New 18,000 TEU Ships Club, will it change Transhipment Hubs?
What is today a small club of carriers operating or having ordered 18,000 TEU ships or larger is likely to grow, but not necessarily overnight, as carriers intensify their focus on reducing costs without regard to greater market or infrastructure implications. Maersk, China Shipping, United Arab Shipping and MSC today form the club of carriers with ships of 18,000 TEUs or larger either in operation or on order. CMA CGM is all but in this category, with three 17,700 TEU ships on order and three 17,859 TEU vessels on lease and on order, according to Drewry. But as carriers and alliances strive to remain cost competitive; more of this size of mega ships will likely be on the way, though it may be a far off before any carrier crosses the 20,000 TEU threshold. “18,000 TEUs wil be the obvious next step for those with 14,000 TEU ships,” said Tan Hua Joo, Executive consultant with Alphaliner. “Just a matter of time”, the ships in this category that are deployed or on order would lead to four weekly Asia-Europe loops. The introduction of such ships into the Asia-Europe trade would likely be tied to alliances. “We believe it is unlikely any individual carrier would order 10 or 11 ships for their own account, but one or more carriers may conceivably share the burden,” said Neil Dekker, Head of Container Research at Drewry Maritime Research. Carriers operating ships in the 14,000 TEU range include MSC, China Shipping, MOL and APL. The G6 and CKYKE alliances operate smaller ships on average compared with the P3 and will be expected to seek to narrow the gap through new mega ship ordering, according to SeaIntel. As of February, 82% of all container ship tonnage on order is for ships of 7,500 TEUs and above and 52% is for ships of 10,000 TEUs and above, according to Alphaliner data, clearly pointing to a stepped-up effort by carriers to acquire mega ship tonnage to remain cost competitive. Only seven ships in the 18,000 TEUs and over category are so far in operation with all Maersk 18,200 Triple-E ships, out of the 20 being built. The rest are under construction or just announced, including five 19,000 TEU ships for China Shipping, six 18,000 TEU ships for MSC and six 18,800 TEU ships for UASC, according to Alphaliner. How quickly others will step up is unclear. Dekker said Yang Ming, “K” Line and NYK Line have seemingly decided on 14,000 TEU ships as a maximum size for the moment. CMA CGM recently told Containerisation International that given its’ existing orders and need to await reaction to the P3 Network it has no further plans to place ship orders within the next 03 years. Can these new developments alter the selection of global transhipment hubs?
Shipping Lines need to Co-operate or go Bankrupt
As the rates have shrunk to a dangerously low level, many Intra-Asia carriers are beset with survival problems now. “We will see more bankruptcies if rates don’t go up,” warned Chief Executive Tim Wickmann of Singapore based MCC Transport, a subsidiary of AP Moller-Maersk, in a media interview in April. He suggested that Intra-Asia carriers should pursue more vessel sharing agreements, slot swaps or joint sailings and quit competing for more containers. “The supply-demand balance will be more in our favour, and we can increase rates and actually start to earn money,” Mr Wickmann was quoted by Lloyd’s List. He believed that “if shipping lines continue to co-operate and help each other to expand portfolios, it’s not necessary to add capacity.” In spite of 5% to 6% growth, freight rates in the region have deteriorated over the past 02 years due to worsening over capacity, reported Lloyd’s List, with 60 companies plying the trade creating fierce competition. “Rates just keep going down. It has really been quite
bad in the key Intra-Asia corridors,” he said. “One of the problems is that there is no barrier for entry in this trade, quite often the situation is not because customers ask for lower rates, it’s because shipping lines are giving them lower rates to get more business.” Another major issue is lines’ competition behaviour, which the CEO called “charity” as some lines are moving containers almost for free.
Does Mega Ships mean Congestion, Late Arrivals and Quay Wastage?
Mega ships bring inefficiencies to quay and stack yard operations as well as declines in schedule reliability, says PSA International CEO Tan Chong Meng. Mr Tan told delegates of 18th TOC container Supply chain Asia Conference and Exhibition at the Marina Bay Sands Hotel, Singapore, that bigger ships are a mixed blessing. Mr Tan said 80% of cargo is concentrated in alliances, while 20% of vessels are mega ships, characterising the development as “three steps forward and two steps back”. Containerships, he said are now 400 metres long and result in far more “berth wastage” as handling two of them renders 90 metres of a berth unusable while three smaller ships could fit in nicely before. Of the 52 berths PSA operates in Singapore, said Mr Tan, 20 can handle mega ships which is less than 40% of total quay capacity. By 2018 35 out of 67 berths will be able to handle mega ships he said. “But, in terms of kilometres of quay, these 35 berths will take up two-thirds of the total, so it’s a much higher investment, which means our capacity investment is much higher over the next two decades,” he said. Another problem was the effect of the cargo flows from the mega ships when combined with cost reduction such as slow-steaming and voided sailings, reported the British International Freight Association (BIFA) newsletter. “Schedule reliability is getting worse and reached a new low of 64% of on-time arrivals in the 04 quarter last year and it does not seem to be getting better”. This is compounded by the huge numbers of containers being loaded and unloaded in a single call, which led to far more complexity in yard operations and had a direct effect on landside flows in and out of box terminals, he said. “We have to find new ways of optimising the supply chain, the upsizing of vessels is only the beginning. The other parts of the supply chain have yet to catch up,” said Mr Tan.
Maersk Profits, is it due to Own Terminals?
Maersk Line is solidly outperforming all other carriers that publicly reported financials last year. Is Maersk showing that size scale and management can allow it to chart a different course from its’ many smaller competitors? Its’ results stood out last year, that much is obvious. Maersk generated EBIT of USD 1.57 billion in 2013 following USD 525 million in 2012. It posted an operating margin of 5.8% last year, the highest of 19 carriers reviewed by Alphaliner. With the two largest carriers surveyed, Maersk and CMA CGM, firmly in the black, the remaining 17 lines combined to produce more than USD 2 billion in operating losses. With their results last year, Maersk and CMA CGM “extended the gap between themselves and the rest of the industry,” Alphaliner said. Analysts are certainly far from declaring Maersk any sort of winner. Jefferies’ Hong Kong based analyst Johnson Leung says Maersk’s profits would have been 70% or roughly USD 1 billion lower last year if it
paid APM Terminals, which handled 18 million Maersk Line TEU, the same amount that its’ competitors paid, USD 149 per TEU versus the USD 90 paid by Maersk, Leung said. As a result of the discounts it charges Maersk, “APMT is currently generating less than half of the EBITDA margin of its’ Asian counterparts,” he wrote in March.
US containerized Exports – Steepest Decline
US containerized exports tumbled 9.0% year-over-year in February to 923,493 TEUs, the lowest monthly volume in 32 months, according to preliminary figures from PIERS, the Data Division of JOC Group. This 9.0% drop was also the steepest year-over-year decline since, August 2009. February was the 3rd straight month of year-over-year declines. February containerized exports also slipped 4.7% from January. “China’s manufacturing sector is struggling, with activity at private firms contracting in March for the 3rd straight month as new business growth declines,” said JOC Economist Mario Morena. “China’s demand for industrial resins and scrap metals declined sharply in February as a result. Expect more fiscal stimulus shortly with the purpose of putting a floor under the government’s target economic growth rate of 7.5%.”(JOC).
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).