Archives for posts with tag: liner

At the start of April, the commencement of joint operations between the major Japanese liner companies in the form of ‘ONE’ ushered in the latest step along the road in the consolidation of the container shipping sector. In February 2017 we took a look at how the concentration in the sector was evolving, and now seems like a good time to review how the profile looks today.

For the full version of this article, please go to Shipping Intelligence Network.

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One year ago we reported that it looked like container shipping was “at last starting to build towards something more positive” and that “2016 may well be seen as the year in which the container shipping sector really started to tackle its problems head on.” One year later, it looks like 2017 lived up to at least some of the expectations, with improved market conditions clearly visible.

 

For the full version of this article, please go to Shipping Intelligence Network.

SIW1155In the famous novel a young Oliver Twist pleads in vain with Mr Bumble at the workhouse “Please Sir, I Want Some More”. In early 2014, containership owners would have been looking for the opposite of the young Oliver – anything but more of the prevailing conditions. Yet once again challenging markets prevailed, and by the end of the year boxship players had probably “had enough”.

Anything But More

After five years in the doldrums, 2014 was essentially more of the same for the liner sector. With the global economic downturn having cut harder into demand in the box sector than almost anywhere else, half a decade on and containership operators were still found wrestling with the need to find ways to absorb potentially surplus capacity. The fully cellular containership fleet expanded by around 6% to 18.2m TEU in full year 2014, and trade growth in the same ballpark was not enough to push the market balance back into a more positive direction.

Fed Up Yet?

Box freight market conditions remained extremely volatile with liner companies in an ongoing battle to manage incoming capacity. Average spot freight rates for the year were up a little (7%) on the Far East-Europe route but down a little (3%) on the Transpacific. Few liner companies (except the market leader) made substantial profits, although towards the end of the year falling bunker prices at least started to reduce liner company costs.

If anything, the story was even worse on the charter market. Earnings remained depressed for yet another year, with only limited gains on historically low levels. Cascading of capacity from the mainlanes, allied to idle capacity, kept the pressure on charter owners, although later in the year there was some relief in the Panamax sector where unexpectedly robust redeployment onto intra-regional trades and a declining fleet provided more substantial support for rate levels than in other size sectors. Panamaxes also bucked the trend against generally falling asset prices in the boxship sector, with end year 10 year old secondhand prices up over 20% on end 2013 levels.

Ready For A New Twist?

So, if everyone has “had enough” and can’t take any “more”, what might change? Well, the industry consensus suggest things are getting a little tighter now. Plenty of capacity has been absorbed by slow steaming (with no sign yet of lower bunker prices changing things, though this needs to be watched carefully), much less capacity is idle (around 1.3% of the total fleet today) than in previous winters and the orderbook looks much more manageable at 18% of the fleet. Demolition remains historically high, with 0.4m TEU scrapped in 2014. Meanwhile, port congestion, most obviously on the US West Coast, may start to soak up significant amounts of capacity.

More And More

This might be enough to convince some investors that there’s no more (pain) to come and it’s time for a change in fortunes. But at the same time, liner companies still have plenty of big ships scheduled for delivery (and look set for another spending spree, placing orders for a new wave of ships of 20,000 TEU and above). Whatever the view of the optimists, extra capacity to be added, allied to economic headwinds in a number of parts of the world, will certainly pose challenges for the sector. Containership market players will have to artfully dodge the obstacles if they don’t want to be asking why they have had more of the same this time next year. Wish them luck. Have a nice day.

Each year, in the first week of November, we invite readers of the Shipping Intelligence Weekly to predict the value of the ClarkSea Index one year ahead. The competition entries are always interesting, and give us an idea of what the shipping industry’s expectations of the market really are. However, as everyone knows, it’s hard to get it right and the competition can only have one winner…

Stick Or Twist?

In 2013, it felt like there was some consensus amongst industry players that the bottom of the cycle might have been reached and that markets would start to take a turn for the better. Shipowners contracted 176.9m dwt of new ships, the highest level since 2008, reflective of a more optimistic outlook than previously. The ClarkSea Index represents a weighted average of tanker, bulker, boxship and gas carrier earnings, and it is interesting to see if the entries in our annual competition supported this optimism.

At a first glance it seems that competition entrants had a cautiously positive outlook, with the average prediction of the early November 2014 index value at $14,553/day, well above the $10,843/day average prediction for November 2013 from last year’s competition. The average forecast was also far above the actual full year 2013 ClarkSea Index average of $10,263/day, and the value at the start of November 2013 of $10,767/day.

Hard Times?

Looking at 2014 to date, this optimism may have been slightly misplaced. The ClarkSea Index overall has not performed particularly well since November 2013, averaging just $11,625/day. Crude tanker earnings have improved but have been spiky, while product tanker earnings have generally remained under pressure. Bulker earnings have seen limited upside aside from some helpful spikes in the Capesize market. Gas carriers have been the star performers, with significant earnings gains, but containership earnings have remained in the doldrums.

During most of 2014 to date, the index has stood below the $12,000/day mark. Across the 45 weeks in the year to date, the ClarkSea Index only exceeded the average competition prediction in three of them. However, last week, on 7th November 2014, the ClarkSea Index rose to $15,139/day, helped by more positive bulker and tanker markets and up 41% year-on-year, if still well below the 2004-13 historical average of $20,795/day.

Pipped At The Post?

So, although index levels this year have generally remained low, the recent rise has meant that the actual value on 7th November was higher than the majority of competition entries. Around 25% of the ‘forecasts’ stood in the $13-14,000/day range; maybe people were right to be optimistic after all? However, having dipped below the $10,000/day mark in September, the index has only really improved over the last month or so.

So, is the glass half empty or half full? Depending on your viewpoint, the cautious optimism has either been misplaced or justified. Whatever the case, this year’s winner is Mr Peter Bekkeston of Klaveness Chartering with a forecast of $15,123/day. Have a nice day, Peter; your champagne is on its way.

SIW1147

Lower vessel productivity has been a key feature of the container shipping sector in recent years, as elevated bunker prices have incentivised container lines to slow down their services and add extra vessels to maintain schedules. However, with bunker prices having seen a significant drop over the last few months, it’s worth taking a closer look at how things stand today.

Helping Hand

The reduction in vessel productivity resulting from slow steaming in the face of increased fuel costs was initially focussed on the long-haul east-west trades, where slow steaming is operationally more straightforward. However, it has since spread to other parts of the liner network. As box shipping faced up to oversupply in the wake of the economic downturn in 2008, this spread has helpfully absorbed some of the surplus vessel capacity.

However, it’s not always simple to quantify the precise amount of capacity absorbed by the drop in vessel productivity. It hasn’t all been due to slow steaming. Other factors such as services being re-routed on longer journeys, for example Asia-USEC cargo being carried via Suez rather than Panama, have also added to the drop in productivity.

Counting It Up

On each trade lane today’s running capacity is generated by a specific amount of vessel capacity deployed at today’s productivity levels. This can be compared to the capacity that would have been needed to generate the same running capacity at previous (higher) levels of productivity. Adding up the difference between the two across trade lanes is one method for estimating the capacity being absorbed by reduced productivity. The graph shows the development over time of this estimate. Capacity absorbed rose to 0.9m TEU by June 2011, as bunker prices broke the $500/t barrier. By the start of 2014, the total had risen to 2.0m TEU, with bunkers at around $570/t, having peaked at over $700/t. The connection between bunker price increases and lower vessel productivity was strong.

Speed Up Or Down?

But is the trend here to stay? Bunker prices slipped to as low as $450/t in October but the capacity absorbed by lower vessel productivity has continued to increase, passing the 2.5m TEU mark in September. The position of containerships on the speed/consumption curve means that the benefits from slowing down are highly significant. In the bulk sectors gains from slower speeds are less dramatic due to their location at a shallower point on the curve, meaning that in improved markets operating speeds will increase again. But speed-related productivity gains seem less clear for boxships unless bunker prices fall quite a bit further. This is borne out in recent years by the trend in ordering boxships optimised for slower speeds than their predecessors, and despite falling fuel prices many lines have thus far re-iterated commitment to slower speeds.

Still, when the economics change swiftly it’s worth watching closely, and there could yet be increases in productivity. If this proves to be limited, containership market players will breathe a sigh of relief. When you need some stress relief in today’s tricky market, keep taking it slow.

SIW1146

Last week’s Analysis highlighted the rejection of the ‘P3’ container shipping alliance plans by the Chinese authorities, and how it might relate to the movement of trade by national fleets or otherwise. This week the focus is shifted to examine how liner shipping, ‘P3’ or no ‘P3’, fits within the pattern of consolidation in the key volume shipping sectors.

How Does It Stack Up?

In reality shipping is a relatively fragmented business. Over 88,000 vessels constitute the world fleet across almost 24,000 shipowners, with an average of less than 4 ships per owner. Limiting the analysis to 10,000 dwt and above, the average is still less than 7 ships. When talk of the ‘P3’ first hit the container shipping news, concerns were raised about the potential level of consolidation in shipping. Does that really stack up?

In Bulk, But Not Consolidated

As the graph shows, there has been consolidation of ownership, but over the last 20 years it has actually been fairly gradual. Today the Top 20 tanker owners account for 30% of the tanker fleet compared to 26% in 1994. In the bulker sector the Top 20 owners account for 22% today compared to 15% twenty years ago. In general, larger entities such as industrials have increased their share of the bulk fleets. Both sectors saw a fair amount of consolidation between 1994 and 2004, before a drop in the share accounted for by the Top 20 owners since then. The downturn post-2008 looks to have led to some fragmentation as the distressed position many traditional owners found themselves in created opportunities for new entrants (and new money).

Ticking The Boxes?

Containership ownership, meanwhile, has always been dominated by large, fairly corporate, ‘liner’ companies and some substantial charter owner interests. With ‘strings’ of containerships needed to operate scheduled services, ownership has been consolidated amongst fewer entities, and in 1994 and 2014 the Top 20 owners accounted for just under 60% of overall capacity, a much higher share than in the bulk sectors.

Concentrated Liners

However, liner operation (rather than boxship ownership) is where volume shipping is most highly consolidated. Large liner companies have historically been afforded some protection, first by the conference system and then by the approval of a network of alliances, reflecting the capital intensive nature of running box shipping services and the associated infrastructure. Today the Top 20 lines operate 77% of container capable capacity globally, up from 66% in 2004 and 37% in 1994. This is clearly a highly consolidated part of shipping, ‘P3’ or no ‘P3’ (itself a proposed alliance, not a merger of operators).

Overall, shipping remains quite fragmented despite some gradual consolidation. However, liner shipping, with its heavy operational demands, is generally much more concentrated. It’s certainly not quite Coca-Cola and Pepsi, but even without the ‘P3’ alliance this is where volume shipping is by some distance already at its most consolidated. Have a nice day.

SIW1128

SIW1095In March 1963 the minutes of a meeting at Blue Funnel, arguably the Maersk of its day, noted that containers were “probably not required substantially for 10 years”. Later in the year the head of cargo handling followed up with a paper arguing that 3,000 miles was the limit for viable containerisation. Meanwhile Malcolm Maclean was setting up Sealand.

History Lessons

Although this sounds like management myopia, in the 1960s things were not as clear as they look with hindsight. Liner shipping was being crushed by the massive cost of handling a mix of small parcels, unit loads and minor bulks like forest products. Palletisation, containerisation, ro-ros and LASH all offered potential solutions and dealing with cargoes that would not fit into containers was a big worry. In the end containers swallowed the containerisable cargo and the rest ended in specialist carriers. But it was a massive change.

20 TEU Vision

Fortunately these seminal turning points don’t happen often – companies are lucky (or unlucky) to hit one in a lifetime. But when they happen, the decisions are agonising. The misjudgements made by Blue Funnel illustrate three points. Firstly when companies arrive at the crossroads, the track ahead is not clear because there is no track – they have to make it. Secondly containerisation needed a new organisation and capital investment which made the existing system obsolete. How many chairmen can cope with that? Thirdly, being biggest does not help. Blue Funnel had a cargo liner fleet to worry about. Much easier to be Mr Maclean with a blank sheet of paper.

50 Years Later

Today container companies, with a fleet of 5,137 ships worth $100 billion, are still struggling with the track ahead. The business is maturing and in 2009 trade declined for the first time. And despite its key role in the global economy, liner companies suffer from patchy returns from asset heavy balance sheets. How can corporate boards escape from this trap? The current strategy is to grow out of trouble by investing in much bigger ships. The average size of containership delivered has edged up over the years, from less than 1000 TEU in the early 1970s to 3300 TEU in 2006 (see graph). Since then there has been a great leap to 6600 TEU and the biggest ship has jumped from 8,400 TEU to 18,270 TEU. Meanwhile trade which grew at 10% pa in the last decade has edged back to 4-7% pa.

Big, But is it Beautiful?

So, as Blue Funnel found 50 years ago, it’s tough at the top. In the end they set up the OCL consortium with three other liner companies, made some highly speculative bulk shipping investments, and gradually faded away. Is there a moral to the story? Well, in interesting times, shipping businesses should worry less about ships and focus on the basic reason why they’re there – better, cheaper transport. Of course ships are part, but not the heart, of that strategy. Have a nice day.