Developments in the deep sea sector will have profound effects for the shortsea sector and for intermodal transport in Europe. This was the message of Lars Jensen, CEO & Partner of SeaIntel Consulting, in Shortsea15 conference in Copenhagen on June 18th. This conference was organized by the European shortsea promotion centres in cooperation with Copenhagen Business School.
Canary birds were used to detect dangerous environment in coal mines in the old days. In the conference, Lars Jensen claimed that the Asia-Europe deep sea container market is the canary that warns of a dangerous environment for container shipping lines in general – including shortsea shipping.
The major problem is that the orderbook for mega-size container carriers is too high. Consequently container shipping capacity will grow faster than demand, since trend growth in global trade seemed to have slowed down to 3% per year.
Lars Jensen claims that there will be too many 18.000-22.000 TEU container vessels. At the end of 2014 there were 15 such vessels and currently there is 73 more on order. In addition there is 68 ships on order in the 13.000-18.000 TEU size class. The overall TEU fleet capacity is expected to increase 8% in 2015 and then further 5% in 2016. In the last quarter of 2015 the year-on-year TEU capacity will be 10% higher in the Asia-Europe trade.
The main driver is that competing lines are forced to order large ships or leave the business due to economy of scale of ship sizes. This leads to a continuing structural overcapacity and all lines are forced to focus on costs, not service. The mega-alliances will add to this cost drive and will not change the grim picture for shipping lines.
The average vessel size in the Asia-Europe trade will grow from 11.600 TEU in 2014 to 13.500 in 2016 and this will have a negative effect on service. Service frequency and the number of weekly services will fall dramatically and stress on large ports on given weekdays will increase.
Shippers are not willing to pay for service and the service level is expected to deteriorate in deep sea shipping. Currently only 60-70% of vessels are on time within +/- one day and transit times are increasing due to slow steaming. Maersk Line has abandoned its Daily Maersk service as shippers were not willing to pay for the extra service it offered with higher frequency and reliability.
Low rates and lower service
The rates have already collapsed and will stay low. The shipping rate from Asia to North-Europe has dropped from $1.800/TEU in the start of 2014 to $200/TEU currently.
Carriers are forced to focus on unit costs with commoditized products and standardized back-end services. Shippers must adapt to the new service level or switch to a portfolio of carriers, which collectively matches their needs. More shippers may turn to forwarders to manage their portfolio (see Forwarders are increasing their market share). All parties must consider a reality where most cargo is spot and not contract cargo.
The new reality will strain ports. With fewer calls and larger sizes the land requirements and the peak demand for shortsea and hinterland connection will increase. Sudden port congestion problems will occur and further investments are required by the ports.
Local markets will not be insulated from the fall-out of the impending global restructuring. Ships earlier engaged on the Asia-Europe trade will move to other markets. Intra-European trades will have larger ship sizes and consequently call on fewer small ports.
Shortsea rates will stay low since time charter rates of all ship sizes will fall and larger ships with lower unit costs will be used. Cost focus leads to a higher focus on third party feeder services like Unifeeder, who have recently reported that they have won back some cargo from feeder services of deep sea carriers.
Shortage of small feeders
There are few 100-1.500 TEU ships on order and increased demand for feedering may lead to shortage of small feeders. The cost of on-carriage by truck will remain high and the cost of feeder vessels calling on large ports will increase. The use of large feeder vessels will lead to a demand for feeder-to-feeder in many areas, since many small and medium size feeder ports cannot accommodate feeder vessels of more than 1.500 TEU.
Continued structural overcapacity
Lars Jensen concludes that there will be a continued overcapacity in the 2-3 years to come. More orders of mega-carriers are expected and this will have a cascading effect on other trades. Rates will continue to be under pressure and carriers will focus on unit costs, not service. This will change the container market as we know it.