Shippers struggle as containership capacity has outgrown demand

By Zhang Ye in Leipzig Source:Global Times Published: 2015-6-2 18:53:01

As shipping companies continue to strive for scale, containership capacity has grown larger and larger, sparking concerns that all this new capacity won't be utilized effectively as fleet growth outpaces trade.

The world's largest containership, the CSCL Globe, sits in berth at the Port of Felixstowe, UK on January 7. Photo: CFP

In the past few years, Ni Lulun, a senior executive with a company running a port business in Shanghai, has seen ever larger containerships anchoring at the Shanghai Port.

"The average size of vessels on the Eurasian routes has increased 40 percent since 2007 to 13,000 twenty-foot equivalent units (TEUs) currently," Ni, vice president of Shanghai International Port (Group) Co (SIPG), told the Global Times Friday during the annual summit of the International Transport Forum (ITF) held between May 27 to 29 in Leipzig, Germany.

The Shanghai Port is not the only one experiencing such a trend.

The Qingdao Port in East China's Shandong Province said on its website that it has entered the era of mega-ships after United Arab Shipping Co's Barzan vessel - with a capacity of 19,870 TEUs - arrived at the port in late May.

In December, China Shipping Container Lines Co (CSCL) carried out the maiden voyage of its 19,100 TEU vessel at the Tianjin Port.

The era of mega-ships

It has been a fact that many shipping companies are pursuing larger vessels, Weng Lin, vice president of COSCO Container Lines Europe GmbH, told the Global Times Thursday during the summit.

By the end of 2014, ships with at least 8,000 TEUs of capacity accounted for 52 percent of COSCO's total self-run fleet, according to the company's annual report.

Weng said that COSCO's largest containerships at present can carry around 14,000 TEUs.

COSCO's major domestic rival CSCL has pushed the boundary of ship size further to 19,100 TEUs.

UK-based market consultancy Clarkson Research Services estimated in February that in 2015, global container fleet capacity will rise 5.8 percent year-on-year.

New orders have already passed the 20,000 TEU mark in 2015 with a series of 21,000 TEU vessels contracted by Hong Kong-based container shipping company Orient Overseas Container Line?at Samsung Heavy Industries in March, according to a report that Clarkson published on May 20.

The world's largest containership now carries more than 19,000 TEUs, and 22,000 TEU ships are expected to begin operation in the near future.

According to the ITF, an inter-governmental organization at the Organisation for Economic Co-operation and Development, the average capacity of containerships has doubled over the past decade.

The trend has been driven by the search for economies of scale.

A mega-ship has the advantage of lower costs for each container (in construction, fuel and operating expenses), especially on the competitive trading routes between the Far East and the EU, where freight sizes are large, a CSCL PR representative told the Global Times in an e-mail on May 26.

The PR representative noted that CSCL now runs five 19,100 TEU ships.

Time to brake?

"A large vessel of above 19,000 TEUs, which usually costs $150 million to $200 million though, has become an industry trend, but they may not be an efficient choice if the new capacity cannot be used effectively," an industry insider, who asked to remain anonymous, told the Global Times during Friday's summit.

There is not enough cargo to take advantage of the new capacity due to the current economic downturn and the previous over-investment in large ships, he said.

China, one of the world's biggest economies, reflects the world's soggy trade picture. The country's exports and imports tumbled in April, falling 6.2 percent and 16.1 percent respectively from a year earlier.

Clarkson estimated in February that the global containership trade, which accounted for more than 60 percent of global seaborne trade by value, would rise 6.7 percent year-on-year in 2015. By contrast, the global containership fleet in 2015 is set to rise 7.8 percent in capacity, outstripping the growth rate of 6.3 percent in 2014, Alphaliner, a French shipping industry research firm, estimated in January.

"At present, the usage rate of a mega-ship [referring to ship of 19,000 TEUs and above] is around 80 percent," Ni said. "If the pursuit of big ships continues, no party, whether it is a shipping company or a port operator, will be a winner."

SIPG, the second-largest shareholder of Bank of Shanghai, had invested lots of money to cope with big vessels, but the cargo flows are not sufficient to offset their big investments, he said.

Ni thinks that it is difficult for a shipping company to get its big vessels fully loaded on its own, as cargo owners usually prefer to contract with a group of shipping companies due to safety concerns.

SIPG has started diversifying its businesses, and it plans to reduce the proportion of port businesses in its overall business activities from 90 percent to 60 to 70 percent, Ni said.

Against the backdrop, shipping companies are betting on the tie-ups with each other, hoping to cut costs, tackle overcapacity and lower charter rates by sharing vessels, said the PR representative from CSCL.

CSCL inked an alliance with United Arab Shipping Co and France's CMA CGM in September 2014.

COSCO has also tied up with international shipping companies such as Japanese Kawasaki Kisen Kaisha Ltd and South Korea's Hanjin Shipping Co, forming a network called CKYHE in early 2014.

Alliances can be effective to some extent, but they can hardly solve the industry's overcapacity problem, analysts said. Furthermore, these agreements draw unwanted attention from antitrust regulators, which might complicate matters.

Copenhagen-based Maersk Line, Geneva-based MSC Mediterranean Shipping Company SA and CMA CGM had hoped to set up an alliance, dubbed the "P3 network."

However, the tie-up died in June 2014 because it couldn't get permission from the relevant governments, including China. MSC and Maersk later set up a smaller alliance.

Hope from 'One Belt, One Road'

There's a lot of pessimism about the shipping industry's prospects due to overcapacity after large amounts of capital flowed into the sector in the past, Weng said. However, the "One Belt, One Road" initiative will facilitate greater trade between countries and massive new opportunities for the tepid shipping industry.

"The Silk Road project covers the majority of populations in the Eurasian region. Where there are people there will be consumption and trade," he said.

The "One Belt, One Road" initiative was proposed by President Xi Jinping in 2013 to change the world's economic landscape and generate new growth.

The initiative covers 4.4 billion people, or 63 percent of the world's population.

COSCO has showed its ambition in exploring opportunities in the initiative.

On May 20, COSCO, the Export-Import Bank of China and Brazilian miner Vale signed a financial and transport cooperation pact to solidify cooperation among BRICS countries, according to a statement posted on COSCO's website.

Meanwhile, COSCO has been in advanced talks with Greece over the further cooperation in the country's biggest port Piraeus, Reuters reported on May 15, citing Greek Defense Minister Panos Kammenos.

Greece is selling a 51 percent stake in the port. It has invited COSCO, which has been investing in port construction in Piraeus through its COSCO Piraeus Container Terminal arm, and two other shortlisted investors to submit bids by September, the report said.

Weng from COSCO refused to comment on this during the summit, and COSCO's Beijing headquarters cannot be reached for comment by press time.

CSCL also appears to have attached a lot of importance to the "One Belt, One Road" initiative. CSCL has set up offices in countries and regions along the Silk Road Economic Belt, believing the initiative will create an opportunity for the company to transform itself into a global logistics supplier, CSCL Deputy General Manager Qian Weizhong told the Xinhua News Agency in March.
Newspaper headline: Testing the waters

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