The Mega Containers Invade

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Tuesday, 27 January 2009

Container shippers are unleashing a wave of titanic vessels on the oceans during the biggest dip in global trade since World War II. The trend could keep sea freight rates depressed well into 2010. That's good news for their customers, the millions of businesses big and small that import parts and products from overseas. But it's likely to spell pain within the shipping industry itself and could precipitate consolidation as smaller players are pushed out.
The jumbo vessels -- many longer than three football fields -- carry everything from strawberries and tea to iPods and motorcycles, for thousands of customers at once. The economies of scale can be great if shippers can fill their holds.
The MSC Daniela is a glimpse of the future. The size of an aircraft carrier, the ship completed its maiden run from Asia to Europe this month packed with 13,800 containers, or equivalent units, each big enough to contain all the contents of a three-bedroom house.
Thirty-five ships of Daniela's scale are scheduled to hit water in 2009, doubling the number floating today. They'll make up roughly a quarter of the net increase in container capacity on the high seas. The Asian companies that make up 16 of the top 20 container shippers are also ordering the ships, led by China's Cosco Container Lines with 24. By 2013, some 200 ultralarge ships will be in service around the world.
Meanwhile, a ship capable of fitting 22,000 containers has been designed by South Korea's STX Shipbuilding Co.
Giuseppe Di Maio, an operations manager at the Daniela's owner, Mediterranean Shipping Co., said the company filled every slot -- but at bargain rates.
Shippers are eager to avoid partially filled vessels at almost any cost. "To fill their big boats, these guys will cut their price to any level for customers," said Dirk Visser, an analyst at Dynamar NV, a Dutch consultancy.
With overcapacity and a drop in trade, the bottom recently fell out on shipping rates. The rate for shipping a container from Asia to Europe, the world's busiest trade lane, has fallen to around $300, one-tenth the cost of a year ago, even as some shippers cancel regular runs. Some ships have gone so far as to take containers free. The only cost to the shipper is roughly $500 in fuel and transit fees, which are assessed on all containers.
According to the most recent data available, the U.S., Japan, China and the European Union all suffered 10% declines in exports in November, auguring a bitter 2009 for global trade. Yet shipping companies aren't expected to cancel any orders for new ships, allowing the global fleet to increase by over 12% -- way ahead of expected demand.
Two European billionaires are leading the move to supersize ships. Gianluigi Aponte, owner of Geneva-based Mediterranean Shipping, has ordered 48 ultralarge vessels, including the Daniela. . His strategy is to gain market share by building bigger ships and aggressively recruiting customers, said people familiar with the company. MSC is the second-largest container shipper in the world, with 450 vessels, behind Denmark's A.P. Moeller-Maersk, with 500 ships.
Mr. Aponte's rival is Jacques Saade, the 71-year-old founder and director of Marseille-based CMA-CGM, which has ordered 37 ultralarge ships. The two tycoons, who've been battling each other since the 1970s, study each other's moves like chess players. "We're not shrinking anything in our organization," Mr. Saade said in a rare interview. "If we need to, we'll order more big ships, for economies [of scale]."
Some companies are suspending routes and scrapping smaller vessels -- to little effect. Recent analyst reports predicted rates are unlikely to rise until the end of the economic downturn. "The challenging environment could continue in 2010 until a demand recovery narrows the demand-supply gap and improves the level of profitability in the sector," a J.P. Morgan & Co. report said.
Most of the new big ships were ordered before the economic bust in anticipation that the China-fueled boom in global trade would continue. But instead of canceling orders, shippers now see an opportunity to force a shakeout in what has long been a fragmented industry of family-led carriers.
In the 1990s, A.P. Moeller-Maersk pioneered the first gargantuan container ships.
Source: Wall Street Journal