On a macro-basis, business seems to be improving. Unemployment figures in the United States are improving monthly, there has not been an EU debt crisis since Cyprus's in March, and the re-election of Prime Minster Shinzo Abe in Japan appears to mean the Bank of Japan will boost the money supply in order to gently inflate their economy.
Negatives include a slowing of the Chinese economy as well as stubbornly high global oil prices. The quiet bursting of the real estate boom in China will affect their domestic economy as the Chinese leadership continues to struggle to get provincial and municipal corruption and favoritism under control. While credit has tightened, the Chinese are aware of the need to maintain economic growth in order to keep their 1.4 billion citizens satisfied. Oil prices remain stubbornly high in the aftermath of the Egyptian crisis in which they rose from U.S. \$ 98 / bbl to yesterday's \$ 107.00
But while carriers need to be cognizant of the world in which they operate, their most important supply & demand issue is that of TEU's.
TEU Supply & Demand:
The average ship size has tripled since 1996, when largest vessel size
was 4000 TEU capacity. 2014 capacity will average 18,000
TEU's with 2020
forecast at 20,000 TEU's.
1996 - 4,000 TEU
2001- 6,000 TEU
2006 - 8-10,000 TEU
2008 - 11-15,000 TEU
2011 - 16,000 TEU
2014 - 18,000 TEU
2020 - 20,000+ TEU
What does this development portend? The increase in ship size increases the importance of mega ports as they reduce average trade-route distance and put pressure on terminal handling abilities to move more containers even more quickly.
Confirming the increasing importance of the Pacific Rim economies to the world as a whole, there are 17 port expansions in Asia, 6 in the rest of the world, but just 2 in the United States. While Europe seems to be prepared bigger volumes, major investments are needed in the U.S., South America and Africa to deal with larger ships being used, as well as those being planned.
An Asia-Europe capacity increase:
Carriers have added 622,000 TEU to the Asia-Europe route, one of the world’s two largest trade lanes, over the past 12 months from July 2012 to June 2013. According to maritime analyst Alphaliner, this is half of the new capacity delivered worldwide which puts severe pressure on rates unless the EU economies recover and can take more Chinese product.
Meanwhile, at least 33 mega ships over 10,000 TEU were delivered during the same July 2012-June 2013 timeframe, for an aggregate capacity of 442,000 TEU's with most of them are deployed in the Asia-Europe trade lane.
However, the weak Asia-Europe trade demand has driven the carriers to remove the same amount of capacity in order to avoid a rate war. However while smaller ships have been replaced by those efficient mega ships; they have been redeployed to other trade lanes, which causes a new round of rates wars reaching across multiple trade lanes.
During the July 2012 – June 2013 period, transpacific routes grew by 321,000 TEU's, up 12 %. Oceania and Africa – related routes saw the largest percentage capacity increases, with Oceania-related trade experienced 15.1 % capacity increase, and Africa-related trade a 14.5% growth..
Overall, new box ship deliveries hit 1.275 million TEU's in the past 12 months.
Impact on ports:
Fundamentally, the market is seeing too many TEU's coming on the market, being injected, particularly in the large trade routes. This leads to pressure on rates to fill boxes, which leads to market instability and price volatility.
The increased consolidation in intra-regional feeder services using larger vessels is effecting the smaller ports as the re-deployment of “smaller” vessels to the North-South trades is creating pressure on ports and terminals who lack the facilities or finance to expand.
As feeder vessels get larger, they require more thought in utilizing them efficiently. Ultra large ships need more berth space, more equipment, more land, larger turning circles and better interchange between terminal and hinterland. If not all these factors are balanced, the ultra large fleet will lead to berth congestion. In addition, the very cost increases their ultra sizes were designed to reduce.
An additional issue, especially in the unionized ports in the EU and US that as technology is used to improve efficiency, labor relations will become a challenge. As port and terminal strategies vary from private ownership and financing to public-private joint operations, the port workers are increasingly used as a place to reduce costs. However, the EU and US longshoreman have the ability to fight back by striking, which has the ability to cause immense economic repercussions on every level from national economics to the supply of holiday ornaments on store shelves.
Impact on Rates:
With pressure on rates, it is now more important than ever to keep costs low, improve efficiency, and maximize revenue.
On a “Macro” level” the use of Big Data to maximize revenue, and Supply Chain Management. Carriers need to realize the shipper requires delivery to inland destination and not the port, and there are sufficient large carriers on most routes for them to find another carrier.
On a “Micro” Level: To emphasize service as well as rates. In the spirit of Japan's Total Quality Management which emphasizes customer satisfaction, impress on every employee the mantra of “under promise and over-deliver” because satisfied clients do not leave.
Thought for the Week: “Cutting rates to maintain a customer base increases both gross sales and net losses.”