Europe’s roll-on, roll off shipping sector is refusing to allow the continent’s deepening sovereign debt crisis derail its drive to cut costs, boost efficiency and achieve sustainable long-term profitability amid forecasts of modest market growth.
The increasingly niche sector is about to get a major boost with Atlantic Container Line expected to order five extra-large multipurpose ro-ro vessels. The ships, which would replace aging vessels that have been operating in the trans-Atlantic trade since the mid-1980s, reportedly will have a revolutionary design with adjustable decks able to carry containers, cars and trucks, and out-of-gauge cargoes.
More important, the vessel order would send a strong signal that major carriers such as ACL aren’t ready to give up on the versatile multipurpose ships in favor of pure container vessels. It’s also indicative of the resilience of the European ro-ro market, even as weakness reigns in much of the surrounding region.
While operators in the Mediterranean, Baltic and North Sea regions, which deploy half of the world’s ro-ro capacity, struggle with economic weakness in most markets except Germany, European ro-ro carriers in the global seaborne auto trades, mostly based in Scandinavia, are cashing in on an unexpectedly strong market.
Still, the conventional Europe-based ro-ro business is keeping the faith despite sluggish demand. ACL’s owner, Naples, Italy-based Grimaldi, shows no signs of slowing its relentless effort to push ro-ro into new markets.
ACL in February launched a weekly ro-ro service from the U.S. and Canada to Finland and Russia. The service — ACL says it’s the fastest and most frequent link between North America and the Baltic — uses ACL trans-Atlantic ships and ice-class vessels operated by Finnlines, Grimaldi’s Helsinki-based carrier.
Grimaldi also is enlarging its ro-ro footprint within Europe, launching so-called motorways of the sea aimed at taking freight off the roads. Most recently, it added a three-times-a-week Genoa-Valencia service to its network, offering truckers a 24-hour transit option to the congested highway link between the Italian and Spanish port cities.
Clouding the ro-ro market’s future, of course, is a eurozone crisis whose timing couldn’t be much worse: The deepening crisis and economic recession not only is stunting traffic growth on key routes, but carriers also face soaring bunker prices and increasing demands to invest in ships that meet stringent environmental standards in the North Sea, English Channel and Baltic markets.
The eurozone crisis is deepest in the peripheral European Union nations that rely heavily on ro-ro shipping, led by Greece and Ireland. But more mainstream ro-ro markets also face slowing demand, a slowdown proving too much for some carriers to survive. Sea France, a subsidiary of French state railway SNCF that competed on the U.K.-France cross-channel market, collapsed in late 2011.
Ports, including the continent’s largest, also are feeling the effects. Rotterdam’s ro-ro traffic stalled in the first quarter of 2012 as its biggest market, the U.K., sank into a double-dip recession.
Some companies saw the potential for a 2012 collapse as far back as last summer. Seven months before posting a record $134 million pretax profit for 2011, Danish shipping and logistics company DFDS last August began working on contingency plans to address a possible decline in 2012. The company generates 80 percent of its $2 billion annual sales from freight and 20 percent from passenger traffic, which has held up better.
Even as they compete more fiercely among themselves, Europe’s largest ro-ro carriers face tougher challenges from cargo- hungry railways and truckers on major short-sea markets. Shipping lines on the busy U.K.-France route are losing market share to railroads and trucking companies using the cross-channel tunnel linking Europe’s second- and third-largest economies. Eurotunnel, the tunnel operator, handled almost 350,000 truck shuttles in the first three months of 2012, up 21 percent year-over-year. Eurotunnel’s rail freight unit, Europorte, reported a 38 percent increase in revenue year-over-year in the quarter to $67 million.
Eurotunnel has raised the stakes dramatically by submitting a bid to operate the channel ports of Calais, France’s fourth-largest port handling 1.6 million trucks and 38 million tons of cargo annually — and neighboring Boulogne.
Europe’s ro-ro carriers are considering consolidation to achieve synergies in the face of slow-growing markets, rising operating costs and rate-destroying competition. “It looks as if market conditions are set to become more challenging in 2012. We therefore see limited organic growth, but envisage opportunities to grow by acquisition,” DFDS CEO Niels Smedegaard said.
The next wave of mergers and acquisitions likely will involve current operators rather than outside investors such as U.S.-based private equity fund KKR, which paid $1.3 billion for Turkey’s UN-Ro-Ro, U.K. venture capital group 3i and German insurance giant Allianz, which bought into Scandlines.
DFDS, which became northern Europe’s biggest short-sea shipping and logistics company with the $425 million acquisition of Norfolkline from Denmark’s A.P. Moller-Maersk in 2010, is leading the drive to consolidate the industry. Most recently, it teamed up with Louis Dreyfus Armaterus, a privately held French shipowner, in a nine-ship joint venture operating on routes between the U.K. and France and France and Tunisia.
DFDS owns 82 percent of the new company, which is scheduled to start operations in July and generate $360 million in revenue in its first year.
The continent’s ro-ro industry is being whittled down to a select group of well-capitalized companies, comprising P&O Ferries, acquired by DP World in its 2006 acquisition of the U.K.’s P&O Ports; Stena, a $4.2 billion-a-year Swedish company also active in the tanker and offshore oil and gas shipping; Germany’s Scandlines and DFDS, which dominate the North European market; and Grimaldi, which is emerging as the sole pan-European player, with international operations embracing North and South America and West Africa.
Merger and acquisition activity in the North European ro-ro business faces considerable antitrust hurdles that could slow consolidation. Denmark’s DSV, one of the largest Scandinavian trucking and logistics groups, pulled a joint bid for DFDS in 2009 after European regulators launched an in-depth investigation of the planned deal. Three years later, DSV’s sea freight volumes are lagging market growth, and the company’s vow to restore market share could involve another bid for another shipping company.
“The consolidation that has occurred over the past 10 years I expect to continue,” DSV CEO Jens Bjorn Andersen said in April. “We hope for more M&A activity this year.”
Even as they weigh fresh takeovers, some of the largest ro-ro operators continue to shed non-core businesses. DFDS, for example, sold a ro-ro/breakbulk terminal in Rotterdam last year for $35 million and then acquired a 65 percent stake in Alvsborg, a Swedish terminal operator that has a 25-year concession at two ro-ro terminals in the Port of Gothenburg.
The outlook for European ro-ro lines in the global car transport market, such as Wilh. Wilhelmsen, Hoegh Autoliners and Norwegian Car Carriers, is much more bullish.
The industry, with its small order book, is better placed than most other shipping sectors that have large order books to avoid a double-dip recession, according to Drewry Shipping Consultants.
The demand side is looking good. Japan, the world’s largest car exporter is in position for strong growth through 2015, and the European auto trade is likely to return to pre-U.S.-recession levels by 2015. South Korea, the second-largest seaborne vehicle trader, will post an average increase of at least 4.5 percent for the next 10 years, Drewry said.
Although auto production is shifting toward Asia, there is also a ray of light in the eastbound trades. Only a few years ago, this was a ballast leg for car carriers transporting vehicles from Asia, but many vessels now sail with paying cargo as Chinese demand for luxury European models surges.
Europe’s ro-ro business may be suffering at home, but it looks ready to embark on a bull run in the rest of the world.
Contact Bruce Barnard at email@example.com.