s0 special lecture tim power presentationbipc.kr/2014/pt/s0 special lecture_tim...

Liner Liner shipping: challenges shipping: challenges and implicationsand implicationsand implicationsand implications

BIPC 2014BIPC 2014

Tim PowerDirector Head of Maritime Advisors 14

th November 2014Director, Head of Maritime Advisors

2Drewry presentation: BIPC 2014

1. Liner fundamentalsContents

Liner economics and the cycle Historical market growth

Contents

Historical market growth Historical supply demand balance

2. Key challenges

3 I li ti3. Implications

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Liner fundamentals

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Liner economics and the cycleLiner economics and the cycle

Liner shipping is a cyclical industry; cycles driven by cash balances and utilisationOptimism supports

orders Supply exceeds Demand for demand /

trade growth slows

Demand for new tonnage

Over tonnaging

Freight rates recover

Freight rates drop

Demand and Supply realign

Demand for vessels drops

Fleet growth slows / trade

recovers

realign

dropsrecovers

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Liner economics and the cycleLiner economics and the cycle

Liner economics are fundamentally challenging and promote earnings erosion

Factor EffectFactor EffectEconomies of scale Structural overcapacityPerishability Push for short-run contribution – rate erosionyHigh operational gearing Focus on price competition

Commoditised service offering Limited differentiation of product; price i iCommoditised service offering competition

Fragmented industry No coordination of capacity development, intense competitionpInelastic demand curve Falling rates have a limited effect on demand

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Liner economics and the cycle

Liner shipping is fragmented

5 000

10,000HHI Index

4,000

5,000 Wide Body Aircraft Manufacturing

3,000Cruise Lines (2)

2,000International Express Package (4)

0

1,000

Even Competition: all competitors have equal market shareNo. Competitors

Container Shipping Lines (3)

Shipbuilding (1)

Notes1. Source: UBS Global Shipbuilding reports May-092 Source: Natixis Carnival report Sep 09

0 5 10 15 20 25 30 50p p q

Highly Competitive (less than 100) Unconcentrated (100-1,000) Modest Concentration (1,000-1,800) High Concentration (greater than 1,800)

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2. Source: Natixis, Carnival report Sep-093. Source: Drewry, Containerisation International4. Source: RBC, Fedex report Aug-09


Historical growthHistorical growth

Growth has been rapid but volatile: very hard to match capacity growth to demand growth

16%210

11%

150

180

mte

u)

6%

120

owth

(%)

ntai

ner t

raffi

c (m

-4%

1%

90

Ann

ual g

ro

Glo

bal c

on

-9%

4%

30

60

-14%0

30

00 01 02 03 04 05 06 07 08 09 10 11 12 13

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200

200

200

200

200

200

200

200

200

200

201

201

201

201

Container Traffic (mteu) Annual growth


Rates and profitabilityRates and profitability

Result: profitability has been poor and very volatiley y

Historical development of E-W Freight Rates (US$/teu) Sample carriers’ EBIT (US$bn and %)

1,600

1,800

8

10

12

20%

25%

30%

EBIT profit/loss ($bn)

EBIT margin(right axis)

1,200

1,400

4

6

10%

15%

600

800

1,000

-2

0

2

-5%

0%

5%

200

400

600

-6

-4

2

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14-15%

-10%

5%

0

200

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q

132Q

133Q

13

4Q13

1Q

14

2Q14

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

Note: EBIT margins based on average of sample carriers after currency conversion to US dollars when necessary. Sample consists of Maersk Line, APL, CMA CGM, CSAV, Hanjin Shipping (container), Hapag-Lloyd, HMM (container), NYK (liner, calendar year basis), Wan Hai, Yang Ming and Zim

© Drewry 2014

East-West blended spot rate Global blended spot rate


Nothing changesNothing changes…

Mogul Steamship Co Ltd v McGregor, Gow & Co 1892

“Shi h d b tt ll t th i ti i i“Shipowners had better sell out as there is no use continuing in business if the law decides we must cut each others’ throats and ruin ourselves”ourselves .

John Swire, agent for Alfred Holt, founder of the Far Eastern Freight Conference

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Challengesg

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Global container trade growth has slowed downGlobal container trade growth has slowed down

Asian financial

US recession China outsourcing

crisis

New globalglobal norm

Global financial crisis

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financial crisis

Source: Drewry


Price competition forces focus on costsPrice competition forces focus on costs

Commoditised services

Market fragmentation Perishability

Price titicompetition

Cost leadership

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p


What are the main costs?What are the main costs?

Maersk Line - % of costs

Lines are focused on all aspects of cost improvement and network efficiency – vessel and bunker costs are around 50% of a line’s total cost spend

“The network cost initiative and totalThe network cost initiative and total unit cost initiative delivered significant results and total cost reductions are ahead of plan, especially due to a moreahead of plan, especially due to a more cost-effective and better utilised vessel network”.

(APMM 2013 Annual Report – Maersk Line)

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Vessel costsVessel costs

Economies of scale are very significant

1,200 Asia – Europe round-voyage slot cost at 85% utilisation (US$/TEU)

1,044 968

882 845

1,000

845 828 770 736 800

400

600 US$/TEU

200

400

-8 000TEU 10 000TEU 12 000TEU 13 000TEU 14 000TEU 16 000TEU 18 000TEU

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8,000TEU 10,000TEU 12,000TEU 13,000TEU 14,000TEU 16,000TEU 18,000TEU


Carriers play ‘follow the leader’ in ordering bigger ships

Regina Maersk 7,400 teu

Carriers play follow the leader in ordering bigger ships

Mid 1990sOther carriers followed…

Emma Maersk 15,500 teuMid 2000sMid 2000sOther carriers followed…

Maersk Triple E 18,000 teu20132013Other carriers following…

22,000+ teu vessels?2018?Carriers will follow

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Carriers will follow…


Survival of the biggestSurvival of the biggest

8%

10%

12%

2%

4%

6%

argi

n

-4%

-2%

0%

1H14

EBI

T m

a

12%

-10%

-8%

-6%

Size of bubble represents share of global containership

fleet capacity

-12%-50 0 50 100 150 200 250 300 350 400 450 500

Above 10K teu fleet ('000 teu)Notes: Above 10K teu fleet and global fleet share, as of July 2014EBIT margin for Japanese carriers (K Line, MOL, and NYK) based upon calendar year January-July, not its fiscal year that starts April

Source: Drewry Maritime Research

© Drewry 2014


Wide variations in unit costsWide variations in unit costs

35%

40%

45%

20%

25%

30%

atio

*

10%

15%

Big

ship

r

-5%

0%

5%

Size of bubble represents share of global containership

fleet capacity

-10%1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800

Estimated unit cost ($/teu)

* Big ships identified as above 10K teu; big ships ratio and global fleet share as of July 2014

Source: Drewry Maritime Research

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Terminal performance is critical to achieving benefits of largest ships

Lines expect:

Largest vessels for the trade/route to be handled without physical constraintsUnit handling costs are maintained – requires a competitive environmentAs vessel size increases, port time is maintained, in spite of increased container exchangeSpeed of essel t rnro nd is important b t reliabilit is j st as importantSpeed of vessel turnround is important, but reliability is just as importantReliability includes

• Departure on scheduleDeparture on schedule• Connectivity with feeders/relay services at hubs• All containers loaded (including empties)• No constraints/congestion on landside service

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The challenge for Ports and TerminalsThe challenge for Ports and Terminals

How to handle the higher container exchanges per call on larger ships?g g p g p

Ship size (teu)

Length (m) Width (m) Max draft (m) Boxes wide(teu)

12,000 365-380 48-50 15.5 19-20

15,000 400 56 16 2215,000 400 56 16 22

18,000 400 59 16 23

20-25,000 440-450? 59-61? 16.5? 23-24?

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Source: Drewry


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Shanghai. independent information and independent information and advice advice to the global to the global maritime industry. Since then we have worked maritime industry. Since then we have worked with over 4,000 clients in more than 100 with over 4,000 clients in more than 100 countries. countries.

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