I met with a container line executive earlier this month and found him to be in a grumpy mood. Troubled by the state of the industry, he posed the question, “Why do we continue to serve the Asia-Europe and trans-Pacific” markets, when those trades yield nothing but losses year after year? “We have to be there,” he said with resignation.
What prompted the question was less the past than the future. When carriers look out at the next three years, they have a tough time seeing where the profits will come from. In the last few months, as rates have tumbled, ship orders have piled up and analysts turned negative on carrier stocks. An ominous feeling has crept into the industry.
Not only have ships whose deliveries were delayed during the recession started arriving, but ship ordering also has restarted following a hiatus during the recession. It’s the nature of the ordering that some find particularly unsettling.
Ships such as Maersk Line’s 18,000-TEU Triple-E class, 20 of which have been ordered by the Copenhagen-based carrier, drastically cut per-container operating costs and will thus force competing lines to replicate those economics by piling on orders for bigger ships themselves. That is exactly what’s happening.
“There is no way you can compete on cost if you only have 8,000- to 9,000-TEU ships and your main competitors are running 13,000-plus-TEU ships,” said Lars Jensen, CEO and partner of SeaIntel Maritime Analysis in Copenhagen.
The mega-ship category is driving the market and will be the primary force shaping the industry in the years to come. According to Alphaliner data, 161 ships of more than 10,000 TEUs are on order, more ships than in any other category. The mega-ship category accounts for 48 percent of all capacity on order. The mega-ship category is expanding much faster than the container ship fleet as a whole; the total order book stands at 29.9 percent of the current operating global fleet, while the order book for mega-ships represents 167 percent of that existing fleet, according to Alphaliner data.
Carriers behind in the mega-ship race are playing catch-up, the effect of which will be to swell global capacity. According to SeaIntel, the three largest carriers — Maersk, Mediterranean Shipping Co. and CMA CGM — control 78 of the 97 ships greater than 10,000 TEUs now in service.
The three carriers control 83 percent of the nominal capacity in this category. But by 2013, the share of mega-ship capacity controlled by the three lines will drop to 57 percent as carriers such as Cosco, Hapag-Lloyd, Hanjin Shipping, China Shipping and APL deploy ships in the mega-ship category to maintain competitiveness, SeaIntel predicts.
The pressure to keep pace will hardly let up. With the Maersk Triple-E ships coming, the economics of even a 10,000-TEU ship begin to look quite unfavorable, and this will put pressure on carriers to order even larger ships.
“Either carriers will have to go out and order very large tonnage ships of 13,000 TEUs or larger, or they will have to come up with a value proposition that is so valuable that they can charge a premium on their 8,000- to 10,000-TEU ships. But it is hard to see what that value proposition would be,” Jensen said.
The race to keep pace in vessel economics will undoubtedly affect the market. Such is the irony of carriers acting individually in their best interest while collectively hurting the industry and, by extension, themselves. Alphaliner forecasts global supply to increase 8.7 percent in 2011 and 2012. Braemer believes the 2012 figure will be even higher.
“With the delivery schedule over the next two years to remain firm against an expected sluggish demand, carriers must anticipate further market weakness,” Alphaliner wrote in mid-July. Factors impacting demand include a shift from outsourcing to near-sourcing, in other words a slowdown in one of the main drivers of historic container shipping growth.
Alphaliner says the 2013 outlook is even more troubling for the carriers, with a record 1.73 million TEUs scheduled for delivery, surpassing the 1.57 million TEUs in 2008. As Alphaliner noted, “Most carriers continue to pile up new vessel orders, and the order wave does not appear to be coming to an end any time soon.”