Top 30 Ocean Carriers: Getting back to basics

According to analysts with Drewry Maritime Research, ocean cargo container lines continue to be squeezed out of providing “home grown” integrated logistics services and are now concluding that they can run smarter, more economically sound businesses by leaving ancillary services to third-party logistics providers (3PLs).

“Although partly driven by financial necessity, the trend appears to show that being a one-stop shop is not the way forward for ocean carriers,” says Neil Dekker, head of Drewry Container Research. “That expansion via vertical integration should be replaced by greater focus on the provision of core services.”

Industry analysts contend that this is hardly a new trend, but rather one that has only been gaining traction this year.

For example, last month Maersk announced that it has entered into an agreement to sell the assets of its U.S. trucking subsidiary Bridge Terminal Transport. In June, the world’s biggest ocean carrier also announced the sale of its European railway company ERS Railways to British rail operator Freightliner.

In May, Zim Line sold its holdings in two companies that own container manufacturing factories in China. In April, MSC announced the sale of 35 percent of its ports division Terminal Investments Limited to Global Infrastructure Partners. And in January, CMA CGM declared the sale of 49 percent of its container terminal operating company Terminal Link to China Merchants Holding (International).

Back in 2010, Maersk already sold its stake in the logistics company Trans Siberian Express Service to InterRail, while others started reducing their involvement in third party logistics services even before then.

The implication is that the provision of “home grown” integrated logistics services by ocean carriers is becoming a distant dream that is unlikely to be resurrected in the near future, says Dekker. “This will bring a smile to freight forwarders and independent third party logistics companies who have been arguing for years that ocean carriers should stay out of logistics,” he adds.

Rates in flux
After a strong start in the first quarter, container volumes in the trans-Atlantic trade have declined, and average vessel utilization has dropped sharply, eroding freight rates. As a consequence, container lines are likely to start canceling vessel sailings in October.

At the same time, however, ocean cargo carriers comprising the Transpacific Stabilization Agreement (TSA) Westbound section contend that there is an “urgent need” to begin rate restoration efforts in anticipation of fourth quarter cargo growth.
“Rates have drifted down even more than usual during the typical summer slack period to unsustainable levels,” says TSA Westbound executive administrator Brian Conrad.

After months of uneven demand and gradually eroding freight rates in the U.S.-Asia trade lane, container-shipping lines argue that it’s time to begin reversing the trend.

Member carriers have announced plans to raise freight rates for all commodities and from all U.S. origin points by at least $100 per 40-foot container (FEU) at the beginning of this month.

Several industry analysts suggest that this is a plausible move, including Walter Kemmsies, chief economist at the coastal and civil engineering firm Moffatt & Nichol. “We’re forecasting a surge in outbound demand for U.S. agricultural commodities,” he says.

A number of TSA-Westbound lines had already filed individual increases across the board or in key market segments last month, while other members are looking to that October 1 effective date. “Not only are we headed into the busiest time of year for the trade, but we are also seeing signs in the market that U.S. exports to Asia are poised for recovery in coming months,” says Conrad, who adds that lines view the $100 per FEU general rate increase (GRI) amount as a minimum, given current rate levels.

“Anytime the lines undertake a GRI, they are mindful of the price sensitivity for many westbound cargoes and the need for an incremental approach in restoring rates,” Conrad adds. “At the same time, we need to be clear that the recommended GRI will not, by itself, raise rates to levels that make an adequate contribution to round trip revenue.”

While the GRI is voluntary and will be implemented by lines individually according to their specific needs at this time, Conrad says transpacific carriers remain under considerable financial pressure in the current environment and will be looking at further opportunities for revenue recovery in late 2013 and early 2014.

Carriers in all trade lanes are also trying to control capacity by ridding themselves of antiquated vessels. According to the Paris-based consultancy, Alphaliner, containership scrapping is expected to reach 450,000 TEU this year, if the current pace continues.

Stephen Fletcher, Alphaliner’s commercial director, says it would then surpass the record 381,000 twenty-foot equivalent units (TEU) deleted in 2009. In the first four months of this year, 93 units for 195,000 TEU have already been sold for demolition or de-celled, with the average age of scrapped ships falling to a low of 22 years compared to between 25 and 30 years historically.

“The rise in the capacity scrapped is mainly due to the surge in the deletion of 3,000 to 5,000 TEU ships,” says Fletcher. “Thirty units of this size have been sold for scrap so far this year, including the 4,714 TEU Maersk Malacca which is the largest containership ever to be scrapped, in TEU terms. Her sister ship, the Maersk Merlion, is also expected to be scrapped after she ends her current employment later this fall.”

Alphaliner says that more units of this size are expected to be scrapped later this year, including four of the five C-10 ships of 4,528 TEU owned by APL. These five ships were built in 1988 and were the world’s first over-panamax containerships.

Carrier consolidation
But the real issue shaping the future course of ocean liner shipping is consolidation.

Lars Jensen, CEO and Partner with SeaIntel Maritime Analysis in Copenhagen, notes that if Maersk Line, MSC, and CMA CGM create a new partnership in the Asia-Europe trade lane next year, the marketplace will be severely altered.

The so-called “P3 Alliance” is set to begin operation in the second quarter of 2014, and will no doubt force the two competing alliances (G6 and CKYH) to merge if they are to remain viable.

“Our study shows that P3, with a total of 255 ships and 2.6 million TEU, will not only have a significantly larger market share than all its competitors, but will also benefit from massive economies of scale that no one will be able to match,” says Jensen.

According to SeaIntel, a merger between G6 and CKYH in a new G10 alliance is unlikely. Furthermore, analysts estimate that Japanese container carriers are facing a difficult choice if they want to continue their presence on Asia-Europe.

“Japanese carriers such as MOL, NYK, and K Line will be forced to order new ships of 10,000 TEU and beyond as their current fleets can’t compete in relation to unit costs,” says Jensen. “Without bigger ships, they may have to abandon the major routes on Asia-Europe.”

Dr. Asaf Ashar, an independent maritime consultant based in Washington, D.C., says that this development suggests that carriers may finally be able to stabilize rates.

“In economic terms, we call this ‘tacit collaboration,’” he says. “It means that the alliance partners will not try to undercut each other on what they charge. At the same time, however, it means an end to differentiation of services. The industry is becoming increasingly commoditized.”

Panama connection
Ashar also observes that there’s widespread consensus on one aspect of the Panama Canal’s expansion on ocean liner shipping: size matters.

Once the widened Canal opens, ship sizes are anticipated to increase quickly from the current average 4,500 TEU up to around 8,000 TEU—similar to the size of ships presently deployed on All-Water Suez (AWS) services.

There is also general agreement that despite the considerable increase in ship size and the respective reduction in shipping costs, the All-Water Asia/U.S. East Coast (USEC) through All-Water Panama (AWP) route is likely to see only a modest
increase in market share relative to its main rivals, the AWS and the U.S. West Coast (USWC) land-bridge.

“Where opinions start to diverge is on North American service patterns,” says Ashar. “Many of us believe that direct port calls may be replaced by several hub and spoke systems.”

But considering that the deployment of 8,000 TEU ships on AWS, which began in 2011, has so far had no impact at all on the prevailing direct service pattern, any change is not likely to be swift, Ashar adds.

“A recent review of AWS rotations on the USEC indicates that they are still based on direct calls even at relatively small ports like Boston—handling 190,000 TEU a year—and at ports with relatively shallow channels like Savannah,” says Ashar. “It’s reasonable to expect that the deployment of similar ships on the AWP will have a miner initial impact on service patterns.”

The locks of the expanded Panama Canal are designed for New-Panamax (NPX) ships, which are forecast to initially have capacity of 13,500 TEU and eventually 15,000 TEU. Following worldwide trends, it’s quite likely that NPX will be deployed on AWP as well as on AWS services within five years or so following the expansion.

“It’s not unfeasible that that introduction of ships too large for USEC ports’ newly-dredged channels will trigger a change in the service pattern of both AWP and AWS to hub and spoke,” says Ashar. “In this case, USEC ports would find themselves hosting feeder services based on foreign hubs in the Caribbean region for AWP and Canada for AWS.

Ashar says that this change in service pattern could be avoided by further deepening of USEC ports’ channels. However, considering the arduous process of the recent deepening projects, the prospects for this happening look “pretty dim.”

If indeed the all-water service pattern is transformed into hub and spoke, it is reasonable to assume that the all-water feeders will call at smaller ports previously bypassed by direct all-water services.

The additional calls may have a limited impact on the traffic of ports with captive hinterland, such as New York/New Jersey but could be a big blow to ports like Miami, which have invested heavily in water, road and rail accesses hoping to be a first-in and last-out for AWP traffic.

“It will be interesting indeed to hear what the industry makes of these various issues over the new few months,” Ashar adds.