Excerpts:
Until the late 1990s, the largest container ships could carry about 5,000 steel shipping containers, each about 20 feet long. Today, such ships are little more than chum. The size of container ships has exploded, reflecting their role as the packhorses of globalization. Each year, the maritime shipping industry transports nearly $13 trillion of goods, roughly 70 percent of total freight, according to the World Trade Organization.
The Triple-E’s can carry more than 18,000 containers, piled 20 high, with 10 above deck and 10 below. But they can sail only between Europe and Asia, as their nearly 194-foot wide hull is too large to fit into American ports or to slip through the Panama Canal.
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The Mary — stacked so high with cargo that little is visible beyond two smokestacks and a glassed-in command center — is an apt symbol for an increasingly global marketplace. But it also represents the container shipping industry’s overreaching ambitions. Few carriers besides Maersk are profitable, too many new ships are being built, and demand for space on container ships is slowing as economies in Europe and Asia face headwinds.
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“There’s too much capacity in the market and that drives down prices,” he continued. “From an industry perspective, it doesn’t make any sense. But from an individual company perspective, it makes a lot of sense. It’s a very tricky thing.”
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The industry wants ships that carry more containers, more slowly. Fuel prices are a major factor, so ships now commonly “slow steam” to save fuel, cruising at 16 or 18 knots instead of 22. A typical trip from Poland to China takes 34 days.
During a recent voyage to the Suez, the Mary’s crew sailed on a parallel course with a 10-year-old Maersk container ship that held half as much cargo, but the Mary used only 6 percent more fuel.
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But fuel is only one part of the equation. “The supply of ships has far outstripped the growth rate” of container traffic, said Richard Meade, the editor of Lloyd’s List, a leading nautical newspaper, adding that the top shipping lines “have entered into an arms race in terms of size, led by Maersk” and its Swiss rival, the privately held Mediterranean Shipping Company. Newer ships, he said, “are more efficient, more economically viable and more environmentally friendly, but they are only going to deliver those results if they are full.”
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The shipping industry has also lacked significant consolidation, with shipping giants often seen as national assets. The top five container lines are either family- or state-controlled. Revenue at Maersk, publicly traded but family controlled, equals more than 14 percent of Denmark’s gross domestic product.
Shipyards, conditioned to build ever-larger vessels, are cutting prices to keep their order books filled. The Triple-E’s were built for $190 million a ship, which in 2011 was seen as a relative bargain. By comparison, in 2007 China Shipping Container Lines, another major shipping line, paid $1.36 billion for eight ships, or about $170 million a ship — but those had a capacity of about 13,300 containers, nearly 5,000 fewer per ship.
“In this down cycle, the new-built prices are low and money is cheap, so you would much rather go and buy the vessels than go and acquire a company” that has older ships, said Martin Dixon, director of research products at Drewry. “Many shipping lines are struggling to make money, so cost leadership is key to survival. Hence, you’re seeing a lot of investment in bigger ships.”
The bigger ships, though, have been sustained by a growth rate in containerization traffic that has been two and a half to three times global economic growth for decades — and that seems to be coming to an end.
“There are two types of companies that will survive this,” Mr. Sanders of Boston Consulting said. “Either you have the very large companies like Maersk” that “take advantage of scale and make money, or particular shipping lines that operate a niche where they dominate, like a feeder line out in Southeast Asia.
“The other guys,” he added, “are caught in the middle and will have a hard time to make a decent return.”
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While the ships grow, the crews don’t, in another economy of scale. The Mary has a multinational crew of 20 to 30 — and with so few, they multitask.
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The cost of the crew and a range of other expenses related to running the vessel account for more than a quarter of the Maersk Line division’s cost base. Fuel represents more than a fifth. Cutting such costs helps Maersk steady its results.
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Earlier this year, the Nicaraguan government announced plans to build a new canal system, bankrolled by a Chinese billionaire, that would compete with Panama and be wide enough to accommodate the Triple-E. Such plans have been floated before and failed to materialize, but it is the kind of audacious project that only the Chinese might try.
No country more than China has spurred the containerization boom, a byproduct of moving the world’s factories thousands of miles from their biggest markets.
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China is also exerting its influence on the industry. The country’s regulators recently blocked an attempt by Maersk and two European rivals to form a partnership, saying it would hinder competition. Maersk recently proposed a less ambitious alliance with a single rival, the Mediterranean Shipping Company. The proposed deals represent a concession that cargo volume is not rebounding as quickly, so shippers need to share costs and cargo space. Boats are typically full heading west to Europe and partly empty heading east to China. Cargo from Europe to Asia has grown about 30 percent in the last five years, in part because of rising demand from a growing Chinese middle class. But it has not nearly filled all the containers.
At the same time, some manufacturing is moving closer to local markets, a trend that contributes to slowing growth in container traffic. China, too, is trying to foster its own shipping lines. This year, China Shipping Container Lines ordered five ships that will each hold 19,000 containers, about 1,000 more than the Triple-E. They begin to arrive later this year."
(*) If you wonder what industrial organization is, let me quote Uncle Bernard (in French):"Les théoriciens de l'économie industrielle sont une secte, dont l'obscurantisme et le fanatisme donnent froid dans le dos. Il n'est pas difficile de repérer le taliban sous l'expert, et le fou de Dieu sous le fou de l'incitation."
So, you will I hope excuse me if I am NOT Bernard...
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