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 Lately CKYH Alliance have withdrawn capacity from Asia-Europe because of “poor freight rates”, while the New World Alliance has cut transpacific capacity.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.