Shipping lines rethink strategy

Shipping lines rethink strategy

By Robert Wright

Published: March 25 2008 02:00 | Last updated: March 25 2008 02:00

A visit to the vast container terminals that handle most of China's booming manufacturing exports provides a simple primer in how container shipping organises itself. Depending on who its customers are, a terminal often contains clusters of boxes bearing the logos of the several members of one of the main container alliances - the Grand Alliance, New World Alliance and CYKH. There are also usually more uniform piles of boxes belonging to one of the four lines big enough to feel no need of partners - Maersk Line, Mediterranean Shipping Company, CMA CGM and Evergreen.

The independent lines' neat piles will start becoming more mixed-up at some terminals from April this year. On March 10, the three biggest container ines - Maersk Line, MSC and CMA CGM - announced they were to start co-operating on three new services between China, Taiwan, South Korea, Japan, and the US west coast.

The services - for which Maersk Line will provide nine vessels, MSC four and CMA CGM two - are intended to let the three lines withdraw some independently operated services suffering lower-than-expected traffic as a result of the US's economic slowdown. Through the co-operation agreement, the lines could cut back while still offering customers weekly departures from a wide range of east Asian ports, they say.

The unprecedented co-operation underlines how seriously container lines are taking the threat to their vital trans-Pacific business from the slowdown in US growth. It also illustrates the lengths to which lines are going to absorb the slowdown and other challenges - such as the high price of fuel oil - without alienating customers or triggering a damaging slump in rates.

The US slowdown threatens container lines' profitability because falling demand could leave lines with empty space on trans-Pacific services and push freight rates down disproportionately. The other big threats currently facing lines are the high price of fuel - which has doubled in a year - and growing congestion at leading ports in northern Europe, where demand in some places grew by more than 20 per cent in 2007.

The companies have addressed all three worries. Many have cut trans-Pacific services and redeployed the ships to faster-growing markets elsewhere. Many are now providing an extra, ninth vessel on Asia-Europe services previously operated by eight. The additional vessel means operators can slow ships down to conserve fuel. Services that previously offered a weekly service with vessels completing return trips in 56 days have 63 days to travel from Asia to Europe and back when a ninth vessel joins.

Lines whose ships are delayed at congested ports also now have more scope to speed up their vessel to regain their schedule than when ships were running close to their maximum speed.

Ron Widdows, chief executive of APL, the container line of Singapore-based Neptune Orient Lines, says the Grand Alliance (Hapag-Lloyd, NYK Line, OOCL and MISC), the New World Alliance (his own line, MOL and Hyundai) and CMA CGM have all taken ships out of trans-Pacific services.

"Some of the tonnage has found its way into Asia-Europe or other trade lanes, not solely into the Asia-Europe range," he says. "There has been some additional tonnage for dealing with the growth of the eastern Mediterranean and Black Sea."

Other vessels have been redeployed to longer-haul routes within Asia - which accounts for far more movements of containers than either the trans-Pacific or Asia-Europe trades. Such redeployments were not always possible in previous slowdowns because US demand fell in line with that elsewhere.

"Most of the tonnage that was removed is not just sitting around waiting for things to get better in the trans-Pacific," Mr Widdows says of the present situation.

Costs are still rising for lines, however. Mr Widdows points out that, however justified the decision to deploy a ninth vessel on Asia-Europe services, it increases costs. Announcing the 2007 results of OOIL, the parent group of OOCL, on March 5, Ken Cambie, the finance director, warned that, even though the line had been able to increase freight rates even on the trans-Pacific, costs had risen faster.

Expanding US exports thanks to the weak dollar had also reduced average rates. Westbound trans-Pacific traffic attracts lower rates because ships are less full on the return journey to Asia.

There are tentative optimistic signs, however. OOCL, one of the few lines not to reduce its exposure to the trans-Pacific, experienced 11.2 per cent volume growth during 2007 on trans-Pacific routes, 7.9 per cent revenue growth and was growing still faster at the end of the year. The traffic came from lines that cut capacity, OOCL believes. Neptune Orient Lines, parent of APL - which is still heavily exposed to trans-Pacific routes - announced on March 3 that both revenues and traffic had been up 17 per cent for the six weeks starting December 29.

CC Tung, OOIL's chief executive, acknowledges sentiment this year will not be as good as last year. He expects trans-Pacific growth in the low single digits and Asia-Europe growth down to 14 to 15 per cent from over 20 per cent in 2007.

Nevertheless, thanks to the various measures lines have put in place to counteract the US slowdown, he expects the industry to maintain the vital equilibrium between cargo demand and the supply of ships.

"We are hopeful that it will still be reasonably well-balanced," Mr Tung says.