Archives for posts with tag: Transportation and Logistics

‘VWGate’ has raised a flag for managers and technicians in the transport business. ‘Efficiency’ used to be left to the market, but the intrepid twins, consumer health and climate change, have changed all that. Shipping boasted of being the most ‘efficient’ transport mode, but the twins took a look at what was coming out of the funnel and the rest is history (as is anyone not paying attention to emission regulations).

Performing Bare

The shipping industry has been squeezing diesel technology for fifty years and faces similar problems to the VW engine designers. The technical cupboard appears fairly empty, so the opportunities for improving performance look slim. The challenge is to find another way to measure and improve performance.

Declining Productivity

The starting point is operational performance and a surprising ‘big picture’ statistic is that tanker performance in terms of tonne-miles/dwt has fallen 25% in the last decade and is 44% lower today than in 1974 (see graph). This is partly due to the shipping cycle, but a more important reason may be the change in the way oil transport is organized.

In 1974 the system appeared to be super-efficient. ‘Productivity’ of 42,000 ton-miles/dwt was over 75% of the ‘theoretical maximum’ (estimated at about 55,000 tonne-miles/dwt). Until 1973 freight was generally about half the CIF cost of oil and transport was closely managed by the oil majors who controlled most of the fleet. But in the 1980s things changed. Oil cost over $30/bbl and freight was no longer of strategic importance for oil majors. Furthermore, more oil was shipped by traders with no interest in logistics; freight was just a cost (later they discovered that by owning ships they could ‘double dip’ on their cargoes). Progressively the oil majors drew back from managing logistics and took ships from the spot market, a strategic decision which the ‘Exxon Valdez’ incident in 1989 reinforced.

Inefficient Market Hypothesis

The ‘efficiency’ of tanker transport (in terms of cargo-miles per unit of vessel capacity) never recovered from the dis-engagement of the oil majors. Productivity slumped to 25,000 tonne-miles/dwt in the 1980s recession and only increased to 31,000 tonne-miles/dwt when the market recovered in 1997. At the peak of the ‘super-boom’ in 2004 the fleet operated at only 33,000 tonne-miles/dwt. Today it is back down to 24,000 tonne-miles/dwt. As owners celebrate booming rates, the intrepid twins must be wondering what the industry is up to. Tankers are delivering almost half as much oil transportation (on a tonne-mile/dwt basis) as they were 40 years ago (with the spot market more concerned with managing ‘productivity’ in the context of the earnings environment).

Back To The Future

Not many other industries could say that they have halved ‘efficiency’ and lived to tell the tale. Of course you could just bury the figures and carry on as usual (which seems to have been VW’s strategy). Or you could start thinking about what to do about it. Is 1970s-style logistics a lost art? Freight may not be a big deal for cargo interests, but meeting regulatory targets should be. Have a nice day.

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Next week sees the 100th anniversary of the opening of the Panama Canal, which has played a significant role in the history of shipping and seaborne trade. Whole classes of ships have been defined by their ability (or not) to transit the canal. Today, there are still almost 900 containerships in the fleet referred to as ‘Panamax’ and another 3,000 or so capable of passing through the current locks.

What’s The Plan?

The completion of the new Panama Canal locks remains behind schedule, with the opening date now pushed back to 2016. Despite this, the potential impact remains a hot topic. The project was partly driven by the desire to capture greater revenues from the container sector by enticing larger boxships and increased volumes of trade through the canal. The most relevant trade lane in volume terms (by far) is that from Asia to the US East Coast, an estimated 3.6m TEU in 2013 (though an increasing part of this is actually being moved via the Suez Canal).

How Big?

The new canal dimensions will dramatically alter the number of boxships that can potentially transit. As the graph shows, at the start of 2H14, 3,833 of the boxships in the fleet (75%) could transit the current Panama locks (the Panamaxes up to around 5,100 TEU, about 140 of which are actually deployed on Asia-USEC services, and other smaller vessels). An additional 1,111 ships in the fleet (22%) will be able to transit the new canal. On order, 355 of 454 units (78%) will be able to transit the new canal. In terms of ‘cut off point’, most vessels of up to and around 13,000 TEU will be able to transit.

With the vast majority of the world’s boxships able to transit the new canal, how far might upsizing of services via Panama go? Larger ships will offer potentially lower costs per box for today’s cargo, but might also encourage cargo switching from USWC to USEC services (about two-thirds of Asia-US cargo today arrives via the west but a significant share is actually destined for the eastern US).

Switch Up Or Not?

Firstly, the answer may lie with the ports. In order to receive the very largest ships capable of transiting the new locks, there is still a significant amount of infrastructure work to be completed at the USEC ports. Compounded by other issues that carriers face at US ports, the consensus seems to be that carriers may upsize services to the USEC via Panama to around 9-10k TEU first before going further. Secondly, in terms of cargo switching, the move from USWC to USEC is not as clear as it may seem. Logistics supply chains put in place by major retailers, with distribution centres based in the US interior, are likely to be fairly sticky and not instantly so sensitive to unit cost savings in the shipping part of the chain (which may or may not cover the cost of much additional inland transportation).

So, the majority of containerships will be able to transit the new Panama locks when they open. However, the initial impact of the new dimensions on container shipping may not be as obvious or instant as it seems. Project delays or not, it is likely to take some time for the full extent of the impact to be felt.

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SIW1105Tankers and bulkers; love them or hate them, you can’t really escape them in shipping. They are the bed-rock of independent shipowners’ business. Of course there are plenty of specialist vessels, but it’s the two big bulk fleets which inevitably catch the attention of speculative investors. And investment discussions always end up with the same question – should we order a bulker or a tanker?

Playing Investment Tag

Although designed to carry totally different cargoes, these two titans of bulk transport seem to be subject to some deep economic force which draws them together. For example the total tonnage of tankers ordered between 1963 and 2013 was 1,139m dwt, whilst the tonnage of bulk carriers ordered was 1,145m dwt, a difference of 0.5%. Extraordinarily close over a fifty year period. But in the long run what goes around comes around and the year to year pattern of investment was very different.

Tankers First…

A good way to analyse the different ordering trends of tankers and bulkers is to compare the contracts placed each year as a % of the fleet at year end. The chart shows this back to the 1960s. The big boom of the 1970s was clearly led by tankers whose investment built up during the 1960s to peak at 49% of the fleet ordered in 1973. In the same year bulker ordering was 17% of the fleet. This spike was followed five years later in 1978 by a collapse of orders to only 1% of the fleet – 3m dwt of tankers and 1.4m dwt of bulkers.

Bulkers Next…

Then in the 2000s the investment momentum for both segments built up, with orders ratcheting rapidly up from about 9% of the fleet at the beginning of the decade to a peak for tankers of 25% in 2006. Then bulkers surged ahead, with orders hitting a peak of 43% of the fleet in 2007. Not quite beating the tanker record in 1973, but a pretty close second. Meanwhile tanker investors were more restrained with investment of 12% in 2007, similar to bulkers in 1973. And once again, 5 years later in 2012 orders slumped to only 3% of the fleet. All of which helps to put the order recovery in 2013 into perspective. It was a very busy year with orders for 35m dwt of tankers, and 80m dwt of bulkers. This was almost three times the tonnage ordered in the previous year. And the percentage of the fleet ordered surged up to 11% for bulkers and 7% for tankers.

The Bottom Line

So there you have it. There are similarities between the 1970s boom and bust investment cycle and the investment trend over the last five years. In the post-70s downturn bulkers did better than the over-ordered tankers, who suffered a heroic collapse of demand due to a high oil price (sound familiar?). Today bulkers are again leading the recovery, driven by hot cash and a punt on surfing the Asian economic wave. But the lesson is clear enough. Tanker and bulker investment ended up in the same place, but investment cycles along the way are not closely correlated. So ex-pect a bumpy ride. Have a nice day.

SIW1102The car carrier sector has often been regarded as one of the industry’s good long-term bets. With healthy historical trade growth and a cargo likely to remain at the heart of consumer demand, projections have generally pointed towards the need for future investment. Here we examine the key trends; the latest edition of Car Carrier Trade & Transport, freshly available on Shipping Intelligence Network, provides the detail.

The Slow Road

Global seaborne car trade volumes grew by 179% between 1996 and 2008 (a robust 9% p.a. on average), while car carrier capacity expanded by 128%. However, in 2009 trade slumped dramatically (shrinking by 35% in the one year) and following a partial recovery of the lost volumes in 2010, trade growth since then has been more muted. This year it looks as if seaborne car trade will have risen by 3% (to 21.4 million units), well below the historical average, with the total still below the 2008 level. Full year imports to the EU are projected to be down 5% on 2012, and imports to North America up by just 3%.

Developing Nicely

So is the outlook still positive? Well, broadly yes. The growth expected from car buyers in the developing world has been coming through. Since 2008, shipments to developing economies in Asia (led by China) have increased by 70% and imports to Brazil and Argentina combined have grown by 53%. Between 2002 and 2013, car imports to regions outside the traditional major importers in North America and the EU have grown by 179%, whilst North American and EU imports in 2013 are at levels close to 2002 volumes. In 2013, non-North America/EU imports are expected to constitute 65% of sea-borne volumes compared to 39% in 2002 (see graph). With billions of consumers in developing countries keen to become car owners this trend looks set to bolster trade in the future.

Going The Distance

Equally significant is the fact that new centres of car production are emerging, helping diversify the route matrix. Shipments from out-side the EU, North America, Japan and Korea have grown by 13% since 2008, with Indian exports, for example, more than doubling in that time. In some cases the new producers are also further away from consumers, adding clear upside to ‘car-mile’ demand.

So, despite a subdued market today, there’s still a good story for car carriers. Demand fundamentals look robust, and even western world demand will also see some upside as the developed economies gradually move out of recession. In today’s fuel price environment, consumers there are likely to be keen to upgrade to more fuel efficient models. Car carrier capacity on order remains limited to 13% of the fleet, so if trade picks up then things could get quite tight fairly quickly, and investment will be needed to provide seaborne transportation for the cars of the future. Looking ahead, if you need a lift, try asking someone with a car, or maybe a car carrier! Have a nice day.

SIW1101In the Financial Times last week Bill Gates gave the shipping industry a nice tribute. Asked to recommend a book for Christmas, he chose ‘The Box That Changed The World’. Explaining his choice he described shipping as “one of the cornerstones of globalization”, and said that since reading the book he “won’t look at a cargo ship the same way again”. A small but significant step along the road to wider public recognition.

Unsung Heroes

In 2013 the shipping industry will prove its worth by moving 10 billion tonnes of cargo. An amazing number and a reminder that whatever the state of the market, shipping companies must still deliver the goods. Another statistic that might impress Bill Gates is 1.5 tonnes of cargo delivered per capita. An astonishing number, which includes every man, woman and child on the planet. Of course some import more than others, and as this changes it will challenge shipping in the coming decades.

Must We Do Better?

All this is positive, but looking ahead the the focus is now on delivering more cargo with less carbon emissions. Doing this is hard enough, but how can the industry monitor its progress? One perspective is provided by tracking the tonnes of cargo delivered per dwt per annum. The industry’s performance over the last 20 years shows the complexity. Back in 1986, during a deep depression, the world fleet delivered 6.3 tonnes/dwt. But by 2004 this had surged by 30% to reach to 8.2 tonnes/dwt.

Ship to System Gains

This improvement was driven by a tightening market. With higher freight rates, charterers used ships more efficiently. Ships sailed faster, emitting more carbon, but logistical inefficiencies like multi-port discharge, dead-freight and waiting were squeezed out. For example the US Gulf-Japan grain trade, previously a 55,000 tonne parcel in a Panamax bulker for Panama Canal transit, was downgraded to Supramaxes loading a full cargo with no dead-freight.

Cheap and Cheerful

This performance surge did not survive the downturn. After 2009 the ratio fell to 6.6 tonnes/dwt and by 2013 to only 6.1 tonnes/dwt, lower than in 1986. Slow steaming driven by sky high bunker costs has played a big part in this reduction, whilst rock bottom freight rates encouraged charterers to use cheap ships less intensively. In fact the average global transport performance of the fleet may not be any better than 27 years ago; the flat trendline confirms this.

Living up to Bill’s Accolade

So there you have it. Bill Gates is impressed by shipping’s contribution to the global economy. But shipping is not delivering much more cargo per dwt than nearly 30 years ago. Could tighter logistics help it meet IMO’s carbon footprint target? How does 10 tonnes/dwt in 2030 sound? Certainly challenging, but is it theoretically possible? Now that’s a question worth a closer look. Have a nice day.

SIW1100Last Friday saw US retail’s biggest day of the year. “Black Friday” offers tempted shoppers into parting with $57.4bn in the US, followed by more online spending on “Cyber Monday”. That’s a lot of retail activity and the phenomenon is becoming more global. Much of the stock sold is shipped from its location of manufacture by container, so does this help shipping?

Bad Days

Retail spikes like this aren’t a totally new phenomenon, and in any case they haven’t been much help in recent years. Since the onset of the economic downturn, the two key ‘mainlane’ container trades have performed relatively weakly as consumers in the west have remained under pressure. The graph shows monthly year-on-year growth in eastbound Asia-US and westbound Asia-Europe box volumes, reflecting the strength of demand for Asian-made manufactures from consumers in the developed world. Late 2008 and most of 2009 saw a severe downturn in volumes, with retailers destocking rapidly, and most of the time since mid-2011 growth has remained in the doldrums along with the developed economies. Positive growth in 2010 was only really a reflection of how bad 2009 was and overall volumes have seen little growth. Asia-Europe volumes in 2012 were still down 2% on 2008, and Asia-US volumes 1% lower.

Better Days?

However, things might be on the turn. Data on the impact of the last week’s retail trade on box volumes isn’t available yet (and as it happens the US spend on Black Friday itself has initially been reported to be a little down on last year), but recent mainlane volume data has shown a welcome return to positive growth. In June y-o-y growth returned to firmly positive territory on the Asia-Europe lane and followed suit on the Transpacific in July. Across June-October, Asia-Europe trade has been up 8% y-o-y and Asia-US trade up 4%. Having bemoaned the lack of a ‘peak season’ in recent years, carriers may at last this year have seen a surge in volumes during the period in which retailers conventionally stock up ready for the pre-holiday shopping season.

Big World Today

How much help is this? Once upon a time the health of the sector depended on growth on the mainlane trades. These days, due to expansion in the developing economies, and on the north-south and intra-Asia trades, the mainlanes aren’t always the key growth drivers. Volume growth there is only expected to constitute a 23% share of global growth in 2013 (with 39% intra-Asia). However, healthier mainlane trade still certainly helps top up demand growth.

Day to Day

So container transportation connects the world’s producers and consumers, but it’s a big world out there now and retail activity in the developed world isn’t enough to carry containership demand on its own. However, with growth coming back on the mainlanes, further helpful Fridays, Mondays or any other days will be better news for container shipping.

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.