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Megaships Proving a Drag on Ocean Carriers in Trade Downturn
Collapsing demand from coronavirus pandemic restrictions adds pressure to container lines operating half-empty ships
Megaships have become a financial albatross for ocean carriers during the coronavirus pandemic.
By Costas Paris
The megaships that were supposed to carry container lines into a new era of efficiency-driven profitability have become a financial albatross during the coronavirus pandemic.
Ocean carriers have canceled hundreds of services, parked ships and sent vessels on longer voyages to eat up capacity and preserve their finances amid diving trade volumes. But the ultra-large ships that have come to dominate container fleets in recent years are sailing half empty as a downturn in demand envelops Western economies under lockdowns.
Shipping-industry experts say the economic disruption from the pandemic restrictions has laid bare a key weakness in the vessels that can carry some 20,000 boxes each and are as long as the Empire State Building is tall.
The ships provide big operating-cost savings on major trade lanes in periods of high demand, but critics say they also box in ship owners, giving them little flexibility to shift vessels around in response to changing markets.
“A very large boxship is like the A380 superjumbo,” said Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting, comparing them to the Airbus SE double-decker jets that failed to gain traction in aviation markets. “It only works in specific corridors, otherwise it’s too big.”
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II._The Logistics Report
Top news and in-depth analysis on the world of logistics, from supply chain to transport and technology.
PREVIEW
Container ships move the vast majority of manufactured products, and operators touted the behemoths as a tool that would boost global trade. Ship operators said they allow liners to spread operating expenses such as fuel and crew salaries across more shipments, allowing them to offer lower freight rates to customers and effectively decrease the cost of transportation that is a backbone of global trade.
As the coronavirus pandemic took hold and demand collapsed, ultra-large container vessels have been sailing half full or sitting in anchor by the dozens, waiting for the world to open up again.
Liner operators have so far canceled more than 380 sailings since February across the world’s busiest trade routes due to the coronavirus shutdowns, and shipping analysts expect more cancellations as rising unemployment and weakening manufacturing and retail markets severely curtail demand.
Denmark’s A.P. Moller-Maersk A/S, the world’s biggest container line by capacity, according to maritime data group Alphaliner, in 2013 introduced the new generation of ultra-large ships with capacity for 20,000 20-foot equivalent units, or TEUs, a standard measure of container capacity. They were double the size of the largest ships the industry operated just 10 years earlier. That jump-started a competition among carriers to get bigger ships, and the ships are now a mainstay on the world’s busiest trade lanes between Asia and Europe.
The biggest ships on order today can carry the equivalent of about 23,000 containers, and designers are working on adding still more. These vessels require big shipping channels, large berths and supersized cranes that only the biggest ports own.
Now even some liner companies seem to be questioning the rationale for the ships.
“This crisis will impact world economic flows and necessitate that we all rethink our supply-chain models.”
— Rodolphe Saadé, chief executive of CMA CGM
Rodolphe Saadé, chief executive of France’s CMA CGM SA, said in a video message Thursday that global trade will change after the pandemic recedes, with production spreading out to more countries, giving rise to more regional trade.
“This crisis will impact world economic flows and necessitate that we all rethink our supply-chain models,” said Mr. Saadé, whose company ordered nine 23,000-container ships in 2017. “Supply chains will need to adapt to sharp fluctuations between supply and demand.”
Expanding regional trade would depend less on giant vessels operating with carefully choreographed port calls and instead lean on smaller ships that can be deployed more flexibly on point-to-point sailings.
Shipping executives have said the ideal ships for such business are those moving 14,500 containers. They expect demand for such vessels to be higher than other ship types in coming years.
“A 14,000-TEU ship is well suited to be redeployed from one trade lane to another,” said Mr. Jensen. “There will be more demand for this size of ship going forward. Big retailers will be asking for fast deliveries without lengthy transshipments.”
In the meantime, however, shipping lines are absorbing the financial impact by adjusting operations. Mr. Jensen expects the world’s 10 biggest carriers to lose between $800 million and $23 billion this year, depending on how they manage their capacity through the trade downturn.
The liners made a combined $5.9 billion in profits in 2019.
Ocean carriers will have a hard time shifting their broader fleet strategy, however. Shipping lines have many megaships costing upward of $140 million apiece on order—CMA CGM is due to start receiving the first of its next generation of bigger ships this year—and London-based Braemar ACM Shipbroking expects overall container capacity to increase 3.7% this year.
Shipping lines have postponed deliveries in the past but canceling orders would be an expensive proposition, and, in any case, many ships are already under construction and headed into service.
“If you had a blank sheet of paper and planned from scratch, you probably wouldn’t order these ships,” Mr. Jensen said. “But the big liners have invested way too much to sideline them and with the scrapped
III.-The looming demand-side crisis at US -FT-4/8/2020
Slowdown in cargo shipping seems like bad news for global trade prospects
A demand-side crisis could leave abandoned containers stacked up on US shores.
Hello from Washington. The cherry blossoms have come and gone while we’ve been trapped indoors, though I did have a view of one through my front window. The beginning of this week has featured a continued battle for medical supplies across the US, even as coronavirus remains below its predicted peak level of infections.
Our main piece today is on the odd supply-demand shift across trans-Pacific supply chain routes, while our person in the news is Mike Roman, chief executive of 3M. Our chart of the day looks at how far China has to go to meet its phase-one trade deal commitments with the US this year.
The cargo that nobody wants anymore
If you speak to port authorities in the US, they’ll tell you that, for now, everything is fine. But they’ll also tell you that ships generally take about a month to reach the US from China — and that once those ships reach US shores next month, there’ll be a problem.
It’s this: nobody wants that cargo any more.
While China was offline, US companies were still desperate for goods from China. Several weeks ago, America was relatively unaffected by coronavirus and many westerners seemed in denial about just how bad the disease might get. Retailers still wanted jeans and sneakers to sell in New York, automakers still wanted car parts to assemble in the rust belt. Amazon, too, was accepting everything from yoga mats to bedside lamps to distribute through its vast warehouse networks.
Now, Amazon’s warehouses accept only essential items and it’s almost impossible to buy jeans. At the same time, over in China, factories have been restarting their machines and workers have cautiously returned to work. Things the US ordered in more innocent times are now on their way across the oceans.
Port operators, on the front line of the coronavirus crisis, are scratching their heads. The movement of the crisis from a supply-side one to a demand-side one threatens to leave unloved and abandoned shipping containers piling up on US shores. Several ports have told the FT they’ve received panicked calls from companies asking ports if they can store their containers of cargo. Usually, shipping containers sit at ports for as little time as possible. But with companies lacking the warehouse infrastructure to cope with excess stock, leading ports are looking into expanding their storage facilities.
Ocean liners are helping by travelling on longer routes than usual, deliberately delaying the arrival of the cargo to the US, and some are offering to drop the cargo at ports with extra storage capacity in Europe along the way. Trade magazine Splash reports that CMA CGM, a French shipping group, has been routing ships around the Cape of Good Hope and avoiding the Suez Canal, making the journey both longer and cheaper
But if US companies can stop the cargo arriving in the first place, they’re cancelling their orders. Simply, fewer goods will be demanded from China. Shipping lines, largely responsible for making globalisation work, are facing tough times ahead.
Once the temporary glut in cargo has passed through the system, ocean liners will face falling demand. While most ocean liners are watching nervously and saying little, Rodolphe Saadé, chief executive of CMA CGM, told French newspapers on Tuesday that he expected May to be “tense”. The company plans to idle as many as 15 ships.
Freighters are also canning routes to get ahead of the inevitable crash in freighting prices that too much ship capacity would bring. Maersk, the Danish freighter, and the Mediterranean Shipping Co, which jointly run a weekly freight service from north Asia to the US west coast, said they would suspend the service for the entire second quarter. They’ll also suspend another weekly service from south Asia to the US east coast. Lars Jensen, the chief executive of research firm SeaIntelligence, estimates this is about a fifth of their weekly freight capacity.
Meanwhile, anyone trying to export essential goods is hit by rocketing air freight costs. The need to send medical equipment, such as masks and personal protective equipment, quickly has led to increasing demand for air freight, according to Freightos, a freight forwarding company. This is combined with a reduction in supply as passenger jets, which usually carry some cargo, are grounded. High air freight costs, for now, are sending some extra customers to the ocean liners, if speed is not of the essence.
A slowdown in cargo shipping seems pretty bad news for the prospects of global trade, and it may be months before demand in the US and Europe picks up. In the meantime, let’s hope that the companies carrying goods across the world are able to weather the storm — and that idle ocean liners don’t turn into permanent ghost ships.
Charted waters
The trade truce, or phase-one deal, signed between the US and China involved the latter agreeing to buy an extra $200bn in additional US exports over the next two years — $77bn of those this year alone. That is now looking rather unlikely. Purchases by China in the first two months are far below the levels they would be expected to be on a proportional basis to meet the targets this year.
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