Mid-size lines spearhead the latest wave of big-ship orders.
By Eric Johnson
Backed into a corner by the changing dynamics of container shipping, a handful of the world's top liner carriers finally made their move in the last 12 months.
That is to say, they entered into the mega-vessel market, ordering ships of massive scale and equally massive cost. Fresh off industry-wide, record-breaking profits in 2010, these mid-sized lines have come out swinging.
Freight rates have fallen and oil prices have spiked, but better not to let those short-term economic elements distract from the real news of 2011: the new influx of larger-than-life vessels now looming over the industry.
Since American Shipper's
last Top 20 report (September 2010, pages 44-52) no fewer than five carriers who previously refrained from ordering vessels of 13,000 TEUs or larger have done so.
The significance of who was doing the ordering should not be lost on anyone. APL, Hapag-Lloyd, Hanjin Shipping, Hyundai Merchant Marine and OOCL, which have in recent times stayed on the conservative side when it comes to ship ordering, have joined the big-ship fray. They join the big three in Europe ' Maersk Line, Mediterranean Shipping Co. and CMA CGM ' Chinese lines COSCO Container Lines and China Shipping, along with Zim and United Arab Shipping Co., as lines that either operate or have on order vessels of such size.
|Highlights of 2010 results
|' A new overhang of overcapacity looms as mid-sized carriers have jumped into the mega-vessel market.
' While the ratio of ordered-to-existing capacity is reasonable on a historic level, the new wave of ordered ships threatens to shift the supply balance into shippers' favor.
' Not all top lines are truly global, but they are working to fill gaps in their network.
' Intra-Asia is growing substantially but likely doesn't have the revenue potential to save lines from loss-making on east/west trades.
' Major consolidation is hard to envision, with lines likely focusing on profitability.
The raft of big-ship orders in recent months raises some questions. Were the orders proactive or reactive? Will they truly help these lines compete with Europe's big three in terms of per-slot operating costs?
'Having these large vessels can help us to compete with our competition on a level playing field,' Stanley Shen, director of investor relations for OOCL parent company OOIL, told American Shipper
OOCL ordered 10 13,000-TEU vessels between March and May, with four to be chartered to NYK Line, its partner in the Grand Alliance.
'When consortia partners order the same size vessels, then it would be easier for us to mix and match our service loops with like ships,' Shen said.
That Hapag-Lloyd, OOCL's partner in the Grand Alliance, has also ordered 10 13,200-TEU vessels in the last year speaks to Shen's point. It also speaks to the fact that mid-sized lines must pool their resources via alliances and vessel sharing agreements to keep up with the big three lines, whose bigger fleets translate into bumper profits when rates and demand rise as they did in 2010.
An OOCL presentation on the justification for ordering such large ships shows how lines are eyeing the period from 2013 onward as the time when the operational cost battle will begin in earnest.
'The ordering of these mega-container vessels reflects the fundamental change in liner business dynamics, being that the sustained increase in fuel prices has seen operating cost outweigh capital cost per TEU,' OOCL said. 'The cost of bunker fuel is a significant factor in decisions about fleet configuration and deployment, as well as driving operational decisions such as vessel speed and cargo selection.'
Indeed, based on industry research, OOCL calculates it would save 40 percent on bunker costs by sailing a 13,000-TEU vessel rather than three 4,500-TEU ships. The difference is 25 percent between a 13,000-TEU ship and one 8,000-TEU and one 4,500-TEU ship.
'We placed our order to add modern vessels to the fleet at very low prices so that we can improve our cost structure, be more environmentally efficient and assure flexibility in dealing with future demand,' APL parent company NOL told American Shipper
about its own orders for mega-vessels, which include 20 ships of greater than 10,000 TEUs, due for delivery through 2014, and 10 14,000-TEU ships. Five of the 14,000-TEU vessels will be chartered to MOL, APL's partner in the New World Alliance.
Hyundai, the other New World Alliance partner, was the latest to join the fray, on Aug. 10 confirming an order for five 13,500-TEU vessels for delivery from 2013 to 2014.
Hyundai's compatriot carrier Hanjin Shipping said in June it would order five of its own 13,000-TEU vessels, with deliveries to start from early 2012. Hanjin's CKYH Alliance partner COSCO operates or has on order more than 20 vessels larger than 10,000 TEUs. Hanjin already operates a series of five 10,000-TEU ships.
Big Ships Ahead.
Here's a view into just how quickly the big-ship phenomenon has taken hold. Twelve months ago, the order book for the top 20 lines stood at 376 ships, representing nearly 3.2 million TEUs, according to maritime consultant Alphaliner. As of mid-August this year, the order book stood at 413 ships, representing 3.7 million TEUs.
That's a nearly 15 percent increase in the order book, even as deliveries have steadily occurred throughout the last year. But the really interesting part comes when you divide the roughly 500,000 TEUs added to the order book by the 34 vessels added. You get an average vessel size ordered in the last 12 months of about 14,400 TEUs. Again, that's the average for 34 ships.
For sure, Maersk Line's much ballyhooed order for 18,000-TEU vessels skews that average toward the high side, but not enough to fully account for such a startlingly high average vessel size on order.
Bear in mind, a 14,400-TEU ship would be amongst the biggest in operation today. In the last year, it's been the average size of newly ordered ships.
In total, the average vessel on order from the Top 20 carriers was 8,542 TEUs in mid-August 2010. Twelve months later, it's 8,973 TEUs.
All these new, large ships threaten to create a new overhang of capacity, after the industry had returned to a balanced ratio in late 2010 ' a ratio some analysts actually said was low enough to create undercapacity in three years' time. You don't hear those suggestions much anymore.
At the start of 2011, there were 162 vessels 10,000 TEUs or larger slated for delivery through 2014. That was before all the orders detailed above, with the exception of Hapag-Lloyd's series of 13,000-TEU ships (ordered in December) and six of APL's ships already ordered in 2007. What's more, there are more than 100 vessels on order in the 7,500-to-10,000-TEU category due for delivery in the same timeframe.
And that doesn't even factor in potential orders. Top 10 lines Evergreen and CSAV have no such mega-ships in their fleets or order books. CMA CGM's order book, as a percentage of its existing fleet, is now quite small. The Japanese lines have so far refrained from ordering 10,000-TEU vessels. There are imaginable scenarios where the order book could grow further in the near future.
The carrier industry does have some ways to release the pressure of a new capacity overhang if demand doesn't grow as expected in the next few years. Ships can be scrapped, deliveries can be delayed.
Trevor Crowe, senior container shipping analyst for Clarksons, said at an industry conference in London in April that he didn't expect all of the roughly 2.8 million TEUs of total capacity due for delivery in 2011 and 2012 to actually be delivered, easing the pressure on carriers. He also said at the time that he thought liner carriers were doing a good job of managing the order book.
As of mid-August, the total order book represented about 26 percent of the current fleet, a quite reasonable level in historic terms. It was at 56 percent in 2008, for comparison. But while the numbers don't suggest too much capacity is on order relative to the size of the current fleet, there's the intangible and emotional effect that such vessel orders have on the relationship between carriers and shippers, as well as carriers and the financial industry.
The numbers also don't fully explain the effect that all these large vessels ' which will necessarily only fit within large east/west trades ' will have on smaller trades. A large cascade of fairly new post-Panamax vessels into niche trades could bring the overcapacity problem into regions with more promising growth rates.
Then there's this: as the global fleet size rises, the proportion of ordered to existing capacity, and what constitutes a balanced ratio, will change. In other words, 3 million TEUs ordered against an existing fleet of 9 million TEUs represents 33 percent. Those same 3 million TEUs ordered against a current fleet of roughly 15 million TEUs would represent only 20 percent.
But either way, 3 million TEUs need to be integrated into global fleets in a similar time frame. Does the need for new capacity fundamentally change, as the fleet grows, even if the proportion goes down to a level considered reasonable in historic terms?
|'The ordering of these mega-container vessels reflects the fundamental change in liner business dynamics, being that the sustained increase in fuel prices has seen operating cost outweigh capital cost per TEU.'
'The combination of perceived future overcapacity, struggling volumes, rates and elevated costs has brought a certain amount of caution, if not downright pessimism, to the fore again,' maritime consultant Dynamar wrote in its Dynaliners Trades Review 2011
. 'A natural extrapolation has been the fear of a return to market share chasing. Were this to return to the market, then there would be an undoubted air of disappointment, considering the speed, flexibility and creativity shown in late 2008 and into 2010 to manage the cargo/capacity/rates equation much better.'
Changes In 2011.
Driven by scores of deliveries this year, the global containership fleet of the top 20 container lines grew more than 10 percent in the last year to 13.2 million TEUs. Nearly half the table saw their fleets grow by more than 10 percent since August 2010, topped by OOCL, whose fleet grew 19 percent.
The top four lines alone (Maersk, MSC, CMA CGM and China Shipping) added nearly 1 million TEUs of capacity to the fleet, more than three-quarters of all the capacity added since last year's Top 20 report. As said before, the top of the table keeps moving away from the pack.
APL was one of only two lines in the top 20 to shed fleet capacity in the last 12 months (CSAV being the other), though APL also has a larger proportion of order book capacity to current fleet capacity of any carrier in the top 20.
Evergreen line is close, both in order book ratio and in fleet size. The Taiwanese line added 25 vessels, accounting for 220,000 TEUs, to its order book the past year, though none are in the 10,000-TEU-or-larger category. COSCO added nearly 18 percent to rise into the top four, a place it could occupy for some time given its own long-term fleet expansion program.
Unlike last year, there hasn't been a significant move up or down the table by any carriers, and there are no new entrants in the top 20. Aside from OOCL, Hamburg S'd had notable capacity growth of 12.4 percent, marked by the arrival of its new large-volume, shallow-draft vessels specially designed for ports in its key South American market.
UASC, coming in at No. 20, took delivery of its first 13,000-TEU ship, with eight more on the way. China Shipping also received its first 14,000-TEU mega-vessel. Zim and Yang Ming are gradually drawing down their order books, while NYK Line and 'K' Line have followed through on strategies to decrease their reliance on owned containerships in the short term.
The two Japanese lines now maintain the smallest order books in the top 20 by capacity, and both order books shrank from already modest levels in August 2010. 'K' Line's owned capacity actually declined by about 1 percent in the last 12 months, even as it took delivery of nine vessels in that time. NYK's owned capacity grew 5 percent on delivery of ships ordered before its strategic shift.
Gaps In Service.
The big-ship phenomenon has been concentrated in the Asia/Europe trade, with virtually all the ships larger than 10,000 TEUs operating on that trade. But another measure by which to analyze the top 20 liner carriers is how complete their networks are.
research affiliate ComPair Data
provides a glimpse into these networks. Last year, ComPair Data
analyst Francis Phillips wrote that only four lines ' Maersk, MSC, CMA CGM and Hapag-Lloyd ' could truly be considered to possess complete global networks. A fifth line, MOL, comes close ('How many truly global liner networks are there? Answer: four,' at www.AmericanShipper.com
'Most major carriers are active in the trades from Asia to Europe and Asia to North America, and in the intra-Asia trades stretching as far as the Middle East and Australia,' Phillips wrote. 'What sets global operators apart is their mature service networks connecting Asia, North America and Europe with each other, and each of these areas with all parts of Africa, South America and Oceania.'
Dynamar pegged the number of 'truly global carriers' at 13. Along with the aforementioned five lines, it considers APL, COSCO, Evergreen, Hanjin, Hyundai, 'K' Line, NYK Line and Zim to have true global networks.
For its purposes, Dynamar considers a line to be global if it participates in the:
' Far East/U.S. West Coast, Far East/northern Europe, and North America/northern Europe trades.
' Two from the Far East/U.S. East Coast, Far East/Med, or North America/Med trades.
' Connects North America, Europe, or the Far East with four of the following regions: Oceania, the Indian Subcontinent, the Middle East, Africa and Latin America.
Phillips' criteria are a bit more stringent.
'The biggest surprise of this brief survey is the extent to which all other Asian carriers in the 'top 20' ' APL, Evergreen, COSCO, China Shipping, Hanjin, NYK, 'K' Line, Yang Ming, OOCL and Hyundai ' are all still only involved in north/south trading from their Asian home base,' he wrote. 'They are all virtually absent from the European and North American trade lanes to Oceania, South America and Africa.'
He saw the major European lines as partnering effectively to eliminate network gaps.
'The big four global European carriers, along with Hamburg S'd, work together as necessary to aggregate sufficient volumes to run the biggest possible ships, or more efficient loops, in the most strategic global trades,' he said. 'They can be seen dovetailing together at key neutral hubs like Cartagena, Tangiers, Salalah and Mauritius.'
The number of lines to be considered truly global by Dynamar, meanwhile, grew by three from the previous year, 'a clear effect of the after-crisis service resumption.'
Lines previously on the outside of the growing trades to Africa and South America have joined these emerging market frays, but some key gaps still exist.
Phillips also cautioned that lines are creative in the way they can satisfy customer demand, often providing service without any apparent direct links.
'Last year OOCL won an award in Australia as top line in the Australia/Europe trade,' he said. 'It has never had any direct service rights in the trade at all, but has worked hard to combine its Grand Alliance Europe/Singapore rights with its Asia/Australia rights to market a seamless transshipment service all the way. If a shipper in Japan asked MOL to move a box between the U.S. and South Africa, I am sure it would find a way to be helpful.'
One line that has increased its network is COSCO, which aside from jumping up to fourth place in the table has added connections to the East and West coasts of South America in the last year. But COSCO's fleet remains less than half the size of third place CMA CGM, emphasizing the distance between the top three and the rest of the top 20.
Hapag-Lloyd, as Phillips noted, has been able to build a global network despite lacking the fleet size of its European brethren, via a significant number of global partnerships that sees the German line take slots on dozens of services.
CMA CGM, meanwhile, presents an interesting turnaround from 2010. In last year's report, the French line had 31.7 percent of its existing fleet (1.1 million TEUs at the time) on order.
The line has taken delivery of more than 150,000 TEUs of capacity since then, reducing its order book to around 140,000 TEUs. That means CMA CGM's order book represents barely 11 percent of its current fleet, by far the lowest proportion of any of the top 20 lines.
The line's reticence to order more ships may stem from its financial wobbles. Despite blockbuster profits of $2.2 billion in 2010, the line struggled mightily in 2009 and questions still linger about its debt levels. In any case, CMA CGM can also be seen to be a beacon of rationality in a market that now looks headed toward overcapacity.
The rise of intra-Asia as a counterweight to dependence on the traditional east/west trades has been a rising theme in the industry. Indeed, judging by competition levels and volume, intra-Asia is a veritable beehive of activity.
lists no less than 57 lines as participating in the China/Southeast Asia trade, 63 between China and Japan-Korea, and 51 between Southeast Asia and Japan-Korea. Every top 20 line participates to some degree in the trade. It's become a trade that the major lines simply can't afford to ignore.
Volume is high as well. OOCL had twice the intra-Asia volume (1.2 million TEUs) in the first half of 2011 as transpacific volume, and its volume in the trade grew 12.2 percent, compared to 2.5 percent transpacific growth.
Maersk's first quarter intra-Asia volumes were up 7 percent, compared to 3 percent on Asia/Europe trade, while Hanjin's first quarter intra-Asia volume spiked 39 percent compared to 23.3 percent on Asia/Europe. APL said 43 percent of its first half volume in 2011 was tied to Asia and Middle East, compared to 40 percent in the first half of 2010, 'due to greater demand for our services in the intra-Asia trade.'
But volume gains on the trade can distract from the limited scope for revenue and profit gains in intra-Asia.
For OOCL, average revenue per TEU in the intra-Asia trade in the first half of 2011 stood at $731. For comparison, it was $1,598 on the transpacific. APL's average intra-Asia revenue was roughly 40 percent of that on the transpacific.
There's no secret in this. It merely emphasizes the nature of intra-Asia trade, with shorter voyages and less lucrative rates. But it's important to remember when the intra-Asia trade is held up as one that will save liner carriers if demand and rates falter on the more established long-haul
A topic that's never far from anyone's mind is industry consolidation. When every major carrier came out of the 2008-2009 crisis unscathed and intact, it seemed hard to imagine any other scenario where a major acquisition could take place.
But this year has brought its own pressures. CSAV, which expanded rapidly in 2010 (and was a focus of last year's Top 20 feature), has been forced to drop several services this year, has shrunk its fleet, and recently cemented a wide-ranging slot-buying agreement with MSC.
The line's extensive links in its fast-growing home market of South America could make it attractive to some of the larger lines. Currently the eighth-largest carrier by fleet size, it has a very light asset load relative to lines of similar size ' it owns only 10 of the 128 ships it operates, and its order book contains less than 100,000 TEUs of capacity.
|'The combination of perceived future overcapacity, struggling volumes, rates and elevated cost has brought a certain amount of caution, if not downright pessimism, to the fore again.'
The line has also seen changes in its ownership structure this year, with its primary shareholder Maritima de Inversiones, selling off an 18 percent stake of the company to the Luksic Group, a diverse Chilean conglomerate.
That all would seem to make CSAV vulnerable to a takeover. The question is, does anyone have the appetite for such an acquisition, particularly with major economic questions hanging over Europe and North America?
'I do not think we will see a straight takeover by one large east/west carrier of another such east/west player unless in a distressed situation,' said Lars Jensen, principal of the maritime consultant SeaIntel. 'It would appear that such takeovers in the past have mainly led to an acquisition of hardware (vessels, containers etc.) but customers appear not to follow along as easily. Hence, such a takeover would likely only happen if a major carrier was at the brink of bankruptcy and hence the acquisition price would reflect an attractive purchase price of the hardware itself.'
Jensen isn't ruling out smaller acquisitions.
'You could very well see some acquisitions of smaller niche carriers, as large carriers which are heavily exposed to east/west trades look for a way to gain rapid entry into some of the emerging north/south markets,' he said. 'This would largely be a continuation of what we have seen the very large carriers do over the past many years (with MSC as an exception). As also seen with past such takeovers, the acquired party might even continue to operate as a separate brand in order to maintain the niche footprint which was the reason for the acquisition in the first place.'
Lines considering acquisitions have a delicate dilemma to ponder, he added. If they acquire a carrier to gain market share in a specific trade, the gains can't be seen to be too large. So the chosen course has overwhelmingly been to acquire to fill network gaps.
'If you acquire a niche carrier to supplement your own coverage, retention might be much higher than if you acquire a carrier similar to your own,' Jensen said. 'After all many medium and large shippers have specific policies not to ship 100 percent of their cargo with only one carrier ' they want to have at least a few different carriers, partly to ensure a better negotiation position, partly to ensure access to a broader spectrum of products and partly as a risk-mitigating exercise.'
Maersk has said it will continue to eye opportunities but that it doesn't have specific acquisition plans. CMA CGM, which operates a cadre of acquired subsidiaries in niche trades, is focused on its existing network. MSC doesn't speak publicly about such matters and has grown organically anyway. Mid-sized lines are figuring out ways to finance vessel purchases and are concerned with being profitable in 2011.
In short, it doesn't look like a market primed for acquisitions, at least in the short term. So next year's top 20 list may not look very different from that of this year's.