Monday, June 1, 2015

CONTAINER LINES

Costly Bet on Big Cargo Ships Comes Up Short

Weak shipping demand and glut of massive vessels add to the overcapacity on the world’s busiest trade lanes


The Morten Maersk triple-E class container ship, operated by A.P. Møeller-Maersk A/S, is one of the new generation of ultra-large vessels that the world’s largest carriers are betting will crowd out smaller competitors. ENLARGE
The Morten Maersk triple-E class container ship, operated by A.P. Møeller-Maersk A/S, is one of the new generation of ultra-large vessels that the world’s largest carriers are betting will crowd out smaller competitors. Photo: Bloomberg News
The world’s biggest container-shipping operators are making an expensive bet by committing billions of dollars in giant vessel orders. So far, that bet is a losing one as freight rates hover around record lows and demand for ocean shipping is weak.

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Container shipping is a $6 trillion industry that moves more than 95% of the world’s manufactured goods. It is controlled by about 15 European and Asian operators that have pooled their operations through alliances, sharing networks and port calls and using ultra-large container ships that redraw the scale of international shipping. With the capability to carry nearly 19,000 containers, these ships are more than a third larger than the largest ships of a decade ago, and the largest eclipse their surroundings at ports.
Stood straight up, the 1,309-foot-long Maersk McKinney Møller would be taller than any building in Europe and stretch 15 feet beyond the Empire State Building.
The already big operators are looking to grow and expect their smaller rivals, that can’t afford such vessels, eventually to abandon the most lucrative ocean routes, leaving freight rates to move upward as cargo owners find fewer choices to ship their products. For now, at least, it is turning into a very costly plan.
ENLARGE
The glut of massive ships is adding to the overcapacity on the world’s busiest trade lanes, particularly the benchmark Asia-to-Europe route, pushing the cost of shipping a container from Shanghai to Rotterdam down to a record low of $342 per 20-foot container last week. The year-to-date average is $742 a container, down 36% from the $1,151 average for the first five months of 2014.
Container-ship operators say they lose money in the long run on the Asia-to-Europe trade lanes if freight rates stay below $1,300 per container. Analysts estimate capacity in the route at around 30% above annual demand, which is expected to grow between 3% and 5% this year.
“Ordering ships that take years to build is always something of a gamble. As things stand, the roulette wheel has landed on red when all the carriers had put their chips on black,” shipping-data provider Drewry said in a recent research note.
Both carriers and shipyards were hoping to jump-start investment after the steep decline in trade in 2009. The recovery has been sluggish, however. The World Trade Organization says global trade averaged only 2.4% annual growth from 2012 to 2014, and the WTO is forecasting only modest 3.3% expansion this year.
“The rush to order the biggest containerships might pay off in the long run, (but) at present, that gamble has backfired and carriers are faced with overcapacity in Asia-Europe, making it very difficult to see how rates will become sustainable,” the Drewry analysts wrote.
A.P. Møller-MaerskAMKBY-1.02% A/S’s Maersk Line of Denmark kicked off the race of the big ships in 2011, ordering 20 behemoths that carry in excess of 18,000 containers, upping the ante from the largest 14,000-container-capacity ships Maersk had been operating. At the time, shipping analysts and competitors doubted the ships, which cost about $185 million each, could be filled to generate profit, but since then all major operators have rushed to put in their own orders.
Mediterranean Shipping Co. this year took ownership of two ships it says are capable of carrying more than 19,000 20-foot containers, and the Switzerland-based carrier will take six more of the vessels by the end of 2015.
London-based Braemar ACM Shipbroking estimates that investment in the ultra-large container ships, or ULCSs, amounted to 500,000 containers in additional container capacity in this year’s first quarter, representing nearly half the 1 million boxes contracted for all of 2014.
The carriers are pooling space on the ships in alliances that add up to enormous market forces on major trade routes. The world’s two biggest alliances are the 2M and Ocean Three.
The 2M consists of Maersk Line and MSC, the world’s top two container lines by capacity. The 2M moves around 35% of all goods between Asia and Europe and controls a market share of 15% and 37% of goods moved on the trans-Pacific and trans-Atlantic routes, respectively.
Ocean Three, consisting France’s CMA CGM, China Shipping Container Lines Co. and Middle East shipping major United Arab Shipping Co., controls a 20% slice of all cargo between Asia and Europe and 13% and 7% across the Pacific and Atlantic oceans, respectively.
“We have just only finalized the implementation of 2M and our expectations to the benefits remain the same. We are confident the 2M will deliver,” said Maersk Line spokesman Michael Storgaard said. “The alliances have added much more capacity than demand warranted. That is the issue.”
CMA CGM, MSC and UASC said they couldn’t immediately respond on whether their investments in big ships is backfiring.
Basil Karatzas, a New York-based maritime consultant, who advises some of the world’s biggest shipping players, says the drive by container-shipping operators to build ever-larger vessels is reminiscent of tanker owners whose ships grew from carrying around a million barrels of oil in the 1950s and 1960s to more than 4 million barrels in the 1980s.
“The supertankers offered the best economics on paper, but it proved a mistake. When demand for oil softened, they could not find charterers to fill them and at the end they became commercially nonviable,” he said. “Tankers scaled back to the modern VLCC size of two million barrels and container ships may have to go through the same process before operators come up with the optimal size that meets demand.”
Maersk’s shipping operations were profitable in the first quarter, but the carrier said that was largely because of lower fuel costs. ENLARGE
Maersk’s shipping operations were profitable in the first quarter, but the carrier said that was largely because of lower fuel costs. Photo: Bloomberg News
The freight rates took their toll on the majority of carriers in the first quarter with only a handful staying in the black and that was mostly due to the lower fuel cost from the dramatic fall in oil prices last year.
“The lower fuel cost was a significant factor in our earnings,” Maersk Group CEO Nils Andersen said in a recent interview.
Meanwhile, the shipping lines have tried to reverse the slide in container-shipping rates with general rate increases, or GRIs, that carriers have said would kick in on June 1. Analysts expect those increases to be short-lived.
“The bitter truth is that with so much extra tonnage in the water the GRIs are meaningless,” said a senior executive of a major Asian carrier who asked not to be named. “A number of operators in Asia-Europe are already offering rates at around $300 per box and the price war will continue. The choice to invest so heavily in ULCSs is increasingly being questioned.”