TABLE OF CONTENTS Dec 2012 - 0 comments

Outlook 2013: Marine

Global shipping lines seeing signs of fragile turnaround

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By: Leo Ryan
2012-12-01

The domino effect of the recession of late 2008 through 2009 is still being felt by shippers and shipping lines, notably amidst persistent economic doldrums in Europe and recent slower growth in China. The global shipping environment remains characterized by overcapacity and volatile rates. But there’s some light at the end of the tunnel on shipping enterprise balance sheets thanks to the success of some freight rate increases and the positive impact of slow-steaming on soaring fuel costs. And, intriguingly enough, Canadian players on the world’s oceans and North American markets have embarked on a fleet renewal process, with a pronounced “green” dimension, that has not been seen in more than three decades.

According to London’s Drewry Shipping Consultants, the recent implementation of rate restoration by carriers in the core east-west trade lanes means that most are now operating above break-even.

After total carrier losses exceeded US$6 billion in 2011, the overall 2012 figures could show a profit of just over $1 billion or a loss of similar size.

Global 2012 container growth of 4.3% is forecast by Drewry’s, which, in its annual market review this fall, stressed that continued supply side pressures mean the container industry will remain in a transition mode until at least 2014 and probably 2015.

“How well the operators manage capacity deployment during this time will largely determine where freight rates and overall profitability settles. Continued slow-steaming and more idling of capacity, which have been at a relatively low level over the past 12 months, will need to be more heavily utilized strategic weapons in the future – whether the carriers like it or not.”

Drewry’s considers that though carriers have coped relatively well with the influx of new capacity, the new reality is that “there are few genuine positive indicators out there: demand is weak and will remain on the core headhaul trades for the next 15 months at least, the charter market is showing no signs of pick-up, freight rates are under pressure and the cascade of tonnage through the system is starting to cause issues.”

Worthy of special note is a big new item on the table for carriers and shippers: the so-called “indexed contract.” The concept is just at an early stage, but the idea is for contracts covering several years that would seek to smooth out the peaks and valleys of volatile ocean freight rates by offering a more stable pricing environment.

Industry observers, meanwhile, are paying particular attention to developments on the crucial Far East-Europe trade lane, where a virtually across-the-board general rate increase (GRI) of US$500 per TEU (effective Nov. 1) was announced by carriers on this overcapacity-plagued route. It is felt that supply will need to be reduced rapidly for the GRIs to have any chance of sticking within the context of soft demand and sliding spot rates.

The latest idle containership survey of Paris-based analyst Alphaliner shows the number of mothballed box vessels above 500 TEUs in size had climbed to 255 for 550,000 slots as of Sept. 24, or 3.4% of the existing world cellular fleet. Alphaliner considers that a further 30,000 slots will need to be withdrawn soon to restore some supply/demand balance in the troubled trade lane.

 

Escalation of slow-steaming

On the slow-steaming front, Alphaliner has also outlined a rather startling escalation of new trends.

Vessels today are sailing at speeds of less than 14 knots on certain legs in the Far East-Europe strings, increasing the average rotation to 10.5 weeks versus only 8.2 weeks in 2007.

Driven by surging fuel prices, this extra slow steaming is spreading from the Far East-Europe and trans-Pacific to other high-volume secondary routes. Alphaliner estimates that the increased slow-steaming has soaked up 930,000 TEUs, or nearly 6% of the world box fleet.

In an interview, Ruth Snowden, executive director of the Canadian International Freight Forwarders Association, commented on the impact of the above trend in these terms: “We are now witnessing much longer supply chain transits. Inventories are tied up. Equipment availability is much less. Every knot in speed cut out increases the need for more containers.”

Among various marine cargo challenges facing shippers, Snowden expressed strong frustration over the plethora of fuel surcharges and GRIs. “There have been eight increases alone in the trans-Pacific trades in the past 12 months. This imposes a huge administrative burden on freight forwarders who must reluctantly re-quote rates to their customers.”

At the Panama Canal, with construction of an enlarged waterway about six months behind schedule, global shipping lines will likely have until the spring of 2015 to adjust their fleet configurations accordingly.

The US$5.3 billion project includes the construction of two new sets of locks – one on the Pacific and one on the Atlantic side of the canal built in the early 20th century. Work also involves the widening and deepening of existing navigational channels in Gatun Lake and the Culebra Cut. The historical definition of Panamax containerships will evolve from 4,500 TEUs to about 12,500 TEUs. Overall bigger vessel capacity will have a profound impact on Asia-US maritime supply chains for all-water services to the east and east coasts of North America.

Cargo volume through the Panama Canal has bounced back since the 2008 financial crisis hurt international shipping. In fiscal year 2012, the Canal set a new record of 333.7 million tonnes, representing a 3.6% increase over 2011. The top market segments were container vessels (120 million tonnes), dry bulk carriers (83.4 million tonnes) and tankers (51.6 million tonnes).

In light of its growing emphasis on Asian cargo, in September the Port of Halifax became the first Canadian port to sign a Memorandum of Understanding with the Panama Canal Authority.

“Asian cargo is growing over the Port of Halifax and with the Panama Canal expansion nearing completion, large ships will soon have another route option available to and from North America and the Port of Halifax,” said Karen Oldfield, president and CEO of the Halifax Port Authority. “With Halifax’s transit time advantages for our Asian target markets, it makes sense for us to establish a strategic partnership with the Panama Canal Authority and this MOU will be mutually beneficial.”

 

Full steam ahead on Canadian fleet renewal

Meanwhile, Canadian shipping lines active in international as well as domestic markets are steaming ahead – big time – in renewing and expanding their fleets, with particular emphasis on greater fuel efficiency and enhanced “green” performance to further reduce an already low carbon footprint compared with other modes. The more than one billion dollar fleet renewal was kick-started by the federal government’s October 2010 removal of a controversial, longstanding 25% duty on new ships built outside Canada.

 For the Great Lakes carriers, the advanced technologies deployed on the new generation vessels will allow them to even exceed new environmental standards coming into force in North America in 2015.

The first such vessel that will be seen on the Great Lakes/St. Lawrence System will be the Baie St. Paul of Canada Steamship Lines. Following its completion in a Chinese shipyard, it set sail in October from China for Montreal, where it was expected to arrive by early December.

The Baie St. Paul is one of four Trillium Class, self-unloading vessels ordered by CSL for the Great Lakes bulk shipping trades, beginning in 2013.

“The Trillium Class will set new standards in operational and energy efficiency, reliability and environmental protection,” said CSL president Louis Martel.

In addition to a more efficient hull structure, propeller design and anti-fouling paint, and Tier II main engines, the Trillium Class uses variable-frequency drives so fewer generators need to be on line to start machinery – thereby shaving fuel consumption.

Algoma Central Corporation of St. Catharines, Ont. is investing some $400 million for eight new ships, including six Equinox Class bulk carriers, also presently under construction in China. With a hull optimized for hydrodynamic efficiency and cargo capacity, these vessels will be powered by smaller, two-stroke engines that will consume 45% less fuel per cargo tonne than the older four-stroke engines.

In Quebec City, the Groupe Desgagnés has, in recent years, invested about $300 million on new ships, and a sixth is on order.

Montreal-based Fednav Limited has invested more than $500 million for 21 new vessels – nine allocated for Great Lakes/Seaway service – as part of a major renewal program. Seven have already been put into service. The six Lakers recently ordered from Japan’s Oshima Shipyard, to be delivered in 2015 and 2016, will use 20% less fuel and generate 20% less nitrogen oxide emissions than the first generation Oshima ships bought a decade ago.

Regarded as Canada’s pioneer in Arctic shipping, Fednav owns and operates two of the world’s most powerful ice-breaking commercial vessels, the MV Umiak 1 and the MV Arctic. In late October, it announced the placing of an order with Canadian Royalties, a Chinese-owned mining firm, of a 25,000-tonne, ice-breaking bulk carrier from a Japanese shipyard, with delivery slated for December 2013. This ship will be transporting nickel and copper concentrates from the Nunavik Nickel Project in northern Quebec to customers in Europe as well as the import from Europe of mine supplies and equipment.

 Finally, and not least, was the news announced in October of privately-owned Oceanex’s order from a German shipyard for the construction – at a cost of $100 million – of what will be the largest Canadian-flag container/roro ship, with delivery scheduled in the fall of 2013. The Oceanex Connaigra will be joining three other container/roro vessels on the Newfoundland service.

Owned by veteran Newfoundland shipping figure Sid Hynes, Oceanex is a leading player in the east coast transportation industry, operating through the ports of Montreal, Halifax, St. John’s and Corner Brook. “The Oceanex Connaigra has been designed to meet the company’s anticipated growth for the next 30 years,” said Hynes.

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