Overcapacity, Fleet Supply, Weakened Earnings, Consolidation – and now – fears of trade wars fuel further uncertainties for an already unsteady boxship climate. MLPro’s Barry Parker digs in to get to the bottom of all of it.
The report season for 2018 Q1 corporate results saw an “earnings miss” (reported earnings below consensus forecasts of analysts) for the bellwether of listed container equities, A.P. Moller (APM), with its largest portfolio holding being Maersk Line. In a media telephone interview, APM CEO Soren Skou, said, “…in our main business, the ocean segment, we are not making money.” Indeed, figures accompanying APM’s Q1 report showed a slight decline in average laden $/FFE (40’ equivalent) on East / West routes, calculating back to $1,796, compared to the year earlier figure of $1,813.
The business tends towards overcapacity – in recent years, the big players have focused on “economies of scale” – effectively bringing about a race to the bottom as larger vessels have been ordered. The result has been weakened earnings, as shown in FIGURE 1. To that end, the tone has now changed.
On APM’s mid May earnings call (detailing Q1 results), Mr. Skou’s Lieutenant, Maersk Line COO Soren Toft, told listeners, “On capacity, let me also say that in 2015, Maersk Line ordered a total of 27 vessels, 20 of them were large vessels. They've by and large been delivered. And … we have no plans of ordering any ships for at least the next 12 months. Equally with the initiatives we are putting in place, we believe we can keep the present capacity unchanged for the next 18 months, even erring towards a slightly lower capacity in the next couple of quarters, as we implement the Hamburg Süd synergies.”
Fleet supply continues to be a vexing problem. A February 2018 analysis by Baltic and International Maritime Council (BIMCO) offered, “The containership fleet has already expanded by 1.2% in the first month of 2018 – equal to the entire fleet expansion of 2016 … A flurry of new ships has been delivered in January. Not since July 2010 has such a massive inflow of capacity taken place in one month – 254,173 TEU. This includes plenty of feeder ships, but also five ultra-large 20,000+ TEU ships.” And, the strategies for dealing with oversupply are seemingly far from uniform.
One major response to oversupply during the past two years had been consolidation, with many business combinations occurring. After the dust settled, Maersk (which is still absorbing Hamburg-Sud) continues to rank at the top of the leader boards. Late May figures from Alphaliner show the Copenhagen-based giant as controlling more than 4.1 TEU of tonnage (of this, 55% owned, and 45% on charter), just under 19% of the overall market.
Mediterranean Shipping Corp comes in next, controlling 3.3 million TEU, slightly less than 15% of the total fleet, followed by CMA-CGM (which acquired Neptune Orient Lines in 2016) with 1.97 million TEU (11.6% of the overall fleet). But CMA CGM wasn’t done yet. As MLPro went to print, CMA CGM Group announced an agreement between CMA CGM and Container Finance whereby the container shipping and logistics business Containerships (and Container Finance’s holdings in Multi-Link Terminals Ltd and CD Holding Oy) will become part of CMA CGM. The Finnish firm specializes in the intra-European market and will presumably strengthen CMA CGM’s penetration there. Of course, the transaction remains subject to regulatory approval.
A beefier COSCO, which had absorbed CSCL (1.974m TEU, 8.9%), ranks fourth, followed by Hapag Lloyd (which acquired United Arab Shipping Company) with 1.6 m TEU, or 7.3% share of the total. The Ocean Network Express (ONE), formed after three Japanese carriers joined forces – and launched in April 2018, comprises 1.56 m TEU of controlled capacity, or 7% of the total. One transaction in the works, but not yet concluded, will see COSCO acquiring Orient Overseas Container Lines (OOCL), creating a carrier of approximately 2.6 m TEU, if the deal comes to fruition.
Each business combination has the potential to force a realignment of existing alliances, where groups of carriers are able to jointly market their capacity. Xeneta, offering a repository of freight rates (and tools for comparing them) serves many stakeholders, and noted recently in a company blog, “We are all seeing fewer carriers and bigger ships, making less-frequent calls at fewer ports, which can disrupt supply chains and cargo flow. However, the industry is still in uncharted waters."
In another related effort to combat the plethora of extra tonnage, some carriers were seeking to delay deliveries of megaships. In early 2018, both COSCO and Yang Ming pushed back newbuild deliveries, originally scheduled for 2018, out into 2019. On the other hand, South Korean carrier Hyundai Merchant Marine (HMM) trumpeted upcoming plans to order as many as 20 vessels, including 12 of 20,000 TEU capacity. It is Maersk, however, that is often considered the business bellwether. The emphasis of its COO, Mr. Toft, on holding the line on supply is borne out by Alphaliner’s analysis, which shows the shipping giant’s orderbook of 12 ships totaling 105,288 TEU, a mere 2.5% of its existing controlled fleet, well below industry average.
Not everyone is worried about overcapacity. Analysts at Drewry Shipping, which produces the World Container Index, wrote in late April that “Fears of overcapacity are over-hyped,” adding, “Deferrals mean that new containership deliveries in 2018 will not damage the supply-demand balance. More ships are needed to keep up with demand projections.” BIMCO is also looking for steadiness in 2018, with Lead Analyst Peter Sand saying: “Overall demand growth is expected to be lower than in 2017, but still high enough to potentially improve the fundamental market balance. BIMCO forecasts demand to grow by 4.0-4.5% against a fleet growth of 3.9% in 2018. The IMF … significantly lifted expected GDP growth in advanced economies for 2018 and 2019… generally good for container shipping demand.” BIMCO highlighted growth in cargo moving from Asia through the Panama Canal, saying, “2018 is likely to be the year where many container line networks calling the US East Coast will become fully up-scaled by deploying ultra large container ships.”
As if the cost of fuel, the looming IMO 2020 deadline, overcapacity fears and low freight rates weren’t enough to worry about, lurking in the background is the specter of politically induced slowdowns in trade. The opening salvos in what could be a trade war affected neobulk commodities – steel, aluminum, and bulk grains – notably U.S. sorghums bound for China. So far, though fears about slowdowns in the box trades have been widespread, impacts on containerized trades have not (yet) materialized. That said, and as MLPro goes to print for this edition, the saber rattling from all sides – the United States, the EU and china – is getting louder.
For his part, BIMCO’s Peter Sand has insisted that the impending trade war “…is all about the eastbound trans-Pacific trade lane.” In mid May, the U.S. toned down its rhetoric, suggesting that it would look for a rapprochement with China, rather than turning the China to West Coast U.S. trades into a war zone, with widespread tariff increases. By mid June, the U.S. had changed its tune, in line with the rising summer temperatures. It remains to be seen what will really happen. Data from MDS Transmodal, a UK-based consultant, shows that 18.6 million TEUs moved from the Far East to North America overall in 2017.
Separately, U.S. sanctions against Russia and now Iran are back in the news. Consultants from Drewry, writing in their Container Insight Weekly, commented that: “Should negotiations fail to resolve the matter, all non-US countries will be faced with a thorny dilemma: how to continue trading with Iran without catching heat from America? The threat of so-called ‘secondary sanctions’, whereby the US punishes foreign firms for doing business with Iran, will inevitably see companies acquiesce to the demands of the biggest market. That’s already happening.
In mid-May, Reuters reported that Shipping group A.P. Moller-Maersk was the latest in a growing roster of firms preparing to exit Iran. That leaves many stakeholders to wonder whether the EU can keep the nuclear deal with Tehran both alive and relevant. That’s because Maersk's decision follows similar moves by other such heavyweights as French oil major Total and MSC, the world's largest biggest container shipping company.
Reuters also reported that Maersk Chief Executive Soren Skou said, “With the sanctions the Americans are to impose, you can't do business in Iran if you also have business in the U.S., and we have that on a large scale.” Indeed, this is now as much about business as it is about politics – or global security. After all, much of the global supply chain is holding its breath to see what happens next.
To that end, and in terms of the bigger sanctions picture, Drewry noted, “Previous trading restrictions have meant that neither Russia nor Iran has lived up to its billing on the container market. A return to the trade wilderness through greater sanctions (deserved or not) will only increase the likelihood of that untapped container potential going to waste.”
Container shipping is not homogenous; it breaks down into multiple subsectors. What is clear is that smaller vessels, which include ships in North-South trades and regional feeders, have seen more market traction than their larger brethren. The graph charting composite of time charter hires for smaller vessels, provided by the Hamburg Shipowners’ Association (www.vhss.de) shows the volatility over time, as well as recent improvements. Indeed, according to APM’s 2018 Q1 report, rates paid by shippers in the “intra-regional” trades improved dramatically over the comparable 2017 period, rising 21% to $1,433 per 40 foot equivalent.
In the short term, the carriers are attempting to claw back increased fuel costs, with Maersk, CMA-CGM and MSC are all implementing surcharges. Longer term, as all shipping sectors grapple with the advent of restriction on sulfur in fuel (and with longer term efforts to limit the industry’s greenhouse gas emissions), the container sector is responding. HMM’s putative order will see vessels fueled by LNG, or, alternatively by “scrubbers” (which would enable cheaper fuel, with a high sulfur content, to be consumed). CMA-CGM has announced that nine 22,000 behemoths on order will consume LNG fuel- supplied through a ten-year strategic agreement with oil major Total, beginning in 2020.
On the tech side of the business, so-called ‘digitization’ is impacting the container sector, more so than others. “Blockchain” technology – whatever that is – viewed by some pundits as the tidal wave and great enabler in simplifying supply chains, is waiting somewhere in the wings. Maersk took an early lead here, launching a project in conjunction with IBM. In the meantime, CMA-CGM, whose APL subsidiary has joined a consortium, which includes consultants Accenture, is hard at work on a competing effort.
Still, digital efforts are moving ahead. In APM’s mid May Q1 results, Soren Skou explained: “… we see significant customer uptake in the digital offerings and moving through digital transactions online, and that will over time, result both in lower costs and also in our ability to sell more products on our online platform.” He emphasized that point by revealing, “60% of all bookings, 84% of all quotes, $1.3 million worth of business every hour is currently transacted on maerskline.com.”
Online platforms and marketplaces go hand-in-hand with the changing nature of the business, where deregulation in the 2000’s has led to a volatile marketplace dogged by old business practices. INTTRA, by now a familiar online booking platform developed by the carriers in the early 2000’s, is now seeking to add value by getting into the backend of the business by streamlining the management of contracts dogged by old style paperwork and the inefficiencies that go with it.
Separately, NYSHEX, a newer online marketplace presently concentrating its efforts in the trans-Pacific trades, has sought to streamline rate quotations, and has added financial guarantees to drive performance of contracts extending out as far as six months into the future. Still another freight procurement platform, FREIGHTOS, another holder of freight rate data used widely by logistics providers and cargo owners, hopes to bring transparency to the scrum. It has now announced collaboration with the venerable Baltic Exchange (best known for the Baltic Dry Index and its offshoots) to create a suite of container rate indices, based on anonymized data within its system.
At a Hong Kong logistics conference in late 2016, an Alphaliner analyst got up and gave a talk on the current state of the global boxship markets. As he rattled off a long list of what was happening in the sector, listeners nodded their heads and murmured their assent as if to say, “We know.” After five minutes, though, he revealed that he had really been reading from a ten-year old news story. That got a laugh – but he had made his point.
As the containership markets face familiar challenges, though, it also faces the headwinds of ballast water treatment costs, surging fuel costs, falling rates, possible trade wars and IMO 2020 deadlines. The route out of murky waters won’t be any easier this time, especially with the additional burden of countless other pressures looming. Technology no doubt will be a part of the solution. But, in the end, avoiding the mistakes of the past will be just as important.
Barry Parker, bdp1 Consulting Ltd provides strategic and tactical support, including analytics and communications, to businesses across the maritime spectrum. The company can be found online at www.conconnect.com
NOTE: This story first appeared in the MAY/JUNE edition of Maritime Logistics Professional magazine.