set a new industry benchmark for size and fuel efficiency.
Four hundred metres long, 59 metres wide and 73 metres high, the Triple-E is the largest vessel of any type on the water today. Its 18,000 TEU (twenty-foot container) capacity is 16% greater (2,500 containers) than today’s largest container vessel, Emma Maersk.
The Triple-E will produce 20% less CO2 per container moved compared to Emma Maersk and 50% less CO2 than the industry average on the Asia-Europe trade lane. In addition, it will consume approximately 35% less fuel per container than the 13,100 TEU vessels being delivered to other container shipping lines in the next few years, also for Asia-Europe service.
Speakers at the Trans Pacific Maritime (TPM) conference held atLong Beach,Californiain March warned about the threat to existing ocean carriers as freight rates remain uneconomically low, and new mega ship orders contribute to an overcapacity problem that one analyst likened to “playing a game of chicken.”
There were several trends emerging from the conference:
• There is a shakeout brewing that could see the current twenty global carriers reduced to eight carriers, according to Lars Jensen, CEO, SeaIntel Maritime Analysis, based inCopenhagen,Denmark. Unsaid is the concern that two carriers will eventually dominate, and those are China Ocean Shipping Company (COSCO) and Maersk Line. Coincidentally, it was the speakers for COSCO and Maersk who dominated the opening day of the TPM conference.
• The oversupply of vessels means smaller vessels will need to be scrapped. Shipping analysts said the delivery of more mega ships – 10,000 teus and over – makes vessels of 6,000 teus and less obsolete from a fuel and cost efficiency standpoint. The conclusion is these ships will need to be scrapped.
• The result of these trends and rising fuel costs is that carriers will reduce the number ofUSports served by the ocean carriers. One shipping executive says this trend has been clear for some time. The San Pedro Bay ports of Los Angeles and Long Beach are expected to benefit from being the only West Coast complex capable of handling bigger vessels coming from Asia and having the rail connection to speed freight to Eastern destinations. The big question is which East Coast port will handle the bigger ships in the event of a major consolidation: New York/New Jersey,NorfolkorSavannah. This will leave a number of ports scrambling for business. Perhaps the business that they may be forced to embrace is marine highway shipping. This is where US built ships move containers from major ports to smaller ports, an initiative that has been promoted by the US Maritime Administration and by carriers such as American Feeder Lines.
• The final unknown is whether the decline in consumption from Europe and North America will continue to depress trade, especially if there is an economic slowdown inChina. Dr. Hu Jianhua, managing director, China Merchants Holdings, based in Hong Kong, insists thatChinais moving toward a huge increase in domestic investment and consumption and that the decline in economic growth is a move toward a more sustainable pace. A Financial Times report says: “China’s trade deficit hit $31.5bn in February as exports slumped, underscoring concerns about slowing global demand and cooling growth in the world’s second-largest economy…The fall in exports, combined with spectacularly strong imports asChinabought commodities such as crude oil and iron ore, brought the trade deficit to its highest level in years.”
Officials at thePortofLong Beachsaid that their port could handle the larger mega ships, and on March 16th, 2012Long Beachhandled the largest container ship ever to call toNorth America, the MSC Fabiola. The vessel, measuring 1,200 feet in length and capable of carrying more than 12,000 container units, docked at Pier T onTerminalIsland.
However aUSstevedoring executive, while agreeing thatLos AngelesandLong Beachhave the crane capacity to handle mega ships, worried whether the capacity existed “outside the gate.” He was referring to the increased congestion that bigger ships would generate ontoSouthern Californiafreeways, such as the already overburdened 710 freeway.
Another possible problem is that the widenedPanama Canalwill not be big enough to accommodate an 18,000-teu vessel. The Panama Canal Authority’s widening program, due to be completed in 2014 was designed for 10,000 teu vessels, although the canal may take up to 13,000 teus, according to one analyst.
Timothy O’Connell, senior director trade and marketing for Maersk Lines, said Maersk’s decision to build a new class of 18,000 teu ships is driven by “customer demand” and the need to keep prices competitive. He said growing larger is not new, it is a constant process and it occurs in aircraft, retailing and other industries. The shipping business is no different.
He said, “It is what we have to do because of the demands by our customers for low cost product through energy efficiency and low carbon emissions.”
Lars Jensen predicts “a long period of consolidation,” resulting in current global players declining from twenty companies today to eight by 2020. Jensen said there is currently a 30% increase in new buildings of “mega ships” per year.
Global trade is slowing down, and so it cannot compensate for the overcapacity of shipping. Carriers have already slowed down their vessels to save on costs, so this effort cannot boost revenues. Finally, Jensen said, feeder ships that transport containers from main ports to smaller ports will need to grow in size as well. He suggested the vessels of 900 teus and less are probably no longer viable.
Janet Lewis, regional head of shipping research with Macquarie Capital based inHong Kong, told TPM participants she sees no immediate threat of bankruptcy among ocean carriers but worries that carriers are “burning through cash,” and the situation cannot go on indefinitely.
At the same time as Maersk is moving forward with construction of its new mega ships, the FINANCIAL TIMES reported on March 5th, 2012 that Maersk is struggling to regain profitability and says ocean carriers need to cut back on fleet growth:
“The container shipping industry is consistently destroying shareholder value and needs to rein back fleet growth to improve returns, the new chief executive of Maersk Line, operator of the world’s biggest container ship fleet, said in a forthright attack on the strategically vital industry’s practices.
Søren Skou, who took over as CEO in mid-January, was speaking in London a week after AP Møller-Maersk, Maersk Line’s parent, announced a $537m net loss for 2011 for its container activities division, against a $2.64bn net profit for 2010.
Nils Andersen, AP Møller-Maersk’s chief executive, has accepted that Maersk helped to accelerate last year’s industry-wide fall in rates by introducing a daily service from the main Asian ports to the main northern European gateways. The daily Maersk service considerably increased ship capacity on the vital route at a time of already weakening demand.
Mr. Skou said, however, that Maersk Line had captured enough market share to fill the extra capacity and now needed to improve profitability.
“We were particularly pleased to see the up tick we had in volume after we launched,” Mr. Skou told the Financial Times. “On the volume, we’re where we need to be in order to be competitive. Now it’s about trying to get better paid.”
Mr. Skou said that, by facilitating global trade, container-shipping lines performed a vital service to the world economy. But lines had earned, on average, operating profit margins of only 2% over the past seven years and earned “acceptable” margins – of 12% – only in 2010.”