Troubled waters

Companies moving goods by ocean are encountering rough seas amid an unprecedented wave of carrier consolidation and the introduction of massive new container vessels that are swamping the industry with excess capacity.

The addition of new mega-vessels has coincided with a drop in both trade volumes and oil prices, leading to record-low ocean freight rates for customers. But ocean carriers have been forced to make painful adjustments to bolster capacity utilization and rationalize their costs. On the operations side, they are sharing vessels and trying to pare duplication of routes and port calls by fiddling with schedules, skipping sailings, or “slow steaming” to further lower fuel costs.

For importers and exporters, the changes have led to confusion on the water, port side, and up and down the supply chain. Chris Welsh, Secretary General of the Global Shippers Forum, slammed ocean carriers in recent remarks at an industry event. “The liner shipping industry must urgently address the poor quality of service afforded to shippers since the consolidation of the world’s top 20 lines into super alliances,” Welsh said.

Welsh and Drewry, the London-based shipping consultant, have also pointedly questioned the benefits of massive new container ships entering the global fleet.

“It has become a battle of survival with recent rate levels at historic lows and most ocean carriers hemorrhaging,” says Cas Pouderoyen, Agility Senior Vice President of Global Ocean Freight. “The majority of the carriers have already sold off most of their assets, including vessels, container fleets, logistics divisions, and marine terminals. Now they are desperately waiting for the cycle to turn up before the lights are turned off. The carriers have already taken the gains they can from larger vessels, carrier alliances, low bunker costs, and M&A activities, and the race to the bottom has proven to be futile for nearly every carrier.”

infographic 50 years

Outstripping demand

The ocean shipping industry is prone to boom-bust cycles and accustomed to periods when capacity and demand are dramatically out of balance. This time though, the industry could be in for an extended downturn.

One reason is that big ships – those able to carry more than 18,000 TEUs – are coming on line faster than the market can absorb them. Through 2019, carriers will take delivery of 74 more of the 18,000-TEU vessels – and 202 ships with capacity of 10,000 TEUs or more, according to Alphaliner, a leading research firm.

The bigger vessels boast lower operating costs on a TEU per-mile basis. In theory, they lower a carrier’s overall costs for crew, fuel, demurrage (charges for exceeding agreed-upon loading, unloading and sailing times), vessel insurance, servicing and ship maintenance. At least some of the savings are passed on to customers, especially when capacity utilization rates are down.

Global business conditions make it hard to justify the addition of so many huge vessels. In 2015, growth in imports and exports trailed the meager expansion in overall economic growth, the third consecutive year that trade growth trailed global economic gains. Alix Partners, a global business advisory firm, says global container fleet capacity is expected to grow 4.6% in 2016 and 4.7% in 2017. Those are the slowest rates in 25 years but still about twice the rate of demand for container space.

Most of the mega-ships now in operation are sailing from the Far East to Europe, where ports have the infrastructure to handle them. Even though the Panama Canal has been expanded it is only able to transit vessels up to 13,000 TEUs.

Few U.S. ports can handle the largest ships. “The average vessel size for services in the transpacific trade is currently around 6,700 TEUs,” BlueWater Reporting research analyst Ben Meyer wrote recently in American Shipper.

Late in 2015, the CMA CGM Benjamin Franklin, an 18,000-TEU mega-ship, made test stops at the California ports of Oakland and Los Angeles. Cargo handlers, truckers and railroads got advance notice so they could coordinate with the ports and gear up to handle the surge. The tests went well by most accounts, but skeptics point out that both ports would struggle to handle regular calls from ships that large.

On the U.S. East Coast, only Miami, Norfolk and Baltimore can handle mega-vessels. New York/New Jersey, Jacksonville, Savannah and Charleston are in the midst of making changes that will enable bigger ships to call.

The glut of capacity and record-low freight rates have put the industry in a tailspin, forcing carriers to lower their rates to boost loads when utilization falls below 85%. Low fuel costs have been their only bright spot. “But who’s at fault?” asks Christopher Gillis, Editor of American Shipper. “The finger should be pointed squarely at the carriers themselves, who made the decision to build these gigantic ships in the face of a slow-to-cure global recession. The carriers created their own mess.”

Port Chaos

To make ready for the mega-vessels, ports, terminal operators and local governments are forced to invest heavily. Dredging and deepening berths to accommodate deeper drafts. Buying new, larger cranes and other equipment to move containers. Lengthening quays, expanding terminal buildings, adding yard space and larger road and rail connection areas. Raising bridges because of the mega-vessels’ increased “air draft” or height above the water line.

“Consumers will continue to foot the bill for some of the necessary port improvement projects, even if they don’t actually reap any of the benefits directly,” Meyer writes in American Shipper.

Carriers aren’t the only ones consolidating. Big ships require port investment that few smaller terminal operators can afford. As a result, carrier consolidation has been paralleled by consolidation among container-terminal operators, putting more power in the hands of giant operators such as DP World, PSA International and APM Terminals. At the same time, Triton Container International and TAL International Group said they would merge to become the world’s largest container-leasing company with control of roughly 25% of all leased shipping containers. Ports perform better when cargo volumes flow in a predictable, even pattern, but that is seldom the case.

Freight forwarders have grown used to seeing carriers push through General Rate Increases, then back off of increased rates when volumes can’t support them. The forwarders rush to book in advance of announced rate hikes, then hold back cargo after increases go through. In addition, shipments tend to be light in the first half of the month and heavy in the second half as sales people push to meet monthly targets.

Growing Risk

With the expansion and upgrade of terminals, ports and related infrastructure has come the inevitable: heavier concentrations of landside freight. Greater concentrations of freight in turn have dramatically increased risk, as demonstrated by the immense August 2015 explosion at China’s Tianjin port.

The blast killed more than 170 people and resulted in more than $1 billion in losses and damage. It also sent shock waves through the global supply chain, crippling companies across industry sectors that source goods in China.

Zurich Insurance Group, Switzerland’s largest insurer, suffered $275 million in Tianjin-related losses, forcing it to abandon a planned acquisition of RSA Insurance. In the aftermath of the blast, Zurich discovered that it lacked the knowledge and transparency to understand the various risks that its different units had taken on at the port. Tom De Swaan, acting CEO for Zurich Insurance Group, later said: “There was an accumulation of risk there, which was not sufficiently detected.”

Industry Consolidation

Sixteen of the top 20 global carriers are presently members of four major alliances, known as 2M, G6, CKYHE and Ocean 3. Earlier this year, Cosco Group and China Shipping Group merged to form China Cosco Shipping Group, a behemoth that supplants Denmark’s A.P. Moller Maersk as the world’s largest shipping company, as measured by ship value. More deals appear to be in the works, despite a recent warning in a United Nations report that shipping industry consolidation is eliminating competition in smaller countries.

Industry experts say carrier consolidation through larger alliances, mergers and acquisitions is inevitable and overdue.

Since the global recession of 2007-2009, ocean carriers have struggled to cope with the glut in capacity. Most have tinkered with operations to make the most efficient use of their fleets – slow steaming, vessel idling, organizational cost-cutting, and information technology (IT) modernization, says Alix Partners. “Although those initiatives have provided some tangible benefits, the carrier community may finally be coming to grips with the need for significant industry consolidation.”

Many in the industry are squeezed by falling revenues, shrinking profit margins and heavy debt. Says Alix Partners: “Fewer competitors controlling more vessels should lead to more effective management of existing capacity and future vessel orders that would be more in line with demand forecasts.”

For customers, carrier alliances are often easier to navigate than acquisitions, which can disrupt operations for years. “Postmerger integration is no small task, because carriers tend to have customer strategies, IT systems, operational alliance partnerships, vessel fleets, back-office investments, and corporate cultures that vastly differ from one another.”

Industry experts have for some time been predicting a much needed shakeout among the big four alliances and this is now happening. “A serious debate is needed to investigate whether mega-alliances deliver real competition to the marketplace, or if shippers and the containership industry as a whole would be better served by fewer lines competing head-on,” says Welsh of the Global Shippers Forum, a leading trade association for the shipping industry.

RESHAPING THE BIG FOUR ALLIANCES

Ocean carrier alliances let partner carriers share space on larger, more efficient ships, serve more ports and routes, and make better use of vessels in their fleets. At present, nineteen of the 20 largest carriers are formed into four alliances. But following several acquisitions and mergers in 2016 things are changing yet again, and the industry will be down to thirteen lines in three groupings.

This is one possible alliance configuration. Industry experts predict further consolidation into just two major alliances by 2017.

OCEAN CMA CGM Cosco China Evergreen OOCL

THE Hanjin Shipping Hapag-Lloyd K Line MOL NYK Yang Ming Possible additions: UASC & Hyundai

2M Maersk MSC

Lying at Anchor

Unable to spur demand, some carriers have taken desperate measures to constrain capacity by idling ships. In late 2015, carriers began looking harder at leaving ships in anchorage as freight rates along some lanes out of Asia fell below $300-per-container, barely covering fuel costs. Dry bulk vessels – used to transport iron ore, cement, coal, steel, grain and other commodities – are also being idled or scrapped in growing numbers. Dry bulk carriers complain that “zombie ships” – vessels moving loads at a loss – are operating only so their owners can pay off loans.

Scrapping is an option for container ships too, but the plunge in steel prices has made it less attractive for carriers. The vessels they are demolishing tend to be older, smaller ships so there is little impact on overall capacity.

“Larger vessels and alliances were introduced to cut operating cost-per-TEU, and low operating costs are always critical in a commodity business,” says Agility’s Pouderoyen. “You can’t blame the carriers for going this route as it is simply a matter of survival of the fittest. Carriers with no financial resources are an endangered species at the moment.”

Automation to relieve bottlenecks

With ever-larger vessels, there is an intense focus on port automation and innovation. Southern California ports, noted for their congestion, have experimented with a number of tools and techniques to speed cargo movement. Among them:

  • Using ship manifests to forecast arrivals on their websites so that truckers can more precisely plan pickups and figure out the most efficient exit routes.
  • Buying large automated cargo handling machines that are operated remotely or are programmed rather than requiring human crane operators.
  • Opening offsite chassis inspection and storage yards to avoid bottlenecks close to port, where chassis rental and inspection lots traditionally have been located.
  • Identifying problems by tracking how long each truck has been on site and where it slowed. “At Ports America’s terminal in Long Beach, managers can pull up live camera feeds of the truck lines on their smartphones, and they receive hourly reports via email identifying which trucks need to be prioritized,” The Wall Street Journal wrote recently.
  • Requiring truckers to make appointments to pick up containers, so their boxes can be pulled from stacks and ready to load at the appointed time.
  • Cutting wait times through the use of “peel-off” techniques that stack large importers’ containers together for quick loading.