Evergreen Marine chairman Arnold Wang has dismissed concerns that the container shipping business was headed for overcapacity and a market meltdown. He told delegates at the World Shipping Summit (China) 2007 in Tianjin that shipyards worldwide are expected to produce 1.4 million TEUs of tonnage in 2007.
"The ULCS fleet [ultra large container ship above 10,000 TEUs] will grow from four to 152 ships in four years. All these gigantic vessels are expected to join the booming Asia-Europe trade," Wang said.
He said that while some people might start to wonder whether such a huge delivery of tonnage would cause oversupply and lead to a market meltdown, it was essential to analyse the growth in real slot capacity. He said this could be influenced by several 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 over-weight, 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 3,000 TEUs when the above-mentioned factors are taken into consideration.
Replacement of ageing fleet: Ageing vessels account for a notable share of the total existing fleet. More than five percent of current tonnage would normally have been scrapped having reached the age of 25 years. In other words, one out of every 20 newbuildings will be used to fill the vacuum created by the disposal of ageing vessels.
In consideration of low productivity and high maintenance costs, the ageing fleet will be gradually renewed. With part of the newbuilding 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 Asia-Europe service that was using 6,000 TEU ships, then it would shift the 6,000 TEU vessels to replace 3,000 TEU ships in an Asia-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 Asia-Europe (including Mediterranean) trade.
Port congestion: In Asia, 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 US, there are also a number of major expansion plans but due to environmental concerns, lengthy consultations and public enquiries they 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 Asia-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 newbuildings deployed on the Asia-Europe trade, the growth of effective slots will be slower than the nominal capacity increase, and this will help to stabilise the global container shipping market.
For instance, it takes four to five ships to run an Asia-US West Coast weekly loop but it requires eight to nine ships for an Asia-Europe weekly service. The deployment of eight 8,000 TEU vessels can form two weekly services on the Asia-US West Coast 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 Asia-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, Asia-Europe services can serve the Red Sea market en route to Europe. Asia- US East Coast all-water services can carry cargo in transit to South America.
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."
Wang said cargo volumes will continue to rise with stable growth while the tonnage supply will increase slower than expected. "The container shipping market will continue to flourish unless the global economy is impacted by unexpected catastrophes," he said.
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