The Worldwide Economic Wobble – Does it affect Shipping?
There are concerns about the pace of growth in the Chinese economy, consequent to the country’s exports contracting by 18% in February 2014 from the previous year leading to a trade deficit of USD 23 billion for the month.
Though China’s industrial output rose by 8.6% in January and February and retail sales a key measure of consumer spending increased by 11.8% from the year before, these figures however, are less than what analyst had expected adding to the fears of a slowdown. The possible threat of a slowdown in China led to falls in Australian stocks, particularly mining and resource stocks which relies heavily on China’s commodities demand.
Meanwhile, the expansion of Japan’s economy was less than estimated at 0.7% in the 4th quarter and the current account deficit widened to a record in January, highlighting risks in “Abenomics” dubbed after its’ Prime Minister. As reported in The Economist the world economy will have a bumpy 2014. The article says that since, the United States of America is driving the global economy, sustained weakness there would mean prospects for the world’s economy were grim. The report further says that the global recovery will be far from healthy: too reliant on America, still at risk from China and too dependent on the prop of easy monitory policy. These developments do not augur well for container shipping grappling with surplus container capacity, which is bound to continue at least till 2016.
Regulatory Challenges for Shipping Alliances
More ocean carriers are determined to jump onto the mega alliance bandwagon and appear to assume that regulatory authorities will not object. Evergreen has just confirmed a plan to join the CKYH alliance between Asia and Europe at the beginning of March and the G6 alliance which has recently announced the port rotations of its’ new Asia/WCNA and North Europe/USEC-USG schedules, says these could become operational in 2nd quarter 2014.
It means that three mega alliances could be up and running by the middle of the year, namely P3, involving Maersk Line, MSC and CMA CGM; G6, involving Hapag-Lloyd, NYK, OOCL, HMM, APL and MOL; and CKYHE, involving Coscon, K Line, Yang Ming, Hanjin and Evergreen.
But are these not subject to a regulatory approval test, particularly if their market share exceeds 30%?
The European Commission has given very little away on the subject so far but it is not obliged and yet to pass judgement; it could choose to just await proof of abuse of a dominant position from shippers before moving into action.
In this respect regulators have a much bigger potential problem to consider in the Transatlantic, trade lane between Northern Europe and US East Coast/Gulf, where G6 members have just confirmed the port rotations of their five weekly services. It is not yet possible to say how their market shares will change as no vessel capacities have yet been provided. The only fact indicated so far is that there will be little change to the capacity currently offered.
On this basis the G6’s overall share of effective westbound vessel capacity should remain at around 37%, well above the 30% maximum recommended in the EU’s consortium guidelines. P3 would also be in this position. The fact that the G6 has deemed it appropriate to circulate more details of its’ schedules now suggests that it anticipates no major objections will be received from either the European Commission or Federal Maritime Commission.
Once again, the suggestion from this is that market shares over 30% should not be considered excessive by Regulatory Authorities, providing no abuse of a dominant position can be proved. According to industry sources, the EC holds the view that a potentially dominant position like this can be accepted providing it entails clear advantages to shippers and no abuse of a dominant position takes place.
Net Profit Plunges by 90%
Orient Overseas Container Line has reported 2013 net profit down 90% to USD 17.6 million from a year ago, as large tonnage cascaded from Asia-Europe exerted further pressure on intra-Asia and transpacific trades, the carrier’s two main revenue sources.
Orient Overseas (International) Limited, the Hong Kong listed parent holding company that also dabbles in real estates in the US and China, posted USD 47 million net profit, down 84% from a year ago.
Total lifting’s increased 1.5% to 5.3 million TEU. On a per TEU basis, revenue declined 6.3% and operating cost dropped 2%, resulting in 1.2% in earnings before interest and tax margin.
Despite an improved outlook for Asia-Europe trade this year, OOCL signalled cascading from the world’s biggest trade lane would continue to pose negative impact on other trades, especially intra-Asia, where players are already treading on a thin margin.
“Intra-Asia is a very large trade, 12 million TEU (in volumes) per year and rather complex. Cascading into intra-Asia unfortunately will continue. Certainly it is challenging if you look at that intra-Asia capacity has doubled since 2008”, acting Chief Financial Officer Alan Tung Lieh Sing said in a media briefing.
Asia-Europe Volumes Rise by 8%
The Asia-Europe trade lane has started the year strongly with volumes increasing by more than 8% on-year in January, according to Container Trades Statistics, which reports that carriers handled 1.4 million TEU in January, up from 1.3 million TEU a year earlier.
The on-year increase is the largest seen on the trade lane since August, when volumes leapt by more than 10%. It is also the largest amount of containers transported on the trade lane in a single month during the last three years, when CTS began providing data to Containerisation International.
January tends to be the strongest month of the year as shippers rush to move cargo ahead of factory closures for the Chinese New Year.
Broken down into the three subsectors that makes up the overall Asia-Europe trade lane, services on vessels sailing from Asia to North Europe, the largest of the three trades, recorded an 8.1% on-year increase in volumes in January to 895,092 TEU.
The Asia to the Western Mediterranean and North Africa trade lane improved, most volumes leaping 11% on-year to 258,486 TEU.
However, volumes still lag behind 2011 levels, before the Arab Spring related turmoil affected the region.
Capacity deal between Maersk and APM Terminals
APM Terminals and Maersk Line entered into a formal agreement for last year to provide the box line with dedicated capacity at certain key terminals to ensure services remain as efficient as possible.
The deal between AP Moller-Maersk’s container terminal business and shipping line was confirmed in the company’s 2013 annual report.
Maersk Line Chief Executive Soren Skou told Containerisation International that last year was the first time the agreement had been formalised.
He said: “We have a partnership agreement with APMT in a number of container terminals that are critical hubs for Maersk Line.
“We have a relationship with APMT that is completely integrated and where the objective is to make sure the terminals operate as efficiently as possible from a Maersk Line network perspective. It is only for terminals that are critical in the Maersk Line network”.
Mr. Skou said that at certain points in the year the hubs it uses come under pressure, which has knock-on effects for its’ hub-and-spoke operations.
“So making sure that the hubs are efficiently utilised and at the same time don’t break down is the key objective, rather than driving returns for APMT or Maersk Line”, he said.
The agreement provides Maersk Line with dedicated capacity in “strategically important terminals”, AP Moller Maersk said in its’ annual report.
P3 Efficiency Place Pressure on Rivals
The P3 Network will lead to Mediterranean Shipping Co and CMA CGM enjoying the efficiencies demonstrated by Maersk Line in its’ annual results and pile further pressure on rivals, according to SeaIntel Maritime Analysis.
Speaking to sister publication Containerisation International following the publication of Maersk Line’s 2013 results, SeaIntel Chief Executive Lars Jensen pointed out that the Danish carrier had enjoyed year-on-year bunker savings of USD 1.4 billion.
While USD 600 million of this was a result of lower bunker prices, which is out of control of the carriers, the remainder was down to the increased effectiveness of its’ network.
He said that with Mr. Lars Mikael Jensen from Maersk Line set to run the P3’s network centre, it would now be able to have access to more ultra large vessels and improve the efficiency of its’ network further. MSC and CMA CGM, the other members of the P3 Network would also benefit.
Jensen said: “I would expect both that Maersk Line can improve this performance even more as it gains access to more ultra large vessels but also that not only Maersk Line but all of P3 will reach a cost base that is extremely challenging for the other carriers and alliances to match in the short term”.
Jensen said another interesting conclusion from the results was the continued redelivery of charter vessels to owners in favour of own vessels.
“This is not a new development”, “but it does highlight the increasing difficulties non-operating owners and German KG companies in particular, are facing”. (Source Lloyd’s Loading List).
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).