Biggest Container Ships … chasing big dreams of economies of scale!

In December 2015, the quarter-mile-long Benjamin Franklin created history and became the largest cargo ship ever to berth at an American port. Five more mega-vessels were supposed to follow. Owing to lesser than expected demand, the Benjamin Franklin made its last port visit to USA a few weeks ago.

This should not have been a surprise as the shipping industry is struggling through its worst recession in half a century, and that icon of globalization - the mega-container ship is a major part of the problem. With global growth and trade still sluggish, and the benefits of sailing and docking big ships are diminishing with each new generation. Ship owners are now realizing that bigger is not better.

In 1975, the size of a container ship was 1530 TEUs and by 2012 – the size of a container ship was 16000 TEUs. The logic behind building such giants was the unstoppable globalization and to exploit economies of scale.

Increase in Container ship capacity!

But by 2008, that logic had begun to falter. Even as global trade volumes collapsed after the financial crisis, with disastrous effects on the cargo business, ship owners were still commissioning more and bigger ships which had disastrous consequences: This year, 18 percent of the world's container ships are anchored and idle (adding up to more capacity than was idled in 2009). In just the last quarter, global shipping capacity increased by 7 percent while demand grew by only 1 percent. As a result, the price of shipping a container fell by nearly half.

And the solution is …

A study last year by the OECD found that economies of scale from today's mega-ships are four to six times smaller than those in previous periods of upsizing. 

The OECD report looked into the impacts of ships with a capacity in excess of 18,000 twenty-foot equivalent units (TEUs) and found cost savings from bigger container ships are decreasing. Increasing ship size from 8'500 to 15'000 TEU saved approximately $80 per container, while increasing from 15'000 to 19'000 saves $40. Of these savings, over half is attributable to the optimized engines, engine technology improvements rather than capacity of the latest mega-ships.

In other words: Building smaller ships with better engines would offer more savings than going bigger.

Risks, disadvantages & threats of big ships

A Mega ship is a Floating risk: Today's largest container vessels can cost $200 million and carry many thousands of containers creating $1 billion in concentrated, floating risk that can only berth at a handful of the world's biggest ports. Such mega ships make prime targets for cyberattacks and terrorism, suffer from a dearth of qualified personnel to operate them, and are subject to huge insurance premiums.

The biggest ships also bring the biggest landside costs: The biggest costs associated with these floating giants are on land especially at the ports that are scrambling to accommodate them. New cranes, taller bridges, environmentally perilous dredging, and even wholesale reconfiguration of container yards are just some of the costly disruptions that might be needed to receive a Benjamin Franklin and service it efficiently. Even when taxpayers foot the bill for such upgrades, the costs can be passed on to vessel operators in the form of higher port fees.

Traffic jams at sea and at port: In recent years, mega-vessels have caused traffic jams in the water and on-shore as overwhelmed ports struggle to offload thousands of containers. The expense in worker overtime and cargo delays can be significant. Making matters worse, the bigger ships make fewer port visits, leaving operators wondering if they should invest in costly renovations for what would amount to infrequent stopovers.

Economies and Diseconomies of Scale in Container Shipping

Like many forms of transportation, container shipping benefits from economies of scale in maritime shipping, transshipment and inland transportation. The rationale of maritime container shipping companies to have larger ships becomes obvious when the benefits, in terms of lower costs per TEU, increase with the capacity of ships. There is thus a powerful trend to increase the size of ships, but this may lead to diseconomies to other components of container shipping.

For port terminals the growth in ship capacity comes with increasing problems to cope with large amounts of containers to be transshipped over short periods of time as shipping companies want to reduce their port time as much as possible (improved ship asset utilization and keeping up with schedule integrity). Larger cranes and larger quantities of land for container operations, namely temporary warehousing on container yards, may become prohibitive, triggering diseconomies of scale to be assumed by port authorities and terminal operators.

For inland transportation, congestion growing capacity, such as more trucks converging towards terminal gates, leads to diseconomies. Because of technical innovations and functional changes in inland transportation, such as using rail instead of trucking to move containers from or to terminals, it is unclear what is the effective capacity beyond which diseconomies of scale are achieved. The fundamental point is that diseconomies are a challenge that impacts several segments of the transport chain.

The Future of Mega ships

The upfront costs for mega ships look daunting, however the long-term trends in global trade are what should really worry big ship owners. 

The Organization for Economic Cooperation and Development estimates that world trade will continue expanding in the next few decades, but at a much slower pace than it did during the golden age of globalization. A big reason why is that emerging economies, such as China, are hoping to rely more on domestic consumption and less on export-led growth.

However, global capacity will increase by 4.5 percent this year, and by another 5.6 percent in 2017 -- almost entirely due to new mega-vessels. 

Mergers and consolidation, which certain shipping companies are pursuing, might offer a chance to keep those big ships steaming. But sooner or later, even the biggest operators will have to accept that the era of super-sized shipping is almost coming to an end.

Video on MSC ZOE - Largest container ship in the world

60th Anniversary for Container Shipping - marked by Mega Alliances!

60 Years of container shipping:
April 26, 1956, is regarded as a key date in the history of container shipping when standardised containers were first used to transport cargo by sea. The converted tanker Ideal-X sailed from Newark, New Jersey to Houston, Texas, carrying 58 containers on its decks, along with petroleum in its hold.

The idea of putting cargo into containers was the brainchild of trucking magnate Malcom McLean, who calculated that loading a medium-sized ship the conventional way cost $5.83 a ton, compared with less than $0.16 a ton on Ideal X. Mr McLean went on to found Sea-Land Services, for many years the trailblazer as containerisation opened up new markets and gradually connected just about every corner of the world to the global economy.

Today, the European lines dominate the box trades.  Numero Uno being Maersk Line which has reached its number one spot through a series of acquisitions, including Sea-Land back in 1999, followed later by P&O Nedlloyd. Maersk has also led the way in ship development, with vessels of up to 20,000 teu now in service.

An Alphabet soup in the making ?

The current tumultuous times for ocean carriers, especially with poor financial results and the prospect of worse to come in 2016 & 2017 have certainly focused the minds of the top container lines.

Global shipping lines are regrouping to compete more effectively against market leaders who are grouped under strong alliances.  Carrier alliances are once again at the centre of industry attention, as 2017 is bound to see considerable changes in structure and size of at least three of the four carrier alliances.

History of consolidations and alliances:

Over the past decade, shipping lines have talked endlessly about the need for more consolidation, with too many small players still trying to make their way in this highly fragmented and cut-throat business.

First signs of the consolidation were when Maersk Line bought P&O Nedlloyd in 2005, and Hapag-Lloyd acquired CP Ships. Smaller acquisitions happened with Hapag-Lloyd merging with the container arm of CSAV in late-2014 and compatriot Hamburg Sud taking over another Chilean line, CCNI. CMA CGM also bought the German shortsea operator OPDR. But these deals were never going to make a really big difference.

G6 : Two smaller consortia, the Grand and New World alliances, joined up to form the G6, consisting of Hapag-Lloyd and five Asia lines.

P3 that never took off and led to formation of 2M & O3:   Maersk, Mediterranean Shipping Co and CMA CGM attempted to establish the P3 Network, only to be thwarted by the Chinese authorities that would not give permission. Hence, the top two formed the 2M alliance, leaving CMA CGM to team up with China Shipping and UASC in Ocean Three.

CKYHE : Evergreen eventually joined the CKYHE group, along with Cosco, K Line, Yang Ming and Hanjin Shipping.

Reasons for the new MEGA ALLIANCES in 2016 – 2017 :

1. End of the G6 & CKYHE : Nippon Yusen, Mitsui OSK and Hapag-Lloyd are all currently part of the G6 Alliance, which will cease to exist next year, while Hanjin Shipping, Kawasaki Kisen and Yang Ming belong to the CKHYE alliance that also includes Cosco Container Lines Co. and Evergreen Marine Corp Taiwan Ltd.

2. The new vessel-sharing alliances are being formed to take on bigger rivals amid over capacity that has depressed freight rates. The bigger alliances are 2M : A.P. Moeller-Maersk A/S and Mediterranean Shipping Co. that are allied under the 2M partnership, which controls 28 percent of the market

NEW MEGA ALLIANCES IN CONTAINER SHIPPING : 2016-2017:

Ocean Alliance : CMA CGM SA, the world’s No. 3 carrier, and three other major lines signed a preliminary agreement to form a new group called the Ocean Alliance, which could become the second biggest after Maersk Line’s 2M partnership with Mediterranean.

France-based CMA CGM is taking over Singapore’s Neptune Orient Lines Ltd. and plans to bring the latter’s container operations unit APL under the Ocean Alliance. That will mean the partnership could have 26 percent of the market, according to figures from Alphaliner.

Ocean Alliance - by CMA CGM, COSCO Container Lines, Evergreen Line and OOCL

Container shipping faces another major shake-up as four top carriers CMA CGM, Cosco Container Lines, Evergreen and OOCL unveiled their plans for a new vessel-sharing agreement that will challenge the other alliances.

The Alliance :  Hapag-Lloyd AG, Germany’s top container shipping line, and five Asian carriers will form a new vessel-sharing alliance.

The partners :  Hapag-Lloyd AG  & Japan’s Kawasaki Kisen Kaisha Ltd., Mitsui OSK Lines Ltd., Nippon Yusen KK, South Korea’s Hanjin Shipping Co. and Taiwan’s Yang Ming Marine Transport Corp. It will control 18 percent of the world’s container shipping fleet with more than 620 vessels and a combined capacity of 3.5 million standard twenty-foot containers, or TEU, according to the statement.

THE ALLIANCE

Merger talks between Hapag-Lloyd and United Arab Shipping Co. SAG are progressing, and it is anticipated that UASC will become part of the new alliance, helping increase the total capacity of this partnership to more than 4 million TEU.

The Alliance, agreed for a five-year term, is scheduled to commence operations in April 2017 after regulatory approvals.

Possible alliances in future

In these extraordinary times, there could be a decision by the three big Japanese shipping groups or even the two Korean shipping majors to combine their container shipping activities. That really would be a stunning development.

During these extraordinary times, consolidation vis-à-vis alliances and M&As will help the global container shipping industry as it marks its 60th anniversary!

Previous post on M&A 
http://shippingscmlogistics.blogspot.com/2016/04/consolidations-m-alliances-in-container.html

Impact of China’s weakened economy on Shipping

The continuation of negative macroeconomic trends at the global level—principally emanating from China is having a major impact on shipping. Chinese retail sales were up by 11 percent year-on-year in 2015, but the country saw exports fall by 6.9 percent over the same timeframe in value terms, while the import decline was even worse at 18.8 percent.

China’s unstable economy has contributed to an uneven flow of goods to and from the United States, report trade analysts. The impact is significant to ocean shipping providers since China is the largest trading partner for USA outside of the North America Free Trade Agreement (NAFTA).

According to data from INTTRA –  a multi-carrier e-commerce network for ocean shipping – prices for imported goods moved via containers continued in a downward trend in May 2015, led by a 1.2 percent drop in computer prices from China. This is the largest decline since May 2013.

“Since one in every four containers in global trade is ordered on INTTRA portal, we have a good statistical view, yet it may differ from government statistics that include other types of cargo,” says Inna Kuznetsova, President, INTTRA Marketplace. “Our data shows that U.S. exports to China rose by 30 percent year-over-year in the second quarter after a 30 percent year-over-year drop in the first quarter,” adds Kuznetsova in an interview. She believes that some of this swing may be attributed to West Coast port congestion in the first quarter. “ We experienced record volumes on the INTTRA platform last month, as exports rose 76 percent versus June 2014,” says Kuznetsova. “We hope this indicates a strong production and shipping season.”

Raw Materials – the U.S. largest export to China – rose by 31 percent in Q2 year-over-year, including a spike of 47 percent in June. This happened after falling 13 percent in Q1 vs. 2014

At the same time, the Ocean Freight Index notes that nearly 43 percent of overall container import decline was due to decreased imports from China.

Excess capacity woes … Idle ships fleet increase

International Shipcare, a Malaysian company that mothballs ships and rigs, assists beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number in 2015. More on the way as operators are requesting International Shipcare not to lay up one ship but 15 or 20.

The global idle containership fleet at the end of December 2015 hit a record high with a total capacity of 1.36 million TEU, which represents five times more compared to 0.23 million TEU at the beginning of the year, market analyst Alphaliner reports.

Excess capacity woes.... Global idle ship fleet increases

The idle containership fleet stood at 331 vessels at the end of 2015, with the number of idle vessels under 7,500 TEU increasing due to tough market situation.

Additionally, the analyst said that the containership fleet reached a total slot capacity of 19.94 million TEU at the end of 2015, growing by 8.5 percent over a period of 12 months. Furthermore, a record number of 214 new containerships entered the market in 2015. The new ships added 1.72 million TEU to the global fleet, while only 0.20 million TEU were deleted as a result of scrapping, vessel conversions or casualties.

However, the weak market did not stop owners from ordering more containerships in 2015. A total of 255 vessels was ordered with a total capacity of 2.34 million TEU, contributing to further oversupply in the market. Alphaliner said that a significant reduction of the idle fleet is not expected before April, due to blank sailings scheduled to continue in February.

The slowdown of Chinese economy & fall of the Yuan has had major impact on ocean shipping

The rise and fall of China

Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. These were same organisations are now among the biggest victims of Chinese slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8 percent in 2015, while its imports tumbled 13.2 percent. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76 percent since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7 percent in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5 percent last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year.

Scrapping of vessels increase… New orders for ships drop!

Globally, orders for new vessels dropped 40 percent in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15 percent.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says.

The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

The fall of the Yuan…the slowdown and its impact on Ports & Ship building
The yuan has dropped 6 percent since last August. While that should help exports, Hutchison Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an increase in outbound business. According to Ivor Chow, chief financial officer of Hutchison, the devaluation is leading to a slowdown in traffic as customers wait to see how much lower the yuan will fall. “People are really hesitant to commit to orders at this point,” he said on a conference call with analysts on Feb. 2. 2016

The slowdown is hurting many Chinese ports. Sales at Shanghai International Port were 7.5 billion yuan ($1.1 billion) in the third quarter, down from 7.6 billion yuan the year before, and net profit was 1.4 billion yuan, a decline of 18 percent. The Shanghai Shipping Exchange’s containerized freight index has dropped 27 percent since the start of 2015. While container volume at Shanghai’s port, the world’s largest, grew 3.7 percent last year, that was down from 4.8 percent growth the previous year and was largely the result of taking market share away from high-cost rival Hong Kong, according to Bloomberg Intelligence analyst John Mathai.

The slide in oil prices is especially painful in Singapore, home to Keppel and Sembcorp Industries, the world’s two largest producers of offshore oil rigs. Orders for the two companies dropped in 2015 to their weakest levels in six years. Temasek Holdings, which has major stakes in both Keppel and Semcorp is discussing the sale of noncore assets or issuing new shares. It’s in discussions with company executives about raising cash by selling noncore assets or issuing new shares. “We have to plan for a longer winter,” Keppel CEO Loh Chin Hua said on a call with analysts on Jan. 21.

South Korea in December announced plans to establish a $1.2 billion fund to help local shipping companies pay for new vessels they’ve ordered, according to the Ministry of Oceans and Fisheries. The government will push shipyards to downsize and focus on their core businesses—one shipbuilder operated a golf course. Hyundai Heavy Industries, the world’s biggest shipbuilder, said on Feb. 4 that it had suffered its ninth consecutive quarterly operating loss, following a 1.7 trillion-won ($1.4 billion) loss in 2014.

The recession in shipping is causing trade friction. Daewoo Shipbuilding and Marine Engineering is in the worst position among Korea’s shipbuilders. Korea Development Bank and another state-owned lender, Export-Import Bank of Korea, are leading a 4.2 trillion-won bailout of Daewoo. “We see this case as a problem,” Shinichiro Otsubo, director of the shipbuilding division at Japan’s Ministry of Land, Infrastructure, Transport and Tourism, told Bloomberg in December. “If this aid package keeps the firm from cutting capacity, the effect will be potentially big.” Japan hasn’t ruled out the possibility of filing a complaint with the World Trade Organization.