Maritime Market Updates

General outlook: Light at the end of the tunnel?

With US Federal Reserve’s decision to launch the third round of Quantative Easing (QE) through the purchase of mortgage backed bonds to the value of US$ 45 billion per month up to December 2012 combined with Germany’s Constitutional Court granting the green light for the country to ratify the bailout fund known as European Stability Mechanism (ESM), does it mean that trade will grow and the light is at the end of the tunnel for the shipping industry?

The containerised shipping industry is bedevilled not only with the contraction of containerised volume growth, but, more importantly surplus capacity. According to Alphaliner, between August 2008 and the same month of 2012, the average nominal capacity of ships deployed on many trade routes grew significantly.



On the Europe-Far East trade – vessels are now 46% larger than what they were four years ago. On the Middle East –Indian Sub Continent sector ships operated to and from are up 51% than in 2008 and on the main intra regional areas capacity was up by 38%.



The top 20 container carriers had added 844,000 TEU capacity to their fleet over the last 12 months, despite the losses sustained. MSC and Maersk inducted more than half the capacity during this period having placed 218,000 and 232,000 TEUs respectively.



On the worldwide demand equation full container volumes on the Far East to Europe sector in the year 2011 was less 7% as against 2007 and from Far East to US the decline was 11%. However, though the number of ships deployed has increased, due to effects of slow steaming, etc. the number of services has in fact reduced resulting in the nett annualised trade capacity not increasing.



To cite an example on the Europe/Far East trade, the vessels capacity in the year 2012 was a growth of 28% as against 2008. However, the trade capacity which is 9,879,000 TEU was only an increase of 1%. The challenge for shipping lines will be to ensure capacity is in line with demand to restore freight rates to profitable levels. Therefore the surge in extra slow steaming and super slow steaming which has resulted in the absorption of an extra capacity of 5.7% (930,000 TEU) on the Asia/Europe sector will intensify.

Asia-Europe looming price war

Despite capacity reduction by some shipping lines including the G6-CKYH on the all important Asia-Europe route, it may not be sufficient for the carriers to succeed in the proposed October rate increases. ACM/GFIs Cherry Wang said: “The ensuing weakness in freight rates is starting to show the signs of another rate war.”



Meanwhile, World Container Index Shanghai to Rotterdam spot rate dropped by 12% its heaviest decline since December 2011. The Shanghai Container Freight Index, Asia to Europe spot rate was down by over 3%.



To quote Clarkson Securities: “The West bound routes both lost over 3% in a week when several carriers were attempting GRIs. Furthermore, news from the fiscal market that in July – Asia to Europe volumes were 13.2% down year on year will not cause sellers on the forward market to ease up pressure.”

All in all, on the Asia-Europe sector most carriers reported an utilisation factor of below 80% which resulted in some lines adopting “a fighting ship pricing policy” where carriers try to increase utilisation through the price mechanism at the last port of call. In this backdrop, more shipping lines are bound to artificially curb capacity to ensure freight rates do not deteriorate further.

Will challenges drive further consolidation?

The diminishing returns due to high bunker prices, slowing down of external trade growth and the need for high capital expenditure has resulted in the reluctance on the part of bankers to finance shipping lines. As it was stated at the Global Liner Shipping Conference in Singapore, “You need to invest US$ 1.2 b to 1.5 b to build a series of ships for an Asia-Europe service and you need 5-6 strings to compete.”

Though three leading players on the Asia-Europe trade now control 50% of the market as against 20% in 2000, with high capital cost required to sustain services in the liner shipping industry there is bound to be further realignment of shipping lines leading to fewer carriers. To quote the APL President, “I believe we are very close to a tipping point in liner shipping.”

India relaxes cabotage policy – despite protest from domestic ocean carriers

Though it was speculated in the previous article that India was planning to relax its cabotage law, it is now reported that despite continued pressure from domestic ocean carriers the Union Cabinet has approved the waiver of the cabotage policy under the Merchant Shipping Act 1958 for transhipment of export/import containers to and from the International Container Transhipment Terminal (ICTT) at Vallarpadam Cochi for a period of three years, after which relaxation will come up for review.



The Head of DP World Asia, which manages the Vallarpadam Terminal, states: “The governments’ decision will greatly help the Indian trade which has been transhipping cargo through neighbouring ports and that it will be a huge saving for Indian trade in freight costs.”



The writer will through a latter article assess the impact of this liberalised policy on transhipment ports where feasibility studies for new capacity may not have taken into account the competition for transhipment traffic emanating from an Indian Port.



ICTT is the first stage of US$ 600 million DP Worlds’ three phase development offering an annual capacity of one million TEU in the initial phase and four million TEU when fully built. Meanwhile, Krishnapatnam Container Terminal in South India with an 18 metre draught and five Super Post Panamax Gantry cranes having an outreach of 23 boxes, 650 metre quay length can now handle one million TEU annually.

Singapore PSA in the lead

Singapore PSA is the leading port operator worldwide with an annual throughput of 47.6 million TEUs and a market share of 8.1% ahead of Hong Kong’s Hutchison (HPH) 43.4 million TEUs with a 7.4% share. DP World handled 33.1 million TEUs and APM Terminals with 32 million TEUs are closely in third and fourth places while COSCO throughput was 15.4 million TEUs.



The big four container terminals account for 26.5% of the global container port throughput. As reported in the Drewry Maritime Research – merger and acquisition activity continues in this sector.



With APM taking over a significant stake in Russian operator Global Ports Investment a deal that was acquired at US$ 860 million will enhance APMTs ranking next year. China Merchant Holding International (CMHI) has made a strong bid to acquire a significant share of CMA-CGMs terminal link Port activity.

New building/lay up of idle ships

CSAV the South American ship owner is contemplating building 10 new vessels with a capacity of 10,000 TEUs with an option for another 10 for which discussions are on with South Korean, Japanese and Chinese shipping yards. According to Lloyd’s List Intelligence, idle container ship tonnage increased by 35% to 410,700 TEUs (compared to 04 weeks ago) or 290 ships. This represents a 2.5% of the global container fleet most of which are in the 1000-5000 TEUs category.

(The writer, a Maritime Economist, is a Chartered Fellow – Logistics Transport, Chartered Shipbroker – UK, and a University of Oxford Business Alumni.)