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Container Insight: ULCV Capacity Cliff Ahead

By MarEx 2014-02-17 13:16:00

Despite vessel capacity growth exceeding cargo growth to ocean carriers’ detriment over the past two years, much more is still being lined up by those even less capable of affording it.

Continuous orders for ultra large container vessels (ULCVs) reinforces the view that large and small carriers are determined to stay in the race for more competitive economies of scale even though cargo growth is unlikely to be enough to fill all of their newbuilds over the next two years. It seems to be a case of ‘do or die’, with dying not an option because creditors would then never get any of their money back.

As shown in Table 1, the trend means that the capacity of ULCVs over 10,000 teu will increase by 31.4% this year, followed by a further 30% in 2015. Even though some of the deliveries will be delayed, it is hard to see where the cargo to fill the remainder will come from, bearing in mind that the vessels are mostly designed for the Asia/Europe tradelane where westbound cargo growth last year was less than 4%. It was an even lower 2% to Northern Europe, where average vessel size already exceeds 10,500 teu.

Table 1
Scheduled deliveries of ULCVs between 2014 and 2016

Source: Drewry Maritime Research

Source: Drewry Maritime Research

It is difficult to predict the number of vessels that can be delayed in order to alleviate the problem as much depends on the negotiating power of the buyers that have ordered them. Although only 34 of the 44 vessels over 10,000 teu scheduled for delivery in 2013 actually came into service, 20 of which went into Asia/North Europe schedules, the ownership of the 60 vessels due out this year, followed by 68 in 2015, is completely different.  Assuming all newbuilds are delivered on time, smaller carriers’ share of vessels over 10,000 teu (i.e. all excluding Maersk/MSC/CMA CGM) will grow from 45% in 2013 to 57% by the end of 2016, and their ability to postpone orders may not be the same as the power recently wielded by Maersk, MSC and CMA CGM.

As cargo growth in the Asia/Europe tradelane will be inadequate to accommodate the extra vessels, the implication is that some will have to be deployed in other tradelanes, but, were this to happen, much of their economies of scale will be lost as ULCVs are only profitable when well utilised.  Figures 1 and 2 show the many ‘holes’ where their economies of scale are needed by the other lines between Asia and Europe to compete more effectively against Maersk/MSC/CMA CGM, to help highlight the point. Each Northern European service deploys between 10-12 vessels; each direct Mediterranean service deploys more-or-less the same, but there are still some with only 8.

Figure 1
Asia-N Europe services on 01-01-14

fig1v2 Asia-NEur services

Figure 2
Asia-Med services on 01-01-14

fig2 Asia-Med

The inference is that CSCL, UASC and Evergreen may either join together in an alliance, or join one of the other alliances in a more formal way. Existing alliances must also be considering further expansion of their global networks to help soak up the extra capacity over the next two years. Anything is possible, but more thinking than usual outside of the box is required.

The stakes are high, as running empty ULCVs is costly, recently prompting Zim Line to again review its remaining orders for 4 x 8,800 teu vessels, due for delivery in 2015, and 4 x 12,600 teu vessels due for delivery in 2016. At the time of going to print, it is understood that both were in the process of being cancelled, with Zim Line preferring to take a lesser hit deposit fees, said to be around US$68 million for the latter alone.

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Asia/Europe freight rates will stay under pressure in 2014 and 2015, which explains why cost cutting is so high on Maersk/MSC/CMA CGM’s agenda.