SHENZHEN, China — NOL Group President and CEO Ng Yat Chung doesn’t expect a rate war on the Asia-Europe trade lane, largely because carrier alliances are removing capacity and carriers realize “increased competition in a shrinking market isn’t a recipe for prosperity.”
The deep container shipping market downturn is more than just a period in a cycle and will ultimately shape the industry, Ng said at The Journal of Commerce’s 6th Annual TPM Asia Conference in Shenzhen, China, on Thursday. An industry shake-up is inevitable, he said, as companies face weaker demand, vessel overcapacity, tighter financing, high fuel costs and rising capital spending requirements.
Industry consolidation is at an all-time high, as evidenced by the top three Asia-Europe carriers — Maersk, Mediterranean Shipping and CMA-CGM — controlling 50 percent of the market, compared to their total 20 percent stake a decade ago.
“Only the strongly financed carriers will survive,” Ng said. “We also expect, frankly, that carriers will be more focused on efficiency than market share growth.”
Growth will moderate, he said. After container trade expanded at a pace twice global GDP growth in the 1990s and early 2000s, he said the ratio of volume gains to international economic expansion could be as low as 1.1-to-1. The drivers of the container trade explosion — China's entrance into the World Trade Organization in 2001, the wave of outsourcing to Asia that followed and skyrocketing U.S. consumer demand — are over. The phasing out of these engines coincides with vessel overcapacity, sparking rate volatility.
“It’s not good for the carriers, and it’s not good for the shipper because it makes planning difficult,” Ng said.
Bunker fuel prices, which have soared 153 percent to well more than $650 a ton since January 2009, will stay high in 2013 unless there is another global recession. The high fuel costs and the supply and demand imbalance will make slow-steaming permanent, he said.
“I know customers don’t like to hear this, but it’s a fact of life,” Ng said. "The days of $400-a-ton bunker fuel are not coming back for some time."
Sophisticated ship design, ranging from more fuel-efficient hulls to engines, is key to mitigating high fuel costs, but not all carriers will be able to stomach the more than $100 million price tag for a new vessel. The costs for a 10-ship Asia-Europe string could therefor exceed $1 billion. The high capital costs are spurring more partnerships between carriers, as is the drying up of traditional sources of ship financing. The traditional German KG funding model is over, he said. As European banks back off, however, Chinese and South Korean banks will help fill the void. Asian finance sources "will not be at the volume to replace the European banks," Ng said.
APL, the container shipping division of NOL, is taking on more than 30 new vessels with lower slot costs that will allow the carrier to “provide a more competitive cost base,” Ng said. The carrier also is cleaning up its balance sheet in case the economic slowdown is longer than expected and to prepare for expansion when the opportunity arises.
Ng, a former Singapore military leader, said the container shipping industry isn’t that structurally different than the airline and foundry industries. All three have high capital costs and high barriers to entry. What makes the container shipping industry different is that the pace of consolidation has been much slower, in part because owners “might not have the same goals on returns of capital” and can utilize more favorable tax laws.