Matson: Speculative Jones Act capacity would pull down rates

Matson: Speculative Jones Act capacity would pull down rates

Philly Shipyard is currently building two vessels for Matson.

Matson CEO Matt Cox said the US domestic Jones Act trades don’t need two 3,700-TEU container ships that Philly Shipyard plans to build on speculation for use in the US West Coast-Hawaii trade.

Speculative additions of capacity to an already well-served market would be “uneconomic” and would undermine rates, Cox told analysts as Matson announced year-over-year increases in second-quarter profit.

“The severe losses experienced over time in Puerto Rico and trans-Pacific trade lanes provide examples of the detrimental impact that overcapacity can have in this business,” Cox said.

Philly Shipyard said on July 21 it had signed a letter of intent with an unidentified “leading Jones Act carrier” for construction of two container ships, with options for two more, for the Hawaii trade. No firm orders have been placed.

The Philadelphia shipyard is building two 3,600-TEU ships for Matson that are scheduled for delivery in late 2018 and early 2019. Matson also has two container/roll-on, roll-off vessels under construction at Nassco in San Diego. The carrier estimates the four ships’ total cost at $926 million.

Matson has dominated the West Coast-Hawaii trade for decades, and uses the westbound service to balance the carrier’s lucrative eastbound express service from China to California.

Its main Hawaii competitor, Pasha Hawaii, is upgrading its fleet with two 2,525-TEU liquefied natural gas (LNG)-powered ships scheduled for delivery in 2020 by Keppel Brownsville in Texas.

Other carriers in the Jones Act domestic trades, including TOTE and Crowley, also are upgrading their fleets with orders for new ships that will run on liquefied natural gas and meet stringent emission requirements that take effect in 2020. Matson plans to retire seven older steam-powered ships when its new ships are in place.

The Jones Act requires ships operating in US domestic services, including Hawaii, Puerto Rico, and Alaska, to be US-flag and built in US shipyards.

In addition to its core Hawaii routes, Matson has Jones Act services to Guam and Alaska. Matson acquired the Alaska routes of Horizon Lines in 2015. Pasha expanded in Hawaii at the same time, taking over Horizon’s Hawaii services.

Cox said the recent flurry of new vessel orders appears to provide ample vessel capacity for all Jones Act markets, including Puerto Rico, where rates were depressed for years before Horizon’s exit. He said any new entrant to Hawaii would face “substantial” infrastructure investment costs.

Matson reported second-quarter net income of $24 million, up from $18 million a year earlier, and earnings before interest, taxes, depreciation, and amortization of $85 million, compared with $68.8 million in the second quarter of 2016. Consolidated revenue rose to $512.5 million from $467.7 million.

The company said it expects “modest” improvement in each of its core markets, except for Guam, where APL increased its service to weekly from biweekly last December.

Matson said its China service’s second-quarter volume totaled 16,900 FEU, up 15 percent year-over-year, because of stronger demand and an additional eastbound voyage after a vessel’s scheduled dry-docking in China.

The China service provides a 10-day Shanghai-to-Long Beach transit, and uses the same 2,600-TEU ships as Matson’s US-flag domestic service from the West Coast to Hawaii and Guam.

Cox said Matson expects the China service to continue to benefit from faster transit times that allow premium pricing and efficient offloading at the company’s Long Beach terminal, and an improving trans-Pacific market.

“We view the consolidation of international carriers and reformulation of the new alliances in April as potential sources for market improvement longer-term in the China trade,” Cox said.

Contact Joseph Bonney at joseph.bonney@ihsmarkit.com and follow him on Twitter: @JosephBonney.