Written by Jose PaulArticle No. 15 [UNCTAD Transport and Trade Facilitation Newsletter N°77 - First Quarter 2018]
The year 2017 saw a modest recovery in container shipping after a disastrous performance in 2016. According to Drewry maritime research and consulting services, the container shipping industry has lost about US$ 10 billion in 2016. In August 2016, container shipping line Hanjin Shipping of South Korea declared bankruptcy, leaving 66 ships carrying goods worth US$ 14.5 billion stranded at sea. These developments sent shock waves through the container shipping industry.
Shipping analysts have reported a competitive ordering of ultra-large container ships, motivated by economies of scale and by the lower cost of building new ultra-large carriers. This could further deteriorate the existing mismatch between supply and demand, leading to compress freight rates and earnings.
Strategies for survival
To survive in an environment of excess fleet capacity, which resulted in significant decline in business profitability, several container lines engaged in mergers, acquisitions and re-alignment strategies. Efforts sought to optimize the use of excess capacity, expand geographic scope and coverage of markets:
World's top shipping lines, namely Maersk and Mediterranean Shipping Company (MSC), formed a shipping alliance called 2-M to operate services by pooling their resources.
CMA/CGM, COSCO container Lines, Evergreen and Orient Overseas Container Lines formed an ocean alliance to improve their operational performance.
In Japan, three firms (Mitsui OSK Lines, NYK Lines and the 'K' Line) decided to merge into a new entity called "ONE", which will become operational from 1st April 2018.
Ship owners refrained from ordering new ships to bring the supply and demand into equilibrium. (UNCTAD Review of maritime Transport - 2017 , Mergers and acquisitions - Page 48)
These efforts by the liner shipping industry led to a modest recovery in 2017, improving some indicators and injecting a spirit of optimism in container shipping.
Dramatic change: additional orders for new 22,000 TEU ships
Just as the global container shipping sector seemed to overcome a difficult phase, the world's third largest shipping line (CMA/CGM) ordered building 6 container ships of 22,000 TEU capacity, with an option to add 3 more of the same size. This was quickly followed by an announcement by the second largest shipping line (MSC), placing orders for eleven 22,000 TEU ships.
The nine ships of CMA/AGM will be built in China by two subsidiaries of China State Shipbuilding Corporation. Their unitary price is reported to be US$ 138 million, with a total outgo of US$ 1.4 billion for the 9 ships. Out of the 11 ships ordered by MSC, 6 units will be built by Samsung Heavy Industries and 5 by Daewoo Shipbuilding and Marine Engineering in South Korea.
These orders were placed despite advice (from the Maersk Line and Alliance partner in the 2-M Alliance) not to go ahead as this could jeopardize the fragile recovery underway. These orders are estimated to be collectively worth US$ 3 billion and reflect a grand strategy of power play and game plan extending well beyond 2020.
The rationale behind the new building plan
22,000 TEU container ships will become the largest containerships entering services by the end of 2019. Up-sizing container ship capacity to 22,000 TEU by major shipping lines was largely influenced by considerations dictated by the search for economies of scale and was encouraged by lower building costs. Furthermore, since these ultra-large container ships are going to be engaged in the Asia-Europe route (where there is maximum cargo potential), this competitive ordering of ultra-large ships, also reflect the desire of the three largest container lines to maintain their dominant positions and remain the biggest global players.
The three main European container lines (CMA/CGM, MSC and Maersk) seem to be worried about consolidation among Chinese shipping lines. Indeed, the taking over of OOCL by COSCO at a price of US$ 6.3 billion, could lead to their emergence as the third largest global container line. In addition, the possible merger of three Japanese lines could result in their becoming the sixth largest player in this sector. While each European line tries to strengthen its power and influence through a collective alliance, they would also like to remain, individually, in a leadership position in global container shipping:
CMA/CGM has relatively less ships of more than 18,000 TEU capacity and needed to catch up with MSC and the Maersk Line in the ultra-large ship category, to maintain the power balance in the Asia-Europe route. By 2020, 2-M Alliance (i.e. Maersk and MSC) will have 62 units of 18,000-22,000 TEU whereas the Ocean Alliance (i.e. CMA/CGM, COSCO and Evergreen) will have 51 units. If a merger takes place between the two Chinese Lines (COSCO and OOCL), CMA/CGM may lose its prominent position. Therefore, CMA/CGM wanted to strengthen its position by acquiring additional ultra-large tonnage. MSC wanted an equal partnership with Maersk in the 2-M Alliance.
While Maersk will have about 31 ships of 18,000-22,000 TEU by 2020, MSC only has 22 ultra-large container ships. With an addition of 11 ultra-large units, MSC and Maersk become equal partners.
MSC and CMA/CGM have an advantage in ordering ultra-large ships in the current context, when the price of new building is low. The largest container ship in service today is "OOCL Hong Kong" of 21,400 TEU capacity belonging to the Overseas Ocean Container Lines based in Hong Kong. The unitary price of such ships is low (US$ 138 million) compared to Maersk Line's Triple E Class ships of 18,000 TEU (US$ 190 million).
Can container ship size go even larger?
As of November 2017, there were 5,114 container ships of 20.5 million TEU capacity in service, out of which 416 ships were of 10,000 TEUs and above. Of the 428 ships on order in world shipyards, 154 are for containerships of 10,000 TEUs and above.
According to Maersk, the cost advantage of a 20,000 TEU ship over (older) 14,000 TEU ships could be as much as US$ 500 per TEU. According to Drewry maritime research and consulting services , vessels of 20,000 TEUs give a 25% cost advantage over 8,000 TEU ships driving the ship owners to order for larger ships. However, the lower slot costs attributed to ultra-large ships are debatable because such costs do not consider the total costs along the supply chain.
A 2016 DNV GL study pointed out restrictions in the Suez Canal among the most limiting factors for the development of ultra-large container ships in future years. Indeed, the new class of 22,000 TEU ships have a length of 400 m, beam of 61 m and a draught of 17 m, marginally exceeding the limits fixed by the Suez Canal Authority (59-m wide and a 17-m draught). An expansion beyond this point could impact on the whole logistics chain.
The author, Dr Jose Paul, a doctorate in port management of the University of Wales, Cardiff, UK, a former Acting Chairman of J N Port, Mumbai and a former Chairman of Mormugao Port Trust, is currently working as Adjunct Professor of Maritime Studies, AMET University in Chennai, India.
Responses may be sent to: drjospaul@rediffmail.com
