This week’s lead story in Containerisation International was written by Mike Wackett, and with any luck at all, international maritime authorities will lift their heads out of the sand just long enough to read it.
Mike begins with the question, “Will ocean carriers need to lay up box ships in 2009?”, and the body of his story provides all the answers to that rhetorical question. Here is most of his report:
“Halfway through 2008 and the dark clouds have, menacingly, appeared overhead. The ‘perfect storm’ of a credit crunch and a global oil crisis-induced economic slowdown, is forcing ocean carriers to nervously revisit their budgets for the remainder of the year and into 2009.
“Take this week: the world’s largest container carrier, Maersk Line, took the industry by surprise when it announced that it would be cutting an entire loop [or about 7%] of its Asia to Europe network capacity, by terminating its AE5 service, consisting of eight ships of between 4,100 and 5,000 TEU, resulting in a weekly capacity reduction of 4,000 TEU.
“Maersk’s decision was especially surprising just prior to the traditional peak season, when space is normally at a premium. The Danish carrier blamed soaring fuel costs for culling the service, but clearly, it was becoming concerned at the reduced load factor on its vessels.
“The inference from this radical reaction is that the world’s top liner company believes the situation is unlikely to improve in the short or medium term.
“And from his Marseilles headquarters this week, Jacques Saade, chairman and founder of third-ranked CMA CGM, admitted that there were tougher times ahead for ocean carriers who were already seeing lower utilisation factors than last year and experiencing the beginnings of a downward pressure on freight rates.
“Indeed, the Far Eastern Freight Conference (FEFC), presiding over the last rites of the liner conference, before it and others are banished in Europe on October 18, confirms the worrying slowdown in its latest May statistics …”
“The slowdown represents a reality shock for its members who were still, bullishly, predicting the ‘same again’ i.e. 20% growth, only five months previously …”
“The, seemingly, unstoppable growth over the last few years, fueled by the China factor, meant a mad rush of orders from any Asian ship yard that had the capacity …”
“There are in the region of 1,250 container ships on order from Asian shipyards, including more than 100 super post-panamax vessels of over 12,500 TEU, only suitable for deployment on the Asia to Europe trade.
“With ship finance now much more difficult to obtain than at the time of the orders [one industry expert suggests that only about 70% of current orders have finance in place] some of these ships may never be completed; or become the subject of distress sales.
“But what of the ships that are actually delivered during the global slowdown?
“Ocean carriers will no doubt seek to deploy the newbuilds, replacing smaller, older and less efficient tonnage, which would, in normal circumstances, cascade down into other trades.
“Owned ships will be sold, some at knocked-down prices, but chartered ships will simply be off-hired.
“Therein lies the problem; a glut of medium-sized, ageing container ships that nobody wants.
“Moreover, the signs are already here that the container ship charter market is entering a tough period …”
“A lengthy depression of charter rates is the obvious outcome of a period of overcapacity closely followed by a slump in freight rates – adding further to the ocean carriers’ woes.
“If the off-hired and up-for-sale ships struggle to find employment, and given the daily cost of fuel and general operating and crewing costs, it may be more cost efficient to lay up these ships until there are signs of a global recovery.
“The prospect of row-upon-row of ‘ghost’ container ships – similar to the aircraft bone yards of the Arizona desert – is a stark prospect but the result of a 12-month boom-and-bust global economy.
“With the exception of Maersk Line’s recent bespoke orders, newbuilding orders for container vessels have, unsurprisingly, slowed to a trickle, which begs another question – what will the Asian shipyards survive on during the shipbuilding drought?
“Maersk Line, MSC and CMA CGM etc. have justified their investment in the behemoths by quoting economies of scale – but with hindsight they could have taken more heed of an industry senior’s remarks during the height of the boom.
“Evergreen Line’s Chairman, Chang Yung-fa, told CI eXpress last year: ‘I have been in the business for nearly 40 years and have weathered a lot of storms. When the lull comes, the huge ships will suffer instability. In a recession, if my ships are half loaded they will still be viable, but the large ships will be placed at a very high risk.’
“In the coming months Chairman Chang’s comments may prove to have been extremely prophetic.
“Do you think that ocean carriers are heading for a period of considerable slow-down?
“The editor would be delighted to hear your views.” … is the way Mike concluded his comments.
After presenting his air-tight case against the maritime industry’s “bigger-is-better” enthusiasts, and especially against its arrogant pundits, Mike ended up with a tongue-in-cheek request for opposing views. But he was toying with his readers. He won’t hear a single dissenting utterance from the sheepish, and silenced, prognosticators.
Mike presents his case so convincingly that there was no need to mention some of Chairman Chang’s further comments. Mr. Chang had made it clear, when interviewed by journalists, that Evergreen had no intention of joining the rush to purchase megaships, and he indicated that it was his intention to add at least 60 smaller ships to the Evergreen fleet, the industry’s fourth largest, in the near future.
“Ranking is immaterial,” he said. “What is important is trying to run a profitable business … Operators that follow the crowd are likely to suffer once the recession sets in.”
Or Mike could have mentioned the FINANCIAL TIMES article, summarized by an Asian reporting service early in 2005, that began with the headline, “Future Need of Mega Container Ships Questioned”.
“The doubts come at a time when industry insiders expect vessel capacity to increase faster than volumes,” the TIMES reported. In questioning the apparent economies of scale offered by megaships, the report continued, analysts have warned that in order to maintain current schedules, “… such vessels will have to sail faster to make up for the extra time in port. To achieve this, even with modern fuel-efficient engines, this is likely to mean extra spending on fuel.”
The TIMES article reported the analysts as stating that ultimately, “savings will depend on vessels operating with capacity loads”.
And then Mike could have reminded his readers that one of Maersk’s recent CEOs admitted that, in order to sustain acceptable freight rate levels, carriers must now reach 90% or more ship utilization, a far cry from the 75% to 80% break-even level of pre-megaship days. That figure rises to 100% in peak seasons, the ex-CEO added.
A subsequent report from Maersk revealed plans to reduce sailing speeds of these large ships in order to “improve reliability and save fuel”. According to the company, port congestion was having an “escalating impact” on its ability to provide reliable services, but to compensate for the delays, the addition of four (smaller) vessels would “enable us to incorporate additional buffer time in our schedules”. So maybe bigger isn’t better, after all? And maybe faster isn’t better, either?
Or Mike could have reminded his readers what Rainer Dehe of Hamburg Sud has observed; “Once all these ships come into play, there are definitely a number of areas that are going to be real issues in accommodating them. Where in the past there would have been a slight delay with these vessels, now there will be more frequently a domino effect”.
And Mike could also have noted that a supply/demand imbalance has already produced a vessel overcapacity and “domino effect”, and that the late Tommy Stramer considered the possibility that “… the new ships of 8,000-TEUs-plus will be just another white elephant in the industry.”
Nor did Mike see the need to offer further examples of miscalculation. He could have reminded us, if he chose to do so, of the many, many requests by port authorities for public funding for harbor dredging projects. If ports are unable to accommodate those behemoths, those authorities like to explain, cargo will be delivered elsewhere and local businesses will simply whither on the vine.
Those giant vessels, they warn, will bypass undredged ports and divert to places like the Port of Halifax, which already sports depths of 50-feet or more..
Wrong again, Mike could have pointed out. CBC in Canada just issued a report with the unexpected headline: “Cargo traffic at Halifax port down, CN drops train”… and revealed the following:
“CN Rail has reduced its daily service to the Port of Halifax from two trains to one, as container traffic at the port continues to drop”, the report began.
“The rail company says one train has adequate capacity to serve the port’s existing customers …”
“According to statistics released Thursday by the port authority, container traffic was down 20 per cent during the first half of this year, compared with 2007.
“Officials are blaming the economic climate …”
“Halifax has been steadily losing ground for the last eight years … Last year, the port saw a 7.5 per cent drop in business …”
“The problem, suggests Mary Brooks, a transportation expert at Dalhousie University, is that Halifax is too far from where goods are produced and too small a city to buy them, forcing companies to pay additional rail or trucking costs.”
Amen, Ms. Brooks. You’ve just paraphrased what other knowledgeable analysts have said …
• “Megaships strain the capacity of inland infrastructure, terminal operators and rail and truck carriers. As terminals run out of space, ports will be required to seek alternate ways of expanding their operations. The most logical and least costly way to expand without straining the capacity of inland infrastructures, terminal operators and rail and truck carriers is to establish smaller container ports closer to end users.” — Nolan Gimpel (2003)
• “Operational and commercial limitations … reduce the effectiveness of megaships … Carriers will have a more difficult time filling these large vessels, thereby cancelling out the economies of scale these ships are supposed to produce … A limited number of ports are able to service these larger vessels because of harbor depths … These vessels are unable to accommodate importers and exporters who prefer more direct, less costly service. The bigger the ship. the more transshipment and feedering you need, and that costs money.” — Neil Davidson (2004)
… But Mike Wackett’s latest article in Containerisation International puts the frosting on the cake.