Drewry Shipping Consultants, maritime consultants, in a new report “Capacity Management – surviving the container crisis,” concludes that Carriers need to act now to combat the global recession.
While the past six months have seen a huge amount of capacity changes in the industry, freight rates continue to plummet while the industry shirks the painful decisions that are needed to ensure their collective survival.
According to the report, the old analogy about “rearranging the deckchairs on the Titanic” is in fact a good one for the crisis the liner industry finds itself in. Thinking of that grand liner as the market – proud, overconfident and heading towards a catastrophe partly of its own making – then one can see the operators desperately rearranging their fleets, while refusing to acknowledge the necessity of abandoning ship – or ships – before the crisis becomes a disaster.
Drewry has compiled a special, in-depth report called Capacity Management , which analyses how carriers have reacted to the global economic crisis and what steps will need to be taken if they are to survive.
So far they have been altering capacity via service suspensions, slow steaming, service deviations and lay-ups. While some of these strategies are more effective than others, few if any carriers have yet adopted the full suite of measures consistently and there is still reluctance on a collective front to tackle the dire situation head-on. Drewry also argues that the operators who move the fastest and are the most radical in their strategies will be best placed for recovery in the long term. We still expect some major operators to fail this year.
Without a doubt, scrapping and wholesale cancellation of the container orderbook are the two most effective tools of capacity management. While scrapping has increased significantly since 4Q08, it will not alter the fleet enough to make a real difference and carriers will not start sending ships younger than 20 years to the scrap yards.
Unlike in the bulk sector, cancellations of container ships have been very scarce indeed and for the moment at least carriers seem reluctant to forfeit large initial down payments on their orders made in 2007 and yards are definitely playing hardball.
Over 50 main services have been suspended from the core east-west trades since October 2008, but while the end result has led to a net 20-25% reduction in overall capacity on the Asia to Europe and Mediterranean routes, relatively few vessels have been laid up. Furthermore, this has not arrested the very sharp decline in freight rates.
Drewry’s analysis of the core east-west routes identified a total of 48 vessels (249,000 teu) or approximately 3.5% total available capacity (2% of global capacity) that has been laid up, mainly in Asian ports. Many vessels have simply been cascaded elsewhere and in a number of cases two services have been amalgamated into one with resultant tonnage.
This suggests that carriers are still reluctant to lay vessels up despite the desperate trading conditions and that other means of capacity management, though less radical, are more prevalent.
So far, no carrier has been bold enough to mothball a 10,000+ teu newbuild. The emphasis has been on tonnage below 2,000 teu and in returning chartered vessels to owners where contracts have expired. These are the easier options for carriers to consider – certainly compared to accepting that the downturn will last long enough to warrant putting expensive assets into dry lay-up. The costs of preparing a vessel for lay-up and then reactivating it are likely to be well over $1 million for a post-Panamax containership – a figure that needs to be spread over a long period to make lay-up a feasible option compared to continued operations.
Neil Dekker, Editor of the Drewry report, warns “Carriers are having to swallow some very unpalatable truths as the global recession subverts conventional wisdom, and the degree to which they have signed up to the cost-cutting agenda has been rather patchy. While slow steaming has become widely adopted on the Asia-N Europe/Mediterranean trades, several services have remained unchanged even as fuel prices rose to over $700/tonne and then came back down towards $200/tonne. Even at the current fuel price of around $270/tonne, it costs almost $350,000 more to make an Asia-North Europe round voyage on a 56-day rotation (i.e. an eight-ship cycle) than on a 70-day schedule (10 ships). That’s over $17m a year. It is not at all clear that carriers ever fully priced their services to cover the costs of fast transits, but in the present market conditions it is certain that shippers and importers will not pay for speed. Carriers can hardly afford to allow this if they are to continue as viable companies in their present form.”
Similarly inconsistent strategy characterizes the diversion of services to avoid the Suez or Panama Canals. This has been adopted by only a few carriers on only a small number of strings, and only on the backhaul leg, so that a single carrier or group can be operating both high- and low-cost services alongside each other.
The collapse of both demand and freight rates has put most trades into big loss-making territory and, in extreme cases (Asia-North Europe certainly being one) has meant that much of the cargo has been making a negative contribution to fixed service costs. But carriers are still desperate to hold on to hard won market share, even when every extra container carried worsens the profit and loss account With inherent over-capacity and a sharp fall in vessel charter rates, carriers are also having to re-evaluate the worth of their assets when weighing ship time against cash savings and against fuel expenses. It seems as though ship time has been almost completely discounted by carriers in arriving at the decision to bypass the Suez Canal – a move that seems to be driven by cash-flow considerations. For the deviation to make sense from an accounting point of view, the carriers must be valuing their ships at near to zero. In today’s market, that might not be far from reality.
Synthesizing all these new economic realities into a coherent and consistent survival strategy is not proving an easy task – especially in such a volatile cost, volume and rate environment – but with the global picture hardly getting any less daunting, cost minimization is becoming ever more urgent.