Capacity is drum-tight, charter rates are soaring, and carriers are restructuring their routes to free up tonnage for their most in-demand trades. That description sounds like the container trades. It also fits roll-on, roll-off shipping, but there are differences.
In the ro-ro market, there's little danger of overbuilding, despite the huge number of ships on order, and rates are firming gradually instead of at double-digit rates. That's because the specialized world of ro-ro carriers operates by a slightly different set of rules from the ocean container trades. It's also because China is not a significant source of cargo for the ro-ro business - at least not yet.
Like the container-shipping business, ro-ro is on a roll. Even though the number of vessels in the ro-ro fleet has grown by more than a third in the last five years, ships are filled to capacity with the two distinct cargoes - autos and "high-and-heavy" cargoes. High and heavy cargoes include cranes, agricultural equipment and construction machinery, which require special handling.
"Capacity is extremely tight," said Christopher J. Connor, president of Wallenius Wilhelmsen Lines Americas. "What caught us by surprise is that from about the middle of last year everyone was saying, 'You know 2005 won't be as good as 2004, but it will still be a pretty good year.' Now as we look out on our radar screen, we are seeing a 10 percent increase in ro-ro volumes for both autos and high-and-heavy over 2004."
Connor said there is "a mixed bag in that picture," with the most significant volume growth coming from shipments of agricultural equipment and industrial machinery from Asia to the U.S., from Europe and the U.S. to Australia, and across the Atlantic in both directions. Although the dollar has been declining, this has had little impact on imports of autos and machinery because "it's mostly multinational companies selling to themselves," he said.
"All three of our outbound U.S. trade lanes are doing quite well these days because of the weak dollar," said Roy Winograd, vice president of HUAL North America, which is changing its name to
Hoegh Autoliners on June 1 to comply with its Norwegian parent's corporate nomenclature. "The Middle East is the strongest of the three for new and used vehicles and for high and heavy."
HUAL's other two major trade lanes are from the U.S to Europe, and from the U.S. to West and South Africa. Winograd said HUAL is experiencing faster growth in U.S. exports of new and used vehicles than in the high-and-heavy sector. On a global basis, Hoegh Autoliner's fastest-growing trade lanes are from the Far East to the U.S. and Europe, which are seeing strong increases in shipments of cars, especially SUVs, and some high-and-heavy cargoes.
The weak dollar eventually may begin to have more of an impact on the U.S. auto business, according to George Magliano, director of automotive industry research, North and South America, at Global Insight, an economic research and forecasting firm.
"The weak dollar is causing problems for importers, so the auto manufacturers are looking at more and more North American sourcing of both cars and parts," he said.
But he said even though foreign automakers may produce more automobiles in the U.S. and Mexico, this is not likely to slow the increase in oceanborne auto imports. That's because the market for foreign cars is continuing to increase at Detroit's expense.
Magliano said he expects the Big Three's share of the U.S. auto market to fall to 55 percent by 2010 from 55 percent in 2004.
Global Insight projects that U.S. auto imports this year will decline 0.46 percent to 3.38 million vehicles from last year's 3.39 million in 2004, when imports increased 2.53 percent from 2003. The firm projects increases of 0.01 percent in 2006 and 3.95 percent in 2007, with U.S. vehicle imports rising to 3.99 million units by 2010.
The current capacity crunch is aggravated by the globalization of the automobile-manufacturing business, said Paul Carlton, president of MOL Bulk, the non-container business of Mitsui O.S.K. Lines Ltd. He said the automobile trades are changing as production shifts to such countries as Argentina, Brazil, Mexico, South Africa, South Korea, Thailand and Turkey.
As ro-ro capacity has tightened, all of the carriers have been ordering new ships. Carlton said 110 ro-ro vessels are on order for delivery through 2008. Although this represents a 26 percent increase over the existing fleet of 425 ro-ro vessels, there appears to be little danger of overcapacity. By 2008, 140 vessels will be at least 25 years old and ready for scrapping. If capacity remains tight, some of the older vessels may remain in the fleet, although not on the primary east-west trades, he said.
Most of the new ro-ro vessels being delivered or on order have a carrying capacity of at least 3,500 vehicles, as measured by the average small car - the Toyota Corolla. But unlike previous generations of ro-ro vessels, the new ships can be reconfigured at the push of button to carry different kinds of cargo. The largest car carriers have decks that can be hydraulically adjusted in size to accommodate the kind of cargo being carried. With a full 13 decks, they can carry the maximum number of autos. By reducing the number of decks by two or three and creating more height, they can accommodate taller equipment, such as cranes, bulldozers and agricultural equipment.
"In some trades, you want to be able to drop all your decks to get the maximum number of autos in," Connor said. "The newer vessels all have this, so it makes your fleet more homogeneous so you can trade the same vessel in a global trading pattern and adjust it for the characteristics of that particular trade."
Connor also doesn't foresee a surplus of tonnage because of two dynamics. First, the geographic diversity of today's automobile manufacturing. "It used to be that 90 percent of all auto imports came from Japan and 10 percent came from Europe and other countries, including Korea," he said. In those days, car carriers did whatever they could do to get their ships back to Japan as fast as possible. "Today Japan represents only 50 percent of imports and we reckon by the end of this decade it will be around 40 percent."
Connor said this diversification will change even more dramatically as China starts to export cars. Honda Motor Co. already has announced that it will start exporting cars from its two plants in Guangzhou Province in southern China by summer. "You have a much less efficient network today because you're going to a lot more places instead of just going to Japan and putting 3,500 vehicles on one vessel. This sops up more capacity," Connor said.
The other dynamic that weighs in against overtonnaging is the change in the kinds of cars that are being imported. More people are driving vans and SUVs instead of small cars. As a result, the average vehicle being shipped globally is 10 to 12 percent bigger than it was a decade ago. In some markets, such as the Japan-to-Europe and Japan-to-North America trade, the average is closer to 20 percent bigger. "They take up more space on the ship. You may have the same number of decks, but you put fewer cars on them," Connor said.
As tight capacity continues, rates are firming, but only gradually because most of them are set under long-term contracts. Auto-import contracts typically run from five to seven years. Contracts for high-and-heavy equipment usually range from two to four years. Rate increases have been largest in the Asia-North America market, though not as large as in the container trades.
"That's the history of the roll-on, roll-off car-carrying segment," Connor said. "There's less volatility, more stability. And so, even in a strong market, you don't see dramatic swings in pricing, but they are certainly trending up."
To meet the capacity shortage, Wallenius Wilhelmsen has been reconfiguring its schedules "to put the right ships in the right trades so you get the most amount of capacity," as Connor put it. "We eliminate some ports and feed the cargo into a larger port so we save time on our schedule." For example, the carrier has increased the number of ships on its eastbound round-the-world service to 11 from eight, which cut the time between port calls to 10 days from 15 and cut the rotation to 110 days from 125 days.
"Now we call on our ports every 10 days, but we did drop some ports," such as St. John's, Newfoundland, where Wallenius Wilhelmsen used to pick up paper. "There have been a lot of changes in the paper industry, and we made a decision not to stretch ourselves," Connor said. "Now we carry paper out of Savannah - not Canadian papers, but different manufacturers, like Georgia-Pacific. We've had to focus on our major customers to add more frequency and capacity."
Wallenius Wilhelmsen has dropped two or three ports on its round-the-world service. It is cutting back on calls at New Orleans and increasing calls at Norfolk. Like other carriers, it occasionally has to charter ro-ro tonnage for the short term. "Charter rates are very high, so it costs a lot more money if you can get the tonnage," Connor said. "But we have to do it to meet our customers' needs."