If you’re still in the business of roll-on, roll-off shipping, count yourselves a member of an increasingly exclusive club. Having survived the deepening economic recession in ro-ro’s European heartland, you’re also now likely to be in a strong market position, your hand strengthened by the weeding out of weaker players.
One of the most recent casualties, Pacific Basin Shipping, was also one of the biggest. The Hong Kong-listed company in September sold its six ro-ro vessels to Italian carrier Atlantica di Navigazione for 153 million euros ($200 million) after reporting a $190 million impairment on its ill-fated foray into a specialized niche market.
Pacific Basin’s retreat to its dry bulk and tug operations didn’t come as a surprise to ro-ro insiders. The company assured investors in 2008 that it was diversifying into “a promising shipping sector characterized by good demand prospects, an aging existing fleet, a small orderbook and few yards building these vessels.”
But the ro-ro newcomer entered the market on the eve of the global economic recession, deploying ships that could carry freight but not passengers, and lacking its own route network to employ the vessels when they couldn’t be chartered out. “The original premise for diversifying into the ro-ro sector as a tonnage provider is no longer compelling,” the company conceded as it looked for a way to exit the business. The six ships lost $8.5 million in the first half of 2012, “reflecting the increasingly severe weakness in the euro-centric ro-ro sector.”
That a subsidiary of Italy’s Grimaldi Group, one of the most successful global ro-ro operators with services linking North America, Brazil and West Africa to an expanding pan-European network, acquired the Pacific Basin ships didn’t come as a surprise, either. When Atlantica slots the final Pacific Basin vessel into its Mediterranean network in 2015, Grimaldi’s Atlantic Container Line will take delivery of five of the largest ro-ro/container ships ever built, boasting radical design features that will take the industry into new cargo territory.
Ro-ro shipping is becoming increasingly specialized as some carriers divest noncore businesses and others focus on freight or passenger segments. Irish Continental Group sold Feederlink Shipping, its Rotterdam-based short-sea container business, to Denmark’s Unifeeder for around $36 million in 2012, to focus on its ro-ro operations. Scandlines exited its 800,000-truck-a-year freight business last year, with the sale of Baltic Sea routes and vessels to Gothenburg-based Stena Line and Swedish Orient Line, as its private equity owners prepared to sell the Danish-German ferry line.
The U.K.-France ro-ro trade, the world’s busiest, also faces a shakeup after Eurotunnel, the operator of the subsea rail link between the two countries, moved into the shipping business after luring a sizable chunk of freight from the established ferry lines.
Eurotunnel’s truck traffic soared 16 percent in 2012 to nearly 1.5 million units, boosting its cross-channel market share by 5 percentage points to a record 43.5 percent. The overall truck market grew just 2.5 percent from the previous year, but remains about 10 percent below its 2007 peak.
U.K. regulators, however, are challenging Eurotunnel’s entry into the shipping market — it acquired three ships from Sea France, a French carrier that collapsed in 2012, for $88 million — saying Eurotunnel’s new carrier MyFerryLink will significantly increase the Anglo-French group’s share of the cross-channel market and drive up freight rates. This has put British regulators on a collision course with their French counterparts who approved Eurotunnel’s shipping venture on condition it does not cross-market cargo services on rail and ships for five years.
While the northern Europe ro-ro market is keeping its head above water, thanks largely to solid growth on Baltic Sea routes, operators in southern Europe are struggling to make money amid steadily declining traffic within and between countries snared in sovereign debt crises.
The situation is particularly bleak in Greece, where a fifth consecutive year of deepening recession has savaged the finances of all-important ro-ro shipping lines that carry freight from the mainland to more than 100 islands. The crisis hasn’t spared the top operators, including Crete-based Anek Lines, whose net loss ballooned to 60.7 million euros from 22.9 million a year earlier, and Grimaldi subsidiary Minoan Lines, which lost 33.2 million euros last year following a 39.4 million-euro loss in 2011.
Grimaldi’s presence in the domestic Greek market caused tensions with domestic carriers that also compete with the competitive Italian company on Greece-Italy routes where traffic has fallen steadily since peaking in 2006. Seafarers have suffered even worse, with thousands going unpaid for months, according to the seamen’s union.
The industry is bracing for further consolidation in the key north European market, with most attention focused on the next move from Denmark’s DFDS. The company, which cemented its market leadership with the $425 million acquisition of Norfolkline from A.P. Moller-Maersk in 2010, is hungry to grow. “We foresee opportunities to strengthen DFDS’s long-term market position through acquisitions in the years ahead, and our highest priority is, therefore, to continue pursuing our growth strategy,” CEO Niels Smedegaard said.
DFDS expanded its network last year, acquiring three routes from France’s LD Lines, including its first Mediterranean service. But it’s looking for another big deal, and industry watchers say that’s likely to be in the freight segment, which accounts for about 80 percent of its revenue.
Despite the uncertain economic climate, the ro-ro industry is investing in new vessels. Italy’s Ignazio Messia in October signed a $295 million order for four 45,000-deadweight-ton ro-ro vessels. Danish group Nordana kicked off its fleet-renewal program for its Mediterranean-Americas service this month with an order for the first of three eco-friendly vessels that will increase capacity by about 35 percent. In March, Stena Line moved out of its European comfort zone when it launched a service between Sokcho, South Korea, and the Russian ports of Vladivostok and Zarubino that will serve as a launch pad for an Asian network. Grimaldi will take delivery of three multipurpose container ro-ro ships in 2014, and its Finnlines subsidiary has added six new vessels to its fleet over the past two years.
But the industry faces further uncertainty in the run-up to the 2015 deadline for the introduction of tougher environmental regulations in heavily populated coasts in Europe and North America. Ships operating in so-called emissions control areas in northern Europe — the Baltic Sea, the North Sea and the English Channel — must use fuels with less than 0.1 percent sulfur content. This has required investment in costly engine retrofits and the installation of scrubbers at a time when companies face flat cargo volumes and rising overcapacity.
While ro-ro operators in short-sea and regional trades confront uncertain market prospects, fairly bullish supply-demand prospects are lifting European, Japanese and South Korean carriers involved in the global auto trade. The orderbook is equivalent to a modest 8 percent of the current 670-ship fleet, and owners remain level-headed about ordering new vessels even as new markets open up thanks to rising Chinese exports and greater car ownership in emerging economies.
The fleet is expected to grow by a net 1 to 2 percent this year and 2 to 4 percent in 2014 after scrapping of older tonnage.
The one black spot is recession-mired Europe, where most national markets are in free fall. European auto sales slid 9.7 percent in the first quarter to 3.1 million units after declining for an 18th consecutive month in March and are on pace to reach levels not seen in 20 years. Germany, the region’s largest economy and biggest auto manufacturer and exporter, registered the steepest decline of 17 percent in March.
The outlook is brighter in most other markets after global auto sales grew about 5 percent in the fourth quarter of 2012, driven by a strong performance in North America and growth in China. South Korean manufacturers are forecasting a small increase in exports this year, while shipments from China, India and Thailand are expected to post double-digit growth.
“The outlook for 2014 looks more favorable with an expected stronger world economic growth and a recovery in car sales and car imports to western Europe,” Norwegian Car Carriers said in a statement.
Meanwhile, the industry’s top names, including the Norwegian-Swedish Wallenius Wilhelmsen Logistics, South Korea’s Eukor, and Japan’s Big Three of NYK Line, “K” Line and MOL are being investigated by antitrust authorities in the European Union, the U.S., Canada and Japan, who raided their offices in September in search of evidence of possible cartel activities.
The investigations likely will take years, and by then the industry will probably be dominated by an even smaller number of players, which bodes well for the sector’s medium-term prospects.
Contact Bruce Barnard at email@example.com.