Record big ship deliveries worsen container losses

Singapore : Container lines are losing money on Asia-Europe routes after slashing rates more than 50 per cent this year because of a price war and excess capacity. In 2012, 42 of the biggest ships ever built will join the competition.

The record number of ships able to hold more than 13,000 containers entering service will be almost double this year's tally of 22, according to Alphaliner and Clarkson data. They will boost the total fleet to about 100. Ships this big are only used on Asia-Europe routes as they are too large for US ports.

Mediterranean Shipping Co and its new partner, Marseilles-based CMA CGM, will lead the surge, receiving 21 ships and boosting their combined fleet to 49. Asian lines will have 26 such-sized vessels by the end of next year, leaving them reliant on smaller, less fuel-efficient ships to compete with the alliance and Copenhagen-based AP Moeller-Maersk, which together account for about half of Asia-North Europe capacity.

‘Really tough'

"It's getting really tough for Asian lines on a trade that is pretty much dominated by the Europeans," said Jee Heon Seok, a Seoul-based analyst at NH Investment & Securities Co. "There's not much choice at the moment other than reducing capacity to give them a better chance of raising rates."

Spot prices for hauling a 20-foot cargo box from Asia to Europe have dropped to $490 (Dh1,799), the lowest since the Shanghai Shipping Exchange started tracking data, as a flood of new ships outpaces demand for Asian-made goods. The breakeven point on the route is at least $700, according to Morgan Stanley.

Shipments to Europe rose 4.5 per cent in the first ten months of this year, trailing an eight per cent increase in capacity, according to Container Trade Statistics. Volumes next year may rise 3.1 per cent while capacity may increase as much as ten per cent, according to Alphaliner. Routes from Asia to Europe and the Middle East account for 29 per cent of global container volumes, compared with 14 per cent on trans-Pacific services, according to Barclays Capital.

Mediterranean Shipping and CMA CGM, the world's second and third-largest container lines, agreed this month to cooperate on Asia-Europe routes, as part of a wider partnership designed to pare overcapacity and improve service levels. The two lines account for 22 per cent of capacity on Asia-North Europe routes, compared with Maersk's 26 per cent share, according to Alphaliner. The rest of the market is divided between 14 lines operating in four groups.

The new partnership may help Mediterranean Shipping and CMA CGM, which are both closely held, win customers from smaller rivals as they will have more capacity, more services and the biggest fleet of large fuel-efficient vessels, said Um Kyung A, a Seoul-based analyst at Shinyoung Securities Co.

"The alliance is going to put a lot of the Asian players at a huge disadvantage," Um said. "There is no way they will be able to match it."

Maersk has taken advantage of the 23 13,000-plus ships it operates to help set up a daily service on Asia-Europe routes, which offers the industry's only guaranteed shipping times. The company, which expects a loss at its container unit this year, will also begin adding 20 18,000 vessels in 2013. These ships, the world's biggest, will have a 26 per cent per-box cost advantage over the largest vessels currently used on Europe lanes, Maersk has said.

Among Asian lines, only China Cosco and China Shipping currently operate ships with capacities bigger than 13,000 boxes. This reflects a greater focus on trans-Pacific routes by carriers in the region.

Megaships

More Asian lines are set to begin operating mega-ships next year. Hanjin Shipping Co, a partner of Cosco, will get five vessels bigger than 13,000 containers, according to Clarkson data. Cosco will double its fleet of that size to eight. The two lines also work on Asia-Europe routes with United Arab Shipping, which will boost its mega-ship tally to nine from one by the end of next year.

Hyundai Merchant Marine Co will also add its first five mega-ships next year. Its partner APL, a Neptune Orient unit, will get its first ship of that size in 2013.

The Singapore-based carrier has begun receiving ten 10,000-unit vessels. The shipping lines' other partner Mitsui OSK Lines won't get its first mega-ship until 2013 at the earliest.

Capacity cut

Shipping lines have cut capacity on Asia-Europe routes in a bid to revive rates after industry-wide losses, with carriers including Hapag-Lloyd, Maersk and MSC announcing plans to add levies of as much as $250 per box. The cuts may not significantly boost rates, as industry-wide capacity on Asia-Europe routes has fallen by less than ten per cent, according to Johnson Leung, head of regional transport for Jefferies Group in Hong Kong. By contrast, more than 15 per cent of capacity has been cut on trans-Pacific services.

Shipping lines are less able to pare capacity on Asia-Europe routes because vessels are generally too big to be used elsewhere, said NH Investment's Jee. Deploying a smaller ship on the lane would also be uncompetitive because of fuel economy and fixed cost, he said.

"Shipping lines have taken steps to reduce capacity, but it is not enough," Shinyoung's Um said. "They need to make drastic cuts or it's only going to get worse with all those new ships coming next year."

— Bloomberg