Current Issues International topics
March 28, 2011
Container shipping: Successful turnaround Container shipping achieved an impressive turnaround in 2010. Global
container throughput rose by at least 11% last year, after declining for the first time ever in 2009 (-9%). The level of global container throughput was thus higher again than before the crisis. The reasons for the recovery were the stockbuilding of industrial goods and the rapid upturn in Asia above all. 2011 will probably see container throughput increase by 7%. During the crisis the freight and charter rates in the container shipping segment nosedived by 50-80%. At one stage about 12% of the
fleet was out of service (compared with 2% at last count). In the meantime, prices (rates) have recovered, but they are still well below their pre-crisis record levels. Although the next few years will see additional capacity introduced into the market – and especially in the very large container ship segment – demand is likely to grow faster than supply on average until 2015. The problem of overcapacity will therefore be mitigated. In both 2011 and 2012 charter rates could rise by significant double-digit amounts. The medium-term outlook for the sector is intact. Global container
throughput is likely to expand by an average of 7-8% per year until 2015. Container shipping is thus the fastest growing mode of transport. The drivers remain the increasing international division of labour and productivity gains within the sector. All the same, container shipping increasingly finds itself faced with political and economic challenges and risks. These include stricter environmental regulation, capacity bottlenecks at ports, rising fuel prices and protectionist tendencies. Container shipping already above pre-crisis level Global container throughput and container trade (million TEU*) 800 700 Author Eric Heymann +49 69 910-31730
[email protected]
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Editor Tobias Just
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Technical Assistants Sabine Kaiser Sabine Berger
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Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail:
[email protected] Fax: +49 69 910-31877 Managing Director Thomas Mayer
500 400 200 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Container throughput**
Container trade***
* Twenty Foot Equivalent Unit (standard container size). ** Container throughput includes all turnover activity (e.g. includes empty container movements. *** Container trade covers only the number of laden containers that ultimately arrive at the destination port. Source: Drewry Shipping Consultants
Current Issues
2009 sees global container throughput sink for the first time
Container shipping has recovered from recession Global container throughput, % yoy 20 15 10 5 0 -5 -10 91 93 95 97 99 01 03 05 07 09 1
Source: Drewry
World trade and container shipping closely correlated x-axis: world trade, % yoy y-axis: container throughput, % yoy 20 15 R² = 0.73
10 5 0 -5 -10 -15
-20
-10
0
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Sources: CPB Netherlands, Drewry, DB Research
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The biggest container ports in the world: Asia dominant Container throughput (million TEU) Singapore Shanghai Hong Kong Shenzhen Busan Guangzhou Dubai Ports Ningbo Qingdao Rotterdam Tianjin Kaohsiung Port Kelang Antwerp Hamburg Los Angeles Tanjung Pelepas Long Beach Xiamen Laem Chabang
From a regional standpoint it was the European and North American ports that were particularly hard hit by the recession. In 2009 container throughput contracted by more than 16% at northern European ports and by over 13% in North America. The biggest decline of around 36% was posted by the eastern European ports (Baltic area, Black Sea, eastern Mediterranean) that are small by international standards. Several routes were completely suspended at these ports during the crisis. The decline in 2009 is, however, put into perspective by the fact that the eastern European ports had posted the highest growth rates for many years prior to the recession. Of the world’s 30 biggest ports Hamburg suffered the biggest decline at 28%. The deep slump in German external trade 3 was one major reason. On top of this, several feeder services from Hamburg to the Baltic area were temporarily suspended or transferred to competing ports (e.g. Rotterdam). Asian ports were less affected by the crisis as the economic environment there was much more favourable than in Europe and the US. In both the Far East and South Asia the decrease in container throughput in 2009 was about 8%; in the Middle East the decline was a mere 2%. Several Asian ports even managed to grow their container throughput in the crisis year of 2009 (e.g. Khor Fakkan in the United Arab Emirates: +30% to 2.8 m TEU). Container shipping enjoys multiple advantages Before the slump in container throughput in 2009 the sector posted very high growth rates. Between 1990 and 2008, for instance, global container throughput rose by an annual average rate of more than 10%. The discrepancy between the 2009 figure and the prior longterm performance highlights the scale of the crisis.
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The global recession of 2008/09 hit the global container shipping business hard. Global container throughput fell for the first time in the annals of the sector in 2009, contracting by over 9%, according to Drewry Shipping Consultants (Drewry). Prices (freight and charter rates) fell by between 50% and 80%. At its height some 12% of the 1 fleet (based on lot capacity in TEU ) was laid up, which means that at one stage about 600 ships had been taken out of service. According to information from Germany’s Verband Deutscher Reeder (VDR), international shipping lines suffered losses of USD 20 bn in 2009. The reasons for these losses are obvious: the global economic crisis was marked by a slump in trading activities and investment. This had a knock-on effect on container shipping since the fortunes of the sector are very closely correlated with global 2 trade developments.
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The reasons for the historically very high growth in container shipping include the increasing international division of labour and the growing liberalisation of world trade (e.g. China’s WTO accession in 2001). Furthermore, the share of goods that are ideal for shipping via container (semis and finished products) has risen steadily over the last few years, and advances in container technology allow more and more goods to be transported via
2009 1
Source: Hafen Hamburg
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TEU stands for Twenty Foot Equivalent Unit and is the usual standard container size. Container throughput invariably grows faster than world trade: between 1991 and 2008 it expanded by 50% more than world trade. Feeder services operate between the larger and smaller ports within a region. March 28, 2011
Container shipping: Successful turnaround
Asia least affected by the crisis Container throughput by region based on biggest ports, 2005=100 140
120
100
80 05
06
07
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Europe North America
09
Asia 4
Sources: Hafen Hamburg, DB Research
Exports by major trading nations continue rising % yoy 40 30 20 10 0 -10 -20 -30 CN
JP 2009
DE 2010
US
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Asia commands large share of container trade Individual routes as % of container trade, 2009 13.4 28.6 12.7 3.6 3.6 5.2 Trans-Pacific Intra-Asia Transatlantic Other
32.8
Europe-Far East Intra-Europe Far East-Middle East Source: Drewry
Container shipping celebrates an impressive comeback Global container shipping has managed a complete turnaround following the crisis. Global container throughput probably rose by at least 11% in 2010 (final figures are not yet available). This means that the record level of 2008 has been bettered again. The key factor in this recovery was the stockbuilding by the industrial sector and the swift economic recovery in many countries that was often driven by external trade. Particularly the upturn in Asia (real GDP ex Japan 2010: +9%) helped to get container shipping back on a growth track. The world’s leading exporter, China, boosted its shipments by more than 30% in 2010 (2009: -16%). Other Asian economies, too, bolstered the sector. Overall, container throughput in Asia probably increased by at least 13% in 2010, whereas North America (+9%) and Western Europe (+7%) are likely to have achieved only belowaverage growth (Hamburg: +12.7%). Asia setting the pace
2011
Source: DB Research
container (e.g. containers for refrigerated goods or liquids). In addition, container ships possess specific advantages over traditional general cargo freighters: shorter loading and unloading times reduce turnaround times in the port, which cuts costs. Also, the options for onward conveyance via other modes of transport are better with containers than with general cargo. Ever bigger and faster ships have enabled constant productivity gains, although the increase in capacity over recent years has cranked up the price pressure in the sector (see page 5). Extensive investment in port infrastructure has been and remains essential for fast growth. Especially in Asia a very large number of container terminals have 4 been expanded or built from scratch in the last few years. As a result the containerisation level, that is the proportion of cargo shipped in containers, has risen worldwide and exceeds 90% at most of the big ports (Hamburg: 97%; 1990: 69%).
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The focus of the global container shipping sector has been steadily shifting towards Asia in any case over recent years. Some 70% of global container throughput is handled by ports in Asia. In 2009 nine out of the ten biggest container ports in the world were in Asia (in the year 2000 the figure was just five). China is the dominant force in this respect, being home to six of the current top 10 ports. Looking at container trade by shipping route reveals that at least one port in Asia is involved in around 80% of all movements. IntraAsian routes with a share of one-third are by far the most important (2007: just 23%). This illustrates that global container shipping not only benefits from the manufacturing in Asia (China) of consumer goods for western Europe or the US, but that in addition the trade links and the international division of labour between Asian countries have also increased significantly. There are individual ports that are highly specialised in the pure transhipment of containers, thus operating primarily as hubs for global and regional container shipping and handling relatively little local traffic. Overall, besides China there are smaller developing countries and emerging markets (e.g. Malaysia, Indonesia, Vietnam) that are also continually investing in their port capacities. A cluster analysis underlines that both the biggest and the fastest growing container ports are located in Asia. The axes of Figure 8 plot the deviations of the world’s 35 biggest container ports from 4
March 28, 2011
See Heymann, Eric (2006). Container shipping: Overcapacity inevitable despite increasing demand. Deutsche Bank Research. Current Issues. Frankfurt am Main. 3
Current Issues
average throughput and average growth between 1999 and 2009. The upper right quadrant thus contains all the ports whose size and growth are both above the average for the top 35. Six of the seven ports in this quadrant are to be found in China.
Many ports operate mainly as transhipment hubs Importance of transhipment at selected ports* (million TEU) Singapore Tanjung Pelepas Guangzhou Busan Shanghai Hong Kong Dubai Ports Kaohsiung Port Kelang Salalah Rotterdam Algeciras Gioia Tauro Colombo Port Said Marsaxlokk Lianyungang Khor Fakkan Hamburg Shenzhen
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Cluster analysis based on 35 major ports*: China's ports are big and growing fast
95% 49% 45% 21% 25% 45%
x-axis: Deviation from average container throughput (million TEU) y-axis: Deviation from average growth rate (percentage points) 25 Ningbo 20 Guangzhou 15 Tianjin Shanghai 10 Qingdao Shenzhen 5 Dubai Ports 0 Busan Singapore -5 Rotterdam -10 Hong Kong Kaohsiung -15 -10 -5 0 5 10 15 20
53% 59% 98% 30% 95% 95% 74% 90% 96% 71% 90% 29% 11% 0
Asia (ex China)
Other
China
* For scale reasons the port of Tanjung Pelepas in Malaysia has been omitted; its container throughput grew between 1999 and 2009 by an annual average of 64%. Sources: ISL, Hafen Hamburg, Drewry, DB Research
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* Additional figures show transhipment share. Source: Drewry
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German shipping lines lead the container segment Container fleet by nationality of owner, %
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German shipping lines lead the container sector Despite Asia’s dominance with regard to the absolute importance of container ports and shipping it is German shipping lines that continue to top the rankings in terms of the container shipping fleet. In 2009 some 35% of the available lot capacity belonged to German ship owners. German shipping companies are hugely important especially in the operational charter business. According to VDR, they command two-thirds of the charter market.
Growth to continue in 2011 at a slower pace 35
36.7
4.9
8.8 6.6
DE
JP
DK
8 CN
GR
Other
Source: VDR
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The global economy, which has been boosted by dynamic foreign trade figures and booming investment, will lose momentum in 2011. Exports by leading trading nations (such as China, Germany and the US) are likely to expand during the current year by only about half as much as in 2010; in Japan the export growth rate could even drop by more than two-thirds. Global container shipping will feel the effects of this economic cooling. For 2011 we expect a rise in container throughput by some 7%. Intra-Asian transport as well as shipments into and out of Asia will probably expand faster than transatlantic traffic for instance. The reasons for this are Asia’s greater economic dynamism as well as higher investment in the necessary port infrastructure. Container throughput is also set to grow until 2015 at an annual average rate of 7-8% (see page 7), according to the latest market forecasts by Drewry.
Fleet capacity determines prices Fleet capacity growth is a decisive factor for pricing in the sector. As in basically every sector, prices come under more pressure the greater the increase in supply. The global container shipping sector has been marked by constant growth in the size of the fleet in recent years. This has primarily been a consequence of the boom in demand. Since there is a relatively long period between the placing of an order for new ships and their delivery – due to the protracted 4
March 28, 2011
Container shipping: Successful turnaround
Container shipping fleet growing constantly Million TEU 1.6
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0 00 01 02 03 04 05 06 07 08 09 10* Newly built, left
Scrapped, left
Fleet, right * Estimate Source: Drewry
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Charter rates recovered, but below long-term average HARPEX* development 2,500 2,000 1,500 1,000
0 03 04 05 06 07 08 09 10 HARPEX Average support period * Aggregate charter rate index
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New ship orders still at low level New ship orders in global container sector 700
3.5
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0.0 96 98 00 02 04 06 08 10 Lot capacity, million TEU, right Number of ships, left Sources: Clarkson Research Services, VDR
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The most recent recession is a good example of how large order backlogs from boom years still have an impact during periods of crisis and weigh on the earnings situation. Even in crisis-plagued 2009 lot capacity in global container shipping grew by 5%. Chinese shipyards in particular continued to expand their deliveries of container ships virtually unchecked. The coincidence of falling supply and rising demand was the main reason for the sector’s huge drop in rates, which amounted to as much as 80% in the charter business; this shows the market clout of the liner shipping companies compared with that of the charter lines. Smaller container ships were affected by the decline in part as a result of renegotiations, such that in many cases debt servicing was no longer possible; the drop in freight rates for the scheduled lines was not as high – at up to 50% – due to contracts already in effect. 2009 saw fleet capacity increase, although more than four times as much capacity was scrapped as in 2008 and although several shipping lines cancelled some of their orders due to the crisis and/or reached agreement with the shipyards to postpone the delivery of new ships. Since the container ship fleet as a whole is still very new, the scope for scrapping is limited; this option is almost only available for smaller ships (because they are older). Slow steaming and more laid-up vessels make supply situation tight
500
Sources: Harper Petersen, DB Research
lead times – it is typical for the business that new ships are also delivered at times when current demand is growing less strongly or is even shrinking; shipping shares this structural feature (“hog cycle”) with other sectors in which durable goods take a long time to be produced (e.g. the real estate market, aircraft manufacturing, parts of the mechanical engineering sector). Cyclical price fluctuations can become amplified by the considerable time-lag (1 to 3 years) between the placing of an order and delivery of the ship.
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The shipping lines reacted to the imbalance between supply and demand and the resulting plunge in prices by adopting a variety of measures. Global orders of new container ships fell by more than 90% in 2009. On top of this came the above-mentioned cancelled orders and postponed deliveries of new ships. All the measures were insufficient to close the gap between supply and demand in the short run. There were two other measures that the shipping lines mainly used to prevent another drop in freight and charter rates: — Shipping companies relied more heavily on slow steaming, that is slower speeds and thus longer round-trip times for the ships. This is not a new “instrument”. Back in 2007/08 speeds were reduced on many routes as a consequence of rising oil prices. At that time the priority was achieving significantly lower fuel consumption by reducing speeds. Even a relatively moderate reduction in speed from 24 to 20 knots can cut the daily fuel consumption of, for instance, a container ship with a capacity of 8,000 TEU by 40%. Longer sailing times/delivery times and higher labour and capital costs can be more than offset by such cost savings. During the most recent crisis lower fuel consumption continued to be an important argument. The possibility to also reduce the efficiency of the fleet (i.e. to have more ships sailing), had however, become much more important. — Furthermore, the shipping lines felt that the implosion in demand obliged them to lay up – that is temporarily take out of service – a larger number of container ships. The companies had to face
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laying-up costs of several thousand dollars per day. At its peak some 12% of the global container shipping fleet was idle.
Fuel consumption cut by slow steaming
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In the end, the reduced lot capacity has helped average freight and charter rates to pick up again over the last few months – starting from a very low base of course. Ultimately, however, the key driver of the latest price increase was the growing demand for shipping. Overall, the level of charter rates is still low anyway on a long-term comparison.
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Further increase in capacity inevitable …
Speed-dependent (knots) fuel consumption, tonnes per day 250 200
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Ship with lot capacity of 8,000 TEU Ship with lot capacity of 6,000 TEU 13
Source: Drewry
Number of laid-up ships has dropped sharply Number of laid-up container ships worldwide during the crisis 14
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Number of ships, right TEU share of total fleet, %, left Source: AXS-Alphaliner, VDR
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Order books for big ships well filled Fleet and orders on hand according to ship size class (million TEU), July 2010 Up to 1,999 TEU 2,000 to 4,999 TEU 5,000 to 7,999 TEU 8,000 to 9,999 TEU 10,000 TEU and over 0 Existing fleet
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Order book Source: Drewry
Overall, the order books still contain a considerable number of orders placed in the pre-crisis years. Particularly container ships with a lot capacity of over 10,000 TEU are coming onto the market in greater numbers, even though it remains to be seen whether they can also be fully financed. In this segment the ordered capacity in mid-2010 was equivalent to nearly 400% of the available fleet in this size category (total fleet: 30%). These ships are ideal for the busy “expressway” routes, for example, between the Far East and Europe and North America, and they dock mainly at the big container ports. … but the likelihood of sufficient rates is higher
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This means that besides the growth in global demand for container shipping services it is primarily the ongoing capacity developments that are of special significance for the future earnings of the shipping lines. Further capacity increases can be expected over the short and medium term. Already over the last few months the number of laidup ships has fallen dramatically and is currently just around 2% of the global fleet. With the economy picking up, the market for ship financing has shaken off the paralysis induced by the months-long crisis. Around the world, capital is once again flowing into the financing of container ships. In 2010 more new orders were placed for container ships after 2009 had brought hardly any new orders; last year’s orders were still some 40% lower than in 2008.
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All things being equal, the capacity expansion in big container ships will ramp up price pressure primarily in that segment, but ultimately across the entire sector. However, most of the big container ships do not compete directly with smaller ships that mainly provide feeder services or operate on less busy routes and where the volume of orders is not nearly so large. In addition, the market entry of ultralarge ships brings with it the need for smaller feeder vessels. This makes it very likely that individual routes and certain sizes of ship will encounter temporary bottlenecks that will probably result in higher prices. The friendly economic environment should, however, also allow the sector as a whole to generate adequate average profits over the next few years. Also, market observers like Drewry expect that the demand for container shipping will grow faster than the supply of new capacity over the next few years. And slow steaming is an option for flexibly adjusting capacity to potentially lower demand. Slow steaming could even become the rule rather than the exception for individual shipping lines and on particular routes since many ships have been equipped or refitted accordingly in recent years. Operating at slower speeds usually also boosts reliability (meeting delivery deadlines). Of course it is also clear that when demand rises sharply and rates are high that shipping lines will always seek to increase the number of round-trips per ship. Overall, the problem of overcapacity has thus eased currently. And on the demand side, too, the risks are modest at present: we expect March 28, 2011
Container shipping: Successful turnaround
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world trade to grow by 7-8% in both 2011 and 2012. In addition, the fleet capacity should grow less in both years than the average in the preceding decade. We have used growth in world trade and fleet capacity as explanatory variables to forecast the development of the HARPEX Shipping Index (an aggregate charter rate index) in 2011 and 2012 as part of an econometric model. It forecasts a significant 5 double-digit increase in this charter rate index in both years.
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Outlook intact – limiting factors in view
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As previously mentioned, the medium-term outlook for container shipping remains bright with annual growth in container throughput expected to average 7-8% until 2015. Going forward, momentum will continue to be generated by the established stalwarts: the continuing increase in the international division of labour, rising incomes and consumption opportunities in many emerging markets and the thereby initiated trade flows are the most important drivers on the demand side. Rising incomes in important emerging markets – above all in China – may also enable the sector to mitigate the problem of unequal flows and thus reduce the share of empty container journeys (2009: 21%); this would result in considerable cost savings. To date, on routes from China to Europe and the US the share of laden containers is higher than on the return leg.
Supply growing slower than demand % yoy, based on TEU 15 10
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Container shipping fleet Container throughput 2010: estimates; 2011-2015: forecast Source: Drewry
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Transhipment share rising Transhipment as a proportion of container shipping 160
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0 90 92 94 96 98 00 02 04 06 08 10 Transhipment share, %, right Transhipment, million TEU, left Source: Drewry
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On the supply side productivity improvements suggest that container shipping will continue to post high growth rates. These include larger ships (and growing transhipment shares) as well as more efficient loading and unloading systems at the terminals. In addition, the containerisation level will increase worldwide; however, the containerisation level at many ports is already high, which makes a further increase virtually impossible. Slow steaming cancels out some of the productivity gains, unless high freight rates make faster speeds more economically lucrative. Despite this generally rosy outlook the container shipping sector faces many challenges that may limit its growth potential: — Maritime shipping is becoming the focus of national and international climate and environmental policy. Discussion is currently underway about a variety of measures that could mitigate the negative ecological impact of shipping (e.g. CO 2 and pollutant emissions). These include emissions trading, efficiency standards or reducing the sulphur content in fuels. In the end, the shipping lines face higher costs because they will have to invest in their fleets in order to comply with the new standards. In addition, the sector’s competitiveness relative to other modes of transport is declining. In terms of energy consumption per transported tonne, though, maritime shipping remains the most efficient mode of transport. — Capacity bottlenecks at the ports (e.g. terminals, inland seaport traffic) can result in waiting times for container ships as could often be observed, for instance, on the east coast of the US before the crisis. Insufficient shipping depths also act as a brake on the sector’s growth. The growing importance of very large container ships makes a deepening of the waterways/shipping lanes necessary at many ports (e.g. in Hamburg). The expansion
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The short support period does admittedly limit the meaningfulness of the model. The relevant test statistics are admittedly good and are accompanied by the respectively “right” sign. The confidence interval is, however, comparatively wide because of the small number of variables. 7
Current Issues
of the port infrastructure required by the transport industry often flounders because of financial limitations or political resistance.
Oil becoming more expensive USD 140
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— During the global recession protectionist ideas experienced a renaissance in many countries. The danger that the liberalisation of global trade becomes mired permanently is at least no lower now than before the crisis. — The rising number of pirate attacks in several maritime regions means higher costs for ship owners, for instance for insurance or for modifying their ships (e.g. installing shelters for the crews). — The availability of qualified nautical personnel is a medium to long-term challenge for the sector; personnel costs are set to rise.
0 00 01 02 03 04 05 06 07 08 09 10 Oil price, USD per barrel*, left Heavy oil, USD per tonne, right
* Monthly average prices for Brent, Dubai and WTI crude Sources: HWWI, WEFA
— Fuel and lubricant prices will continue rising, because demand for oil tends to rise faster than supply.
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All in all, the sector’s growth prospects are subject to political and economic challenges. Ultimately, however, global container shipping will remain the fastest growing mode of transport over the medium term. Eric Heymann (+49 69 910-31730,
[email protected])
© Copyright 2011. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Printed by: HST Offsetdruck Schadt & Tetzlaff GbR, Dieburg ISSN Print: 1612-314X / ISSN Internet and e-mail: 1612-3158
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