Top 30 Ocean Carriers Special Report: Sailing into the black?

Ocean shippers may be paying a bit more this fall, but carriers say they’re delivering on their schedule integrity. And despite a restrained capacity increase, most leading container vessel operators are still confronting a formidable oversupply challenge.

According to analysts at the Paris-based consultancy Alphaliner, the carriers’ failure to collectively curb effective growth in 2010 and 2011 was the primary reason for the collapse in freight rates last year. Freight rates have also come under pressure again since July as demand weakened across all routes. Average freight rates from China, for example, have fallen by 8 percent since the 2012 peak, with further weakness likely for the remainder of this year.

“There remains significant new capacity coming in the next 16 months, with 19 out of the top 21 carriers still waiting to receive 1.8 million twenty-foot equivalent units (TEUs) of new space between September 2012 and December 2013,” says Stephen Fletcher, Alphaliner’s commercial director. The consultancy notes that among the main carriers, four of them—APL, MSC, Maersk and Evergreen—account for 43 percent of the total new capacity due over this period.

But there’s also reason to believe that carriers will make this a “turnaround year,” as their fleets have absorbed nearly 6 percent of their capacity by lengthening service rotations. “Maersk, which has promoted slow steaming since 2008, is estimated to have absorbed over 220,000 TEU, or 8.5 percent of its current fleet through ‘super’ slow steaming,” observes Fletcher.

Leading ocean carriers will be employing a variety of imaginative tactics and strategies to keep themselves ahead of the competition, say analysts. Here’s what all of this creative tension will mean for shippers over the next six months.

Asset utilization
Industry analysts for Drewry Maritime Research in London agree that the Top 30 ocean carriers have been working their assets harder, which, considering the increasing container dwell times resulting from slow steaming, is something of an achievement.

Andrew Foxcroft, author of Drewry’s Container Census report, forecasts annual container fleet growth will be in the order of 7 percent from 2012 to 2015 as shipping companies continue to adopt a tight container/slot operating ratio, while also increasing replacement purchase in comparison to 2010-2011. ?

At the same time, fleet growth since 2009 has continued to be dominated by leasing companies that have posted TEU growth of 10.6 percent in 2011 and 9 percent in 2010—compared to shipping lines only registering 7 percent and 5.7 percent, states the report.

“Investment by shipping lines in particular was curtailed when their profits slumped and debts rose,” says Foxcroft. “However, some carriers have tentatively resumed equipment investment, but they’re still very much testing the waters.”

Indeed, most leading carriers are spending almost as much time demolishing aging or outdated vessels. According to Peter Sand, chief shipping analyst for The Baltic and International Maritime Council in Copenhagen (BIMCO), demolition activity has remained strong. “In the light of the slowly developing demand side, it’s very positive that the industry deals with the supply side issues to improve the fundamentals,” he says.

Sand notes that regardless of the slow development of demand, freight rates have travelled from a “very poor state” at the end of 2011 to a “comfortable” level on several significant trading lanes.

“Bearing that in mind, BIMCO expects the peak season to become a positive surprise,” says Sand, “with rates holding up somewhat but potentially with a sliding tendency if deployed capacity reveals itself as abundant.”

BIMCO continues to expect that the short-term focus for Top 30 ocean carriers will be on balancing the demand for new tonnage with deployed capacity.

Service enhancements
Analysts also agree that service enhancements and a new emphasis on schedule integrity will help the top carriers with their bottom lines. David Jacoby, President of supply chain consulting firm Boston Strategies International, says carriers have been initiating their own metrics of late, and that shippers will inevitably attempt to work them into their contracts—just as they have worked in rate indexing.

“Shippers are very pleased to see these metrics, and they have been surprisingly widely accepted in a very short time, compared to other changes that the ocean shipping industry has tried to make,” says Jacoby, adding that It doesn’t hurt that Maersk—the largest player on the block—is focusing intensely on the customer and has its APM network of terminals to influence the metrics in a positive direction. “This is all good news for shippers.”

Drewry Maritime Research’s quarterly report Carrier Performance Insight revealed that industry-wide vessel schedule reliability improved to a new record high of 75.7 percent in the second quarter of 2012. The latest score represents a 3.4 percent improvement from the reliability level seen in the first quarter of 2012. Ship arrival reliability improved particularly well in May and June, something that

Drewry attributes to a settling down of schedules following network changes in April caused by new carrier alliances
“The latest data for the second quarter shows that freight rates have increased—from a low level—but so has ship on-time performance,” says Simon Heaney, research manager at Drewry. “We believe that this is probably a fair deal for many shippers…a more expensive but more predictable service.”

Maersk and Hanjin not only maintained their positions as the two most reliable major carriers, but also improved on their performances of the first quarter. Based on Drewry’s regular surveys, Maersk had its best-ever all-trades on-time score of 91.4 percent in the second quarter, up from 89.8 percent in the previous quarter.

Seventeen of the 27 major container lines obtained a reliability score above the carrier industry’s 75.7 percent on-time average in the second quarter, and only seven of the sample failed to improve on their score from the previous quarter.

Drewry also ranks reliability by ship operator. The results show that the most reliable operators in the second quarter were Hanjin, Maersk, Hamburg Süd, and CSAV. Meanwhile,?Drewry continues to monitor carrier key performance indicators at the box level, having introduced this new approach in April as an industry first.??

Sustainable growth
Carriers will be increasingly pressured by shippers to stay “green” while they attempt to remain in the black. But according to Jacoby and other analysts, the top carriers will not be able to absorb even half of these costs without passing some of them on.

“The new regulations and frameworks are individually and collectively very expensive to implement, and somebody has to pay the bill,” says Jacoby.

Major green regulatory frameworks implemented by the Environmental Protection Agency will add cost related to limits on the use of anti-fouling paint, for example. Jacoby adds that mandated reduction of air pollution (Clean Air Act), ship recycling, energy efficiency, and carbon reduction, will also have to be addressed.

“There are other stringent regulations such as the International Convention for the Prevention of Pollution from Ships (MARPOL) by international bodies like International Maritime Organization,” says Jacoby.

So in addition to General Rate Increases (GRIs) and fuel surcharges, shippers are likely to face new challenges in the future. “Some of these regulations or acts have existed for a few years,” says Jacoby, “but there is increased focus on compliance today.”