Ocean car carrier executives have been working overtime to reschedule sailings across their global networks after the catastrophic earthquake, tsunami and nuclear crisis in Japan ruptured the nation’s automotive plants and interrupted exports to Europe and North America.
Almost two months later, the global automotive supply chain is slowly returning to normal as Japan’s Big Three manufacturers — Toyota, Honda and Nissan — resume production at their domestic assembly plants and at foreign factories forced to suspend operations because of a shortage of parts.
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But although the dislocation to auto shipping likely will persist into June as carriers reschedule sailing schedules, the crisis will have minimal long-term financial impact on shipping lines.
The same can’t be said for Japan’s automakers. J.P. Morgan expects the combined overseas production of Japan’s Big Three to shrink 30 percent in the second and third quarters compared to the same periods of 2010.
The Japan disaster could cut car production by 5 million units this year over 2010, economic research group IHS Automotive says, with production in the traditionally slow fourth quarter rising to make up for the shortfall.
For car carriers, the Japanese crisis represents a temporary operational challenge that will ebb quickly as they focus on more pressing market developments, notably China’s sudden emergence in the global auto shipping market.
And, to put the impact further into context, the economic impact of the earthquake on car carriers pales in comparison to the slump in global car sales in 2009 that forced companies to cancel 35 percent of sailings and lay up a record 15 percent of the world fleet.
Car carriers can withstand financial hits and operational hazards because the largest operators fall under the umbrella of Japan’s Big Three shipowners — NYK Line, “K” Line and MOL — or are savvy specialized operators such as the Scandinavian Hoegh Autoliners and Wallenius Wilhelmsen Logistics.
Smaller companies are consolidating to achieve the economies of scale to allow them to compete against larger rivals. The latest newcomer is Norwegian Car Carriers, formed last year by the merger of Dyvi Shipping and Eidsiva Rederi, which charters several of its 15 ships to the major operators, including “K” Line and Hoegh. The Oslo-listed company raised more than $21 million from a share issue in February and placed a $70 million order in March for a vessel capable of carrying 6,500 cars for delivery in 2012. The contract included an option, to be declared by June, for an identical ship at the same price.
Carriers also are investing in bigger and more cost-effective ships to keep pace with growing demand for global car transport. Norway’s Wilh. Wilhelmsen in March launched the world’s largest roll-on, roll-off vessel — an 875-foot-long behemoth with a cargo capacity of 4.8 million cubic feet over six fixed and three hoistable decks. The ship, with its optimized hull and several energy-saving features, including a streamlined rudder design, uses 15 to 20 percent less fuel per transported unit than earlier vessels.
Last year’s recovery in the global car market, aided by government-supported cash-for-clunkers programs, continued into 2011, though shipments from Japan and South Korea to the mature U.S. and European markets appear to have peaked and remain below the pre-financial crisis levels of late 2008.
Yet car carriers reportedly have turned away business in recent months as they restructure their sailing schedules to cope with surging demand in China for European-built automobiles.
European seaborne car exports to China are expected to reach approximately 500,000 units this year, compared with a paltry 20,000 units in 2005. This has convulsed the two-way trade, with eastbound traffic to Asia exceeding westbound shipments to Europe for the first time.
Although good news for car carriers that are charging higher freight rates out of Europe, the imbalance in two-way trade means vessel arrivals from Japan and South Korea to take cars back to Asia are falling behind demand.
China’s emergence as a major customer for European-built cars was highlighted last year by the decision of Germany’s Daimler to stop exporting cars on Maersk Line container ships and use car carriers operated by “K” Line and NYK because shipments had reached the critical mass where dedicated car carriers are cheaper than container transport.
Daimler expects sales of its Mercedes-Benz cars in China to increase more than 20 percent this year over 2010 after jumping 86 percent in the first quarter to 43,990 units.
South Korean carrier Eukor launched a direct service from Europe to China last year, deploying its latest 8,000-car capacity ships. Wallenius Wilhelmsen Logistics, the Norwegian-Swedish joint venture, also increased frequencies on its China Express Service between Japan, South Korea and China.
The surge in Chinese imports caught automakers and car carriers off guard, because many of the cars shipped from Europe are made in China, too. They didn’t figure status-conscious Chinese consumers would prefer European-made cars to identical domestic models despite a higher price tag that reflects transportation costs and a 25 percent customs duty.
China overtook the United States as the world’s biggest car market in 2009, but until recently, most analysts expected Chinese and foreign-owned plants in the country to meet the demand. Now, Chinese demand for imported cars, particularly from Germany, is set to soar with the middle class likely to double to 400 million people by 2014, according to French bank Societe Generale.
China will account for about 15 percent of German exports, including cars, by 2010, compared with 5.6 percent now. China overtook the United States as Germany’s biggest overseas market in December, importing goods worth $7.7 billion, beating the $7.6 billion in shipments across the Atlantic.
European manufacturers are supplying the Chinese market with a mix of locally built and imported models. Audi sold 220,000 cars in China, its biggest market, in 2010 of which three models were built in the country and five were imports. Its decision to launch its latest model, the Q3, at April’s Shanghai Auto Show in April, rather than in New York or Frankfurt, highlighted the importance of the Chinese market.
China’s craving for foreign-built models is good news for car carriers, but there are concerns over the durability of the import boom as European and U.S. automakers ramp up capacity at their Chinese plants and cost-conscious Chinese consumers settle for domestic-built models.
Auto and light truck sales in China grew only 6.5 percent in March. That looks good compared with the 5 percent drop in sales of passenger cars in the 27-nation European Union in the same month. But it was a major setback in a market whose sales surged 32 percent in 2010 and 46 percent in 2009.
The slide in Chinese car sales was attributed to higher oil prices, rising interest rates, the expiration of tax breaks for fuel-efficient models and more expensive food and clothing that has eroded consumers’ discretionary income.
At the end of last year, the China Association of Automobile Manufacturers was eyeing growth of 10 to 15 percent in 2011, but now says the market will do well to grow 10 percent.
Still, 10 percent growth in the world’s largest automotive market means good business for manufacturers and shipping lines that transport their cars.
Also good news for car carriers is China’s emergence as a major exporter of cars. SAIC Motor, the Shanghai-based state-owned company, aims to sell 800,000 cars a year outside China by 2015. Great Wall, the first Chinese car manufacturer to have met EU standards, said exports likely will account for 30 percent of its sales by the same year. And Geely, which acquired Sweden-based Volvo from Ford for $1.8 billion in 2010, launched a light sedan and a hatchback in Australia earlier in the year.
Foreign companies with plants in China also are eyeing exports. France’s PSA Peugeot Citroen is considering low-cost models at a joint venture plant in Shenzhen for the domestic and overseas markets. “Our main focus is China, but nothing prevents us from exporting,” CEO Phillipe Varin said.
Automakers are constantly moving into new markets, particularly in the Southern Hemisphere, creating opportunities, and challenges, to shipping lines. But exports don’t always translate into business for vehicle carriers. Hyundai Motor’s recent launch of its midsize Mighty truck in Brazil won’t boost demand for ro-ro car carriers because the vehicles will be shipped in containers from South Korea as knockdown kits and assembled in Brazil.
Although the demand side is clouded by uncertainty over global car sales, car carriers have a much clearer view of the supply side — scrapping aside — over the next three years.
The car carrier fleet totaled 688 ships of 10.5 million deadweight tons on April 1, according to London ship broker Clarkson. There are 106 vessels of 11.98 million dwt. on order, equivalent to 16.9 percent of current capacity. By contrast, the container ship orderbook is equivalent to 28.8 percent of the existing fleet.
The market faces a shortage of capacity by 2013 with demand rising and the fleet shrinking as owners scrap older tonnage, according to Norwegian Car Carriers. That means rates are set to increase through 2012.
And even as they race to keep pace with Chinese imports and prepare for a Chinese export drive, car carriers can look forward to bumper business in India, the world’s second-fastest growing market after China, which is also eyeing overseas sales.
Contact Bruce Barnard at firstname.lastname@example.org.