A Deeper Look into How These Vessels are Affecting the Equilibrium of the Industry
We’ve heard for years from ocean carriers that when it comes to containerships, size matters. The theory being that running these ever increasingly larger ships allows more boxes to be loaded on board, leading to a cheaper way to run that vessel on a per-slot basis. Over the years, a surge towards larger and larger ships has led to recent vessels boasting 18,000 TEU capacity and the largest on the order books currently being OOCL’s 21,100 TEU vessel.
Problems continue to mount in the shipping industry from low rates to over capacity, and these ever expanding vessel sizes have been exasperating problems even further. The cost of operating a vessel is just one piece of the puzzle. Terminals must upgrade their cranes to accommodate the thousands of containers that can come off of just one vessel. Some Berths must be dredged to even be able to handle the size of the ship at their terminal. Getting these containers into the hinterland is the next obstacle as rail yards and trucks must be prepared for surge in intermodal moves. These larger vessels affect every part of the container shipping process.
To get a deeper grasp on the issues at hand, we spoke with Mr. Neil Dekker, Director of Container Research at Drewry for an experienced view on this vital issue to the industry.
Finding the Right Size
The early 2000’s is where these investments and leaps to megaships begin. While there is no specific size definition for a megaship, it’s generally agreed upon that these ships have a capacity of at least 14,000 TEUs. During this time until the financial crisis in 2008, investments from major carriers began and orders for vessels with ever increasing TEU capacity were placed with ship builders.
Fast forwarding to today, it’s obvious to see that these vessels are coming online during some of the roughest times imaginable, with all time low rates, over capacity, and fierce competition threatening to layup even more ships. As Mr. Dekker puts it, “the competitive edge gained from these larger 18,000 TEU ships compared to carriers with smaller 14,000 TEU vessels is marginalized by the current low freight rates and the low cost of fuel right now.
Because demand was very weak on Asia to North Europe trade last year, the lines are struggling all the time to fill slots and we’ve had a very weak decline in head haul volume of 3.4% year on year in 2015. At the same time we had a global fleet growth of almost 8.4% last year with 41 new ships of at least 14,000 TEU moving into the Asia-Europe trade. So you had the supply and demand fundamentals moving in completely opposite directions.”
Mr. Dekker continued, “In order to achieve the desired economies of scale and lower slot costs, these companies based their average head haul load factors over 90% when originally purchasing these ships, which was pretty optimistic. It’s a vicious cycle because they’re all basically trying to get more boxes to fill all these additional slots, of course the only way you can really do that in a weak market is to drop the rates. That’s why we’re seeing the spot rates on the Asia to Europe trade be so weak and in decline. The point is, whether you’ve got big ships or not you’re not going to be making money with rock bottom rates. For example, we saw $150 per 40ft on the Asia-Europe trade back in March. For the first eleven weeks of 2016, average weekly Asia-Europe spot rates had declined by 69% year-on-year. The fact that you’ve got big ships is almost irrelevant when rates are so low. In fact you could say, in one way the more big ships you’ve got and the heavier exposure you have to the big east-west trades, the potential for bigger losses you can have. It’s not just spot rates we’re talking about which are very low, but even the contract rates on the Asia to Europe trade with large companies have been signed and locked into considerably low rates. In 2015, average Asia to Europe contract rates were about $1,500-1,600 per FEU, but this year many have been signed at around $800-900 per FEU. Even with much lower bunker costs, this still does not mean lines are breaking even.”
As Mr. Dekker puts it, the real culprit of current woes is the rock bottom rates. Because it’s all about this market share, carriers are competing with one another for the lowest rate. The extra capacity on megaships is making the competition even fiercer to lock in customers. This race to the bottom and the dumping of rates is a self-inflicting wound for the industry. These megaships are coming online at the same time and are leading to a very negative situation. It’s a bit of a collective gamble, and it’s not paying off are bringing about is a cascade effect. By pushing out these bigger ships of 8,000-10,000 TEU which are now too small for Asia-Europe into these smaller trade routes, you inadvertently upset the supply and demand balance. We’ve had historically low freight rates on pretty much every trade route and Asia to East Cost South America has been hit very badly. The biggest problem in the industry is where do carriers deploy these ships; because where they’re deployed it seems to cause trouble, because the current dynamics of trade are so weak.”
“Moving to these larger ships seems there’s no logic behind it, it just doesn’t work. A lot of people are starting to think that once you get beyond the 14,000 TEU size vessels, the net gain benefit is negligible. Based on current orders, by the end of 2018 we should have something like 9 or 10 weekly loops in the 18-20,000 TEU range in the Asia to Europe trade and the commercial pressure to fill those additional slots will be immense. The industry has already made the leap to the megaship level; the one saving grace is that ordering has stopped at the moment,” said Mr. Dekker.
A Megaship-less Future Ahead?
In the face of chronic overcapacity, the challenge for service providers today is keeping their rates up. The state of the market at the moment is very precarious, but the real question is, how much can the lines and operators take and keep baring this cost burden? Mr. Dekker says a “trigger point” will eventually happen, where radical changes will occur, potentially resulting in the suspension of a number of weekly strings and idling a tremendous amount of tonnage. The re-jigging of the alliance structure over the next 12 months also makes this even more difficult to achieve. Unless some kind of balance is made at the trade route level, this price war will continue and is unsustainable.
This “magic solution” to the problem of rising costs an operating inefficiency in megaships isn’t paying dividends at the moment. A more holistic approach is surely needed to assess whether these vessels would ever really be able to work. These megaships are certainly not the panacea they were made out to be, but don’t expect them to go away overnight. We maybe in the midst of a turnaround in the thinking of megaships, but a collective push away from them and an industry wide understanding of what is truly needed in maritime transportation is needed if we’re ever going to be able to put a cap on the price war that is raging at the moment.
The Evolution of Vessel Sizes