Update on the Shipping Industry

Stephen DeAngelis

December 8, 2011

As we look forward to 2012, a glut of shipping capacity may be good news for customers and bad news for carriers. The editorial staff at Supply Chain Digest reports, “The large number of ships ordered during better times – many of them of the megaship variety – are likely to continue to overwhelm the pretty strong global growth in container shipping demand for some time, industry analysts say, while noting big drop offs in transpacific volumes.” [“Good News for Shippers and Importers, as Glut of New Capacity will Keep Ocean Carriage Rates Low for Some Time,” 2 November 2011] The report continues:

“That’s good news for shippers and importers, but will risk real financial troubles for some of the carriers, which are barely breaking even on just operational costs on Asia to Europe routes now, and with only a slightly better landscape from Asia to the North America. ‘An excess of capacity on key routes, as well as poor discipline from carriers, means that container shipping lines will not cover their cost of capital in 2011 and many will lose money once again,’ said the analysts at Drewry Shipping Consultants, in summarizing its latest quarterly container forecast. ‘Our new global demand forecast remains fairly positive, at just over 7% growth for this year and despite concern in the western economies, we still see decent volumes in intra-Asia and on emerging trades with Latin America.'”

Most industries would be thrilled with a 7% growth rate in today’s economy; but, as the article notes, many ocean carriers are operating on razor thin margins. “With load factors of only 80-85%, that means carriers have been unable to push through their peak season surcharges and the severe overcapacity in … core east-west trades has been starkly revealed,” Drewry notes.” The article continues:

“The scenario is especially grim in Asia to Europe routes, for which spot rates have fallen by some 69% since March 2010, according to analysts at Alphaliner. That has taken them to the point where they are below zero when factoring bunker fuel adjustments, in what Alphaliner calls a ‘destructive rate war.’ Net rates are now below where they were at the bottom of the market in 2009.”

A fear of many customers is that carriers will withdraw ships from service to reduce capacity; but, at the time the article was written Drewry indicated it did “not see any signs that major carriers are pulling out capacity on Asia to Europe lanes.” As I note below, that has changed.

 

Over capacity isn’t just plaguing the container ship business, Alaric Nightingale and Meera Bhatia report, “Oil prices are sky-high, but a glut in the number of ships built to transport the commodity led Frontline, the world’s largest operator of the biggest oil tankers, to warn on Nov. 22 that it may run out of cash next year.” [“Depressed Tanker Rates Are Crippling Frontline,” Bloomberg BusinessWeek, 23 November 2011] The glut of ships has created the worst tanker market in a quarter of a century. They continue:

“Day rates for leasing tankers have slumped 47 percent since the start of 2010, according to London-based Clarkson, the world’s biggest ship broker, as growth in oil demand has been slowed by the global economic downturn. General Maritime, the second-largest U.S.-based owner of crude carriers, filed for bankruptcy protection in mid-November. And forward freight agreements, traded by brokers and used to bet on future transport costs, anticipate unprofitable charter rates for at least two more years.”

To help reduce its excess capacity, Frontline indicated that it would like to sell three vessels. But, Nightingale and Bhatia report, “That may not be easy.” They explain:

“The global tanker fleet has expanded 11 percent to 555 vessels since the end of 2008, and shipyard orders still equal almost 15 percent of existing capacity, IHS Fairplay says. ‘The main problem right now is there are too many ships, which means we need to increase the demand,’ says Jens Martin Jensen, chief executive officer of Frontline’s management unit.”

The best way to increase demand, of course, is to get oil producing nations to reduce the price of a barrel of oil. With oil prices remaining sky high, consumers are looking for ways to reduce consumption not increase it. Don’t hold your breath, however, waiting for oil prices to drop. Fortunately for Frontline, the company’s chairman John Fredriksen, a Norwegian-born billionaire who controls a 34 percent stake in Frontline, has stepped in with a plan to keep the company afloat. [“Fredriksen offers $500m to rescue Frontline,” by Robert Wright, Financial Times, 6 December 2011] Wright reports:

“The move, intended to save Frontline from the financial collapse, … follows a prolonged period when Mr Fredriksen has kept billions of dollars in cash and other liquid assets ready to capitalise on a poor tanker market. The transaction is backed by $505m of guarantees from Hemen Holding, the holding company representing Mr Fredriksen’s private interests. It will leave the old Frontline, listed in Oslo and New York, as a conservative operator of 40 tankers leased from Ship Finance International, the shipowning company where, as at Frontline, Hemen Holdings is the biggest shareholder. The new company, Frontline 2012, whose shares will be traded on Norway’s over-the-counter exchange, would seek to become a ‘consolidator,’ Frontline said.”

Turning once again to the container ship business, earlier this year Maersk announced that it would begin what it calls a Daily Maersk “ocean liner conveyor belt” linking Asia and Northern Europe. The first successful run was completed in November. [“Maersk completes first run for ocean ‘conveyor belt’,” Supply Chain Standard, 29 November 2011] The service was set up to gain market share by providing importers and exporters with a flexible and reliable alternative for shipping goods between Asia and Europe. Supply chain analyst Bob Ferrari reports “that competitor lines … cried foul, and claimed that Maersk was attempting to gain further market share at the expense of the remaining carriers.” [“The Beginning of a Consolidation Battle Among Ocean Container Carriers in 2012,” Supply Chain Matters, 3 December 2011] He continues:

“The industry’s second and third biggest carriers have responded. Switzerland based Mediterranean Shipping Company (MSC) and France based CMA CGM have announced plans to jointly align capacity in a broad based partnership spanning several major ocean routes. The two privately-held and family-owned entities would form trade line partnerships to serve select Asia-Northern Europe, Asia-Southern Africa, and all South America routings. According to a report published in the Financial Times, this new alliance has the potential to overtake Maersk line, with the two lines together jointly representing 21.7 percent of container shipping capacity vs. 15.8 percent for Maersk. MSC has additionally invited other carrier lines to join this alliance in order to insure ships are operating at full cargo capacity. Controlling family members for both lines indicated in press interviews that these actions are required in order to respond to a rather challenging industry environment.”

In an effort to keep its ships fully loaded, Ferrari reports that “Maersk indicated that it now plans to cut its capacity on Asia to Europe routings. … Maersk officials further noted that they would consider idling more capacity after the Lunar New Year in late January.” He also reported that Orient Overseas “plans to cut Asia-Europe capacity by 20 percent.” That’s quite a change from what Drewry was predicting in early November. Ferrari concludes:

Supply Chain Matters believes that carriers are now compelled to action in responding to the realities of gross excess capacity slowing international trade, and attempts by the leading carriers to lock down market share. The announcements are also a prelude to further industry consolidation or carrier exits occurring in 2012 as the strongest attempt to force exit of other carriers. The open question is what will shipping rates look like in 2012? While carriers have now announced programs to pool capacity, the industry is in the midst of a fight for profitability and in a highly uncertain global economy. If carriers collectively idle too much capacity, shippers are again back to the unpleasant situation of the novel set of economics that occurred during the previous economic downturn. Overall capacity will shrink, remaining active ships will run at lower speeds to save on operating costs and reserving container space will again become a challenge. There could be higher rates for time-sensitive or higher volume shipping routes.”

One of the services offered by Enterra Solutions® is the tracking of maritime shipments to determine if delays are occurring and what the potential impacts of those delays might be. If the situation gets as grim as Ferrari predicts, this kind of information will be invaluable to suppliers as they try to keep customers happy. Ferrari isn’t alone in his dire predictions. The Economist concludes, “Given the stormy waters that may well be ahead, it seems likely that shippers will seek economies of scale not only from bigger ships but also from mergers. The industry is too crowded, many analysts believe.” [“Economies of scale made steel,” 12 November 2011] The article discusses why companies like Maersk are building huge ships. It’s all about “the economies of scale that allow a T-shirt made in China to be sent to the Netherlands for just 2.5 cents.” To read more about supersized ships, see my posts entitled Shipping Industry Update: Going Big and Going Green and The Supersized Supply Chain.

 

If the financial situation in the maritime industry weren’t bad enough, climate talks currently underway are looking to impose levies on ocean-borne traffic. [“Maritime levy plan to tackle climate change,” by Pilita Clark, Financial Times, 5 December 2011] Clark reports:

“Money raised by curbing ships’ carbon emissions would be used to help poor countries tackle climate change, according to a draft text being negotiated at the UN climate talks in Durban. The proposed measure … says the money from some form of maritime levy, which is not explicitly defined, would be distributed through a flagship green climate fund that is also being negotiated at the Durban summit. … While the maritime financing proposal may not make it into the final summit agreement, its presence in even a draft text represents a victory for environment campaigners who have long argued for such a measure. The shipping industry, like the aviation business, is excluded from the world’s only global climate treaty, the 1997 Kyoto Protocol.”

Although the International Chamber of Shipping would undoubtedly prefer that the shipping industry continue to be excluded from climate change talks, the Chamber’s secretary general, Peter Hinchliffe, told Clark that the industry “would prefer to see funding linked to ships’ fuel consumption, rather than an emissions trading scheme.” Regardless of what happens as part of the climate change talks, the maritime sector is facing some stormy seas in the year ahead. Anyone with ties to an overseas supply chain would do well to pay attention as events unfold.