Container Market Seen Flourishing as Ship New-building Spree Continues

Ultra-large container ships expected to join booming trade with Far East, even as ocean carriers contend with slim profits, says Evergreen Marine Chairman Arnold Wang

Tianjin, China — November 5, 2007 — Barring unexpected disasters, the container market looks set to flourish in the years ahead, with China's economic boom continuing to drive growth in container transport and other industries, according to Arnold Wang, chairman of Evergreen Marine Corporation, who spoke at the World Shipping Summit (China) 2007 on November 2 in Tianjin.

In his presentation, titled "Growing Demand as Indicated by the Shipbuilding Order Book," Wang noted that over the past decade China's remarkable economic growth has brought structural changes to global container shipping and other related industries, including shipbuilding and terminal operations.

"In 2006 container throughput in all Chinese ports reached 80 million TEUs [twenty-foot equivalent units], or around one-fifth of the global volume," Wang told the audience at the conference. "For cargoes from Asia to Europe and North America, China's exports have accounted for more than half of market volumes. In 2006 China gained a market share of 65 percent in the Trans-Pacific eastbound trade, 71 percent with the inclusion of Hong Kong. In the Far East-Europe westbound market, a market share of 63 percent was recorded for exports from China alone and 72 percent with Hong Kong's contribution."

Wang added that given the scale of China's economic development, it is hardly surprising that China is now having a significant influence on the overall shape of global container transport and other related industries.

Prospects for Ship New-building

Turning to the subject of the global container ship new-building program, Wang continued: "According to Clarkson's statistics, shipyards worldwide are expected to churn out 1,410 thousand TEU of tonnage in 2007, while in the latest building spree, vessels above 10,000 TEU have increased by a notable extent. In total, ship owners have spent $51.2 billion on container vessels, including 114 vessels above 10,000 TEU. It is believed that more than 150 such ULCS [ultra-large container ships] will be added to order book by the end of this year."

BRS-Alphaliner's new-building statistics echo this development, said Wang: "The ULCS fleet above 10,000 TEU will grow from four to 152 ships in four years. All these gigantic vessels are expected to join the booming Far East-Europe trade."

Wang said that some people might start to wonder whether such a huge delivery of tonnage will cause oversupply and lead to market meltdown, or whether the influx of new capacity will only serve to fulfill ever increasing demand. He believes that in order to forecast market demand/supply, it is essential to analyze the growth in real slot capacity, which can be influenced by the following factors:

  • Limitations of actual loading — Due to loading requirements or broken space caused by special cargo, a vessel's actual carrying capability will not reach its nominal capacity. These factors include overweight, out-of-gauge (over-high and/or over-wide), and dangerous goods, etc. For a 4,000-TEU vessel, the effective slot space can fall to under 3,200 TEU when the above-mentioned factors are taken into consideration.

  • Replacement of aging fleet — Aging vessels account for a notable share of the total existing fleet. More than 5 percent of current tonnage would normally have been scrapped having reached the age of 25 years. In other words, one out of every 20 new-buildings will be used to fill the vacuum created by the disposal of aging vessels.

    In consideration of low productivity and high maintenance costs, the aging fleet will be gradually renewed. With part of the new-building fleet reserved for the replacement of the ageing fleet, the growth of effective capacity supply will slow down as a result.

  • Capacity demand for feeder expansion — To maintain the efficiency of the overall network, feeder services have to be upgraded in proportion to the expansion of mainline services. The tonnage requirement for feeder expansion will reduce the capacity growth of long-haul services.

    For example, if a carrier were to deploy 10,000-TEU vessels to upgrade an existing Far East-Europe service that was using 6,000-TEU ships, shifting the 6,000-TEU vessels to replace 3,000-TEU ships in a Far East-Mediterranean service. The 3,000-TEU ships are then used to expand regional feeder networks. The cascading effects only supply 7,000-TEU of effective slots to the Far East-Europe (including Mediterranean) trade.

  • Port congestion — In the Far East, China in particular, the handling capacity and capability of container ports is being constantly upgraded in line with bullish cargo growth. In Europe, as in the U.S., there are also a number of major expansion plans, but environmental concerns, lengthy consultations and public enquiries are creating major delays measured in years, not months. These bottleneck problems will gradually influence operational efficiency and restrain effective capacity growth.

  • Longer trade routes On the one hand, the booming Far East-Europe market brings huge cargo volumes to carriers. But on the other hand, the longer trade route requires more vessels than other trades and imposes mitigating effects on actual capacity growth. With most ULCS new-buildings deployed on the Far East-Europe trade, the growth of effective slots will be slower than the nominal capacity increase, and this will help to stabilize the global container shipping market.

    For instance, it takes four to five ships to run a Far East-U.S. West Coast (USWC) weekly loop, but it requires eight to nine ships for a Far East-Europe weekly service. The deployment of eight 8,000-TEU vessels can form two weekly services on the Far East-USWC trade and increase weekly capacity supply by 16,000 TEUs. In contrast, the same eight vessels can only constitute one weekly service when shifted to the Far East-Europe trade and reduce the capacity increase by half.

  • Crowding-out effect of way cargo — Long-haul services can also carry way-cargo and thus dilute capacity supply for the main trade. For example, Far East-Europe services can serve the Red Sea market en route to Europe. Far East-U.S. East Coast all-water services can carry cargo in transit to South America.

Impact of Economic Growth

Wang also commented on the relationship between global economic growth and container volumes: "There used to be a proportional connection between the growth rates of global economic development and container volume. Under normal circumstances, the increase rate of container cargo is around 2.4 times that of economic growth. But due to the impact of outsourcing trends, the situation has started to change in recent years. The ratio climbed to 2.8 and 3.6 for 2000 and 2003 respectively.

"In 2004 and 2005, with the outsourcing trends more or less established, the ratio fell to the previous level. According to forecasts by the IMF [International Monetary Fund], the global economic growth rate will range between 4.2 percent and 4.3 percent during 2006-2010. Based on the cargo multiple of 2.4, global container cargo volumes are expected to increase by 10-11 percent in the coming years.

"The pointers above indicate that cargo volumes will continue with stable growth while the tonnage supply will increase slower than expected. Therefore, it is believed that the container shipping market will continue to flourish unless the global economy is impacted by unexpected catastrophes."

Challenges of a Competitive Market

Container shipping is an open and very competitive market, said Wang: "Changes in capacity demand and tonnage supply will directly influence freight rates and loading performances. Furthermore, this industry requires huge investments but only generates slim profits. In the last 10 years, fierce competition has driven the industry's profitability down to micro levels or even into frequent losses. Container shipping has become the least lucrative section of the whole logistic chain.

"For example, the industry achieved a record profit in 2004. But an American Shipper [magazine] study revealed an average profit ratio of 10 percent in that prosperous year compared to 5 percent for a normal year. Given the limited profit margin, carriers' profit outcomes can easily turn negative when freight rates drop by 5 percent or costs increase by the same level."

Wang concluded: "For the years to come, it is forecast that the development of the container shipping industry will continue along a rising path, based on continuous cargo growth and stable capacity increases. We believe that rational competition is the foundation on which we can create a win-win situation among competitors and conduct reciprocal business with customers. We are glad to join with other carriers to explore avenues whereby we can continue our contribution to the development of the global economy."

In addition to serving as chairman of Evergreen Marine, Wang currently also serves as the chairman of Taiwan Shipowners Association and the chairman of Taiwan Strait Shipping Association.