Home' Baird Maritime : September 2011 Contents Why so many ship orders
and why so large?
David Wignall* on the latest port developments
The contrast between the economic performance of Asia and of
Europe and the United States is currently stark.
However, judging by container lines' activities, the long-term
prospects must be good to excellent in Europe and the US. Despite
the US's debt burden, and the risk of a eurozone meltdown, some
lines seem committed to the future health of these economies.
They are not just planning for that future, many are investing in it
as well, ordering large numbers of very large container ships that
only make sense for the Asia-Europe or transpacific trades.
This is strange, since container shipping was hit badly by the
global financial crisis. Companies haemorrhaged cash, bailout
followed bailout. You would have thought that everyone would
have learnt their lessons on gearing and risk, but in recent
months we've seen mega order after mega order. Maersk has
exercised options to build ten 18,000TEU ships, four months
after ordering ten similar vessels from DSME. APL/NOL has
ordered ten 14,000TEU ships from Hyundai and two 9,200TEU
ships from DSME, and upgraded an order of ten 8,400TEU ships
to ten 9,200TEU vessels. Only Evergreen and K-Line have
explicitly said they are staying out of the mega ships market at
the moment. Less than two years on from the sector's near-death
experience, is everyone in such good condition that they have
plenty of cash and see a large gap in capacity that they need to
fill with ever bigger ships?
The immediate prospects for the the Asia-Europe trade and
transpacific trades must be considered weak. Lately CKYH Alliance
have withdrawn capacity from Asia-Europe because of "poor
freight rates", while the New World Alliance has cut transpacific
capacity. The most interesting thing is that the cuts have had little
impact on the spot freight market and the box derivatives trade,
suggesting many think there is still overcapacity.
And now, the good news
Nonetheless, there are bright spots for the sector, with the
addition of new services such as the weekly Chennai-Taiwan
service by Evergreen, Wan Hai Line and Interasia Lines. As one
senior shipping executive said recently: "Long-haul routes aren't
doing as well as we expected, but growing intra-Asia trade is
providing cascading opportunities for mid-sized ships..."
So the implication is that the bigger ships release medium-sized
ships into the new trades -- maybe a misreading of the intent, but
perhaps close to the truth. The new mega ships cannot be used on
the expanding trades in Asia, which need the more flexible,
medium-sized and smaller ships . The really big ships only work on
bigger, longer-distance trades; the trades that are not doing so well.
According to research published by Cullinane and Khanna, as
ship capacity increases the advantage of a bigger ship stabilises no
matter what the length of the route (assuming those ships are fully
utilised). So this leads to the conclusion that for a modest
additional advantage in per TEU cost, companies are choosing to
order larger ships that must be draining their finances. It must lead
to some interesting meetings with their banks, not least with
Drewry Consultants forecasting that long-haul box rates will fall a
further 20 percent this year!
Presumably the banks have some insight into the wisdom of
investing heavily in big ships -- it's certainly unclear to me! Why
are otherwise well-managed companies putting their futures on the
line, fixing their sunk costs ever higher and draining their cash
away? Are they, as cynics may suggest, trying to make their failure
as big a problem for their governments and their banks as possible?
One thing about the really big, 12,000+TEU ships is that their
very presence within the world fleet may change the entire
economic reality of container shipping . Once built, they won't go
away. It is not unlike the advent of the 500,000DWT VLCCs,
where only one or two were built before their long-term viability
became obvious and maximum sizes moderated to some
400,000DWT. However, those extra-large tankers could be laid up,
placed on a specific trade or converted into FPSOs.
Those options do not exist for the large container ships being
built. Those ships will have to be used in the container trades to
realise any return on investment. So the numbers built matters, as
does the commitment to them by the container lines themselves.
Even if theoreticians and more practical companies feel this is all a
big mistake, those big ships will still be around for twenty or more
years, and they will change the container trade.
Trades and cascades
One of the more immediate impacts will be the cascade effect.
As the mega ships displace 6,000-8,000TEU ships from Asia-Europe
and transpacific trades, this will change the nature of the intra-Asia
trades and trades to other regions such as Latin America. This may
seriously affect marginal trades, for example inter-island shipping
in Indonesia. Ships coming available for this trade will be larger
and gearless, increasing the need for effective dedicated terminals
across the archipelago.
If you are the company with the mega ships and you are
pushing ever larger ships down the cascade into the other trades,
this could work for you, creating advantages in several trades
through investment in only one. However, it must be seen as a
risky bet. Those big ships need to be nearly full nearly all the time
to earn their keep.
I've always believed that the shipping industry has always been
highly competitive; lots of smaller players and niches, with strong
commercial attitudes within most companies. However, this view
is facing a challenge, in container shipping. Unless Europe and the
US grow significantly, there will be prolonged overcapacity in the
sector, leading to a fight for utilisation in those big ships. As cash
drains away, some lines ought to fail. But we've been here before,
and lines did not fold then because their host governments and
their banks helped them out. How many more times will this be
required? Is there a real market in shipping if lines are never
allowed to fail?
Perhaps there is no real market -- perhaps there is no penalty for
investing rashly or at the wrong time. This may partly explain the
big ships. If there is no real risk in overextending yourself, and
investing in size can change the world in your favour, perhaps the
logical choice is to invest. By saving the shipping lines in 2008/09,
governments fuelled a market and economic failure, ushering in
another round of big ship investments that, interestingly, benefits
China most. Let's face it: overcapacity leads to lower freight rates,
which boosts trade between Asia and Europe and the US.
*David Wignall has worked in ports for 25 years. He founded his own
company, David Wignall Associates, to develop ports and help managers
get the best out of their terminals.
September 2011 BAIRD MARITIME
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