“Cascading Down” in Container Shipping

Results of the 7th Maritime Trend Barometer 2012 Hamburg, December 2012

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Content INTRODUCTION

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SURVEY FINDINGS

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CONCLUSION

10

CONTACT

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DISCLAIMER

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INTRODUCTION The increasing growth in big container ships on the world’s seas continues. According to industry platform Alphaliner, over 50 ships with a minimum capacity of 10,000 standard containers (TEU) were delivered in the year 2012 alone. This development is expected to peak in 2013. This is when the shipping company Maersk will take delivery of its first 18,000 TEU ships. They will be the world's biggest container freighters. A total of 20 ships of this type have been ordered. These new ships will continue to fuel the cascading down effect, which has visibly intensified since 2011. Nearly all the new big container ships will run on the main Asia-Europe route. However, they will not operate in addition to smaller ships that have been employed on these routes to date but will force them to move to other, lower-volume routes. This, in turn, will trigger the same ‘cascading down’ effect How are the world’s leading liner and charter shipping companies reacting to this trend? UniCredit’s 7th Maritime Trend Barometer focuses on this theme. The survey was carried out in summer/autumn 2012 on an anonymous basis. The answers are representative of shipowners who own over a third of the world's container fleet.

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SURVEY FINDINGS 1.1 THE KEY DRIVERS OF THE CASCADING DOWN EFFECT ARE… (Multiple answers possible) 100%

92% 75%

80% 60% 40%

25%

20%

8%

0%

0% Economy of scale (OPEX)

Bunker price

Freight volume increase

Relatively favourable building costs, compared to smaller ships

Environmental regulations

Nearly all participants (92 per cent) consider that economies of scale and/or the (relatively) lower operating expenditure (OPEX) for large ships are the main reason for the cascading down trend. Another key reason closely connected with this (75 per cent) is the continuing rise in the bunker price. Surprisingly, only a quarter of the people surveyed quoted increased cargo volumes as a reason for using ships with larger capacities. 1.2 WHAT ARE THE MOST IMPORTANT EFFECTS ON THE CONTAINER SHIPPING LINES? Market consolidation by 100%

83%

84%

80% 50%

60%

20%

42% 42%

33%

40% 0% 17%

17%

8% 8%

16%

0% Increased slot sharing

Closure of services

Intensified cooperation e.g. alliances yes es

no

Company w withdrawals

prefer not to say

Slot sharing (i.e. agreements between shipping lines which may also be competitors on sharing the use of ships) and intensified alliances and cooperations are named by 83 and 84 per cent of respondents respectively when asked about the results of the cascading effect. Consolidation among shipping companies will therefore continue. Asked whether shipping companies might even be forced to withdraw from the market or from certain areas in the foreseeable future, there was no clear answer. Opinions on this are divided: 42 per cent of respondents assume that some shipping companies will give up while exactly the same percentage does not expect this to happen.

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Intensifying of hub-and-spoke operations

33% 42%

yes no prefer not to say

25%

Investment in larger tonnage 17%

yes no

17%

prefer not to say 66%

Charter strategy: less chartering

33% yes no 67%

Nor does any clear answer emerge in response to the question whether hub-and-spoke systems will increasingly be used. This system involves the concept of a ‘main port’, favoured only a few years ago by shipping lines in conjunction with the use of big tonnage ships: these only have to call in at one or two ports per region. Here, the cargo is distributed by feeder ships. This makes it possible to achieve faster turnaround times for big container ships. 42 per cent of respondents think that there will be an increase in hub-and-spoke systems, 33 per cent are not sure. In contrast, two thirds of respondents are certain that the liner shipping companies will invest in bigger ships in future. The cascading effect will therefore continue. At the same time shipping companies will apparently make greater use of their own tonnage: two thirds of the respondents expect a reduction in charter operations.

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1.3 WHICH REGION STANDS TO PROFIT MOST FROM EXPANSION OF THE HUB-AND-SPOKE SYSTEM? (Multiple answers possible)

North America

0% 8%

Central America South America

17%

Africa

17%

North Range

17%

Mediterranean

33%

prefer not to say

58% 0%

10%

20%

30%

40%

50%

60%

70%

The uncertainty voiced in the previous section about the future of the hub-and-spoke system is reflected again here. Well over half of those surveyed (58 per cent) do not want to commit themselves to one specific region in which this system could expand. If they do commit themselves, one third of respondents expect this to affect the Mediterranean region. 1.4 HOW WILL THE FOLLOWING BIG NAMES IN SHIPPING DEVELOP IN THE INDIVIDUAL SHIPPING AREAS IN FUTURE COMPARED WITH TODAY?

7000 6000

5563

6646

6321 5423

Capacity in TEU

5000

4000

4000

3236

3000

5481 4604

3571 2808

2000 1000 0

Asia to South America West rotation

Intra Asia

Asia-Afria East Coast actual

EuropeSouth America

EuropeNorth America

future

In this section questions were asked about the average size of container ships now and in future (by cargo capacity in TEU) on five key routes worldwide. Asia-Europe trade was specifically omitted, since the trend for ships of up to 18,000 TEU there as of 2013 is well known and documented. The analysis shows a clear trend for bigger ships on all shipping routes. Respondents expect that for the first time the big container ships deployed on the Asia-South America routes (west rotation) as well as between Europe and South America will average over 6,000 TEU. They see the growth rate in size (by TEU capacity) at well over 10%, with the most striking increases in TEU capacity expected for inner-Asian routes (23 per cent) and between Asia and the east coast of Africa (27 per cent).

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1.5 WHAT ARE THE CRUCIAL OPERATIONAL CHALLENGES FACING LINER SHIPPING COMPANIES IN VIEW OF THE CASCADING EFFECT? 17% 33%

Inadequate port infrastructure Size of vessels employed differ from trade requirements Prefer not to say

50%

50 per cent of shipowners are aware that the ships they employ are not really tailored to the requirements of their individual shipping routes. Judging by the answers to the previous questions, this can only mean that the units are too big. At least a third of respondents confirm that today’s port infrastructures are inadequate for the ships that are deployed. 2.1 WILL THE CASCADING EFFECT LEAD TO A DECLINE IN ORDERS FOR NEW SHIPS? 17%

50%

yes no I am not sure/I don’t know

33%

Half the survey participants expect orders for new ships to decline due to the cascading effects. This will largely be due to overcapacities generated by the use of bigger ships. Only one third of respondents do not expect a reduction in orders for new ships.

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2.2 WHICH DIMENSIONS WILL MAINLY BE AFFECTED BY THE DECLINE IN ORDERS? (Multiple answers possible) 70% 58%

60%

50%

50%

50% 42%

40%

33%

33%

30% 20%

17%

10% 0% 8,000 TEU – 9,000 TEU

6,500 TEU

5,500 TEU

3,000 TEU – 4,000 TEU

2,000 TEU – 3,000 TEU

1,000 TEU – 2,000 TEU

500 TEU – 725 TEU

Approximately half of respondents in each case (42 to 58 per cent) think that the entire range of 2,000 TEU to 6,500 TEU ships will be affected by declining orders for new ships. However, only a third see the 500 to 2,000 TEU ship range, which includes the feeder ships, jeopardised by the reduction in new shipbuilding orders. The outlook is far more positive for the class with a capacity of 8,000 to 9,000 TEU: only 17 per cent of respondents see a drop in new orders here. 2.3 WHICH DIMENSIONS WILL MAINLY BE AFFECTED BY THE DECLINE IN CHARTER ACTIVITIES? (Multiple answers possible) 60% 50%

50%

50%

42%

40%

33%

30%

33%

25%

20% 10%

8%

0% 8,000 TEU – 9,000 TEU

6,500 TEU

5,500 TEU

3,000 TEU – 4,000 TEU

2,000 TEU – 3,000 TEU

1,000 TEU – 2,000 TEU

500 TEU – 725 TEU

The answers here paint a very similar picture to the previous question. The larger classes continue to be attractive for the charter market as do, with slight restrictions, feeder ships up to 2,000 TEU. As many as 50 per cent of survey participants expect a massive decline in mid-size ships.

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3.1 WILL SLOW STEAMING BECOME THE NEW SERVICE SPEED IN SHIPPING LINE SERVICES? 8%

yes no I am not sure/I don’t know

92%

Almost all (92 per cent) respondents assume that slow steaming, meaning a speed of under 20 knots, will establish itself as the new service speed. Only eight percent think otherwise. It can be assumed that these shipowners will be willing, if necessary, to raise the average speed of their ships again at short notice. 3.2 WILL ALL NEW SHIPS BE DESIGNED FOR A SLOW STEAMING SPEED? 0%

0%

yes no 100%

I am not sure/I don’t know

New ships of all sizes will be optimized for slow steaming speeds in future. This is the conviction of all participants in the survey. Independently of this statement, some new ships today are nonetheless able to achieve higher speeds. 3.3 WILL THE LONG-TERM REDUCTION IN SERVICE SPEED AFFECT ENGINE SYSTEMS? 8% 25%

yes no prefer not to say

67%

Two thirds of respondents do not fear that the main engines could be damaged as a result of being throttled for slow steaming. Only a quarter anticipate technical problems as a result of reduced engine speeds.

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CONCLUSION The shipping companies that UniCredit surveyed hope that the use of bigger ships that travel more slowly will enable them to get their rising costs under control. This applies not only to the Asia-Europe route, on which it is virtually traditional to deploy the world’s biggest container carriers, but also to all key routes worldwide. The cascading down effect is spawning reduced demand for charter business and a decline in orders for new ships, above all in the 2,000 TEU to 6,500 TEU class. The shipowners surveyed by UniCredit are convinced that cascading down will result in market consolidation above all on the shipping line side. This will include the increase in slot sharing activities, more intensive cooperation and the building of new alliances. Respondents are as yet uncertain as to whether some shipping companies will withdraw from (sub)markets. In a subsidiary question, the 7th Maritime Trend Barometer addresses another trend: almost all participants state that slow steaming has become the new standard speed on all trades. The “high-speed routes” with speeds of up to 25 knots that were common only a few years ago on the Asia-Europe and USA-Europe routes no longer exist. Likewise, all respondents are sure that ships built now and in the future will all be designed for far lower service speeds than only five years ago. The latest designs/sizes of ships, however provide the flexibility to increase speeds if required.

CONTACT Joachim Flecks Research Global Shipping Tel. +49 40 3692-4570 [email protected]

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