Inside the Box Trade

There’s a new book out that savvy MarEx readers should know about. It’s called Ninety Percent of Everything, and it’s about the shipping industry and how 90 percent of everything we consume is delivered by ship. The book’s subtitle is “Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate.” The author is Rose George, a British journalist and Slate magazine contributor whose previous effort was The Big Necessity, about – are you ready for this? – human waste and the appalling lack in most parts of the world of that most basic of necessities – a proper toilet.

 

If you detect a sardonic note in all of this, you’d be right. The theme of Ninety Percent of Everything is the disconnect between shipping’s importance and its invisibility. How can people know so little about an industry that is so essential, and just what goes on behind that cloak of invisibility? 

“Sea Blindness”

George calls it “sea blindness… the flight of the ocean from our consciousness.” Nobody notices shipping any more unless you live in a high-rise overlooking a port, which is unlikely because most ports are far removed from urban centers. Oh, we may know about cruise ships, and the beach, and sometimes we see a freighter far off in the distance, but that’s about it. It’s an unseen world, and George is determined to correct this “because shipping is so fundamental and crucial and no one knows about it.” 

She embarks on a five-week journey aboard the Maersk Kendal, a 6,000-TEU container ship that will take her from Felixstowe in the UK to Singapore – a distance of 9,288 nautical miles. And she documents everything, from the monotony and boredom to piracy and pollution. She talks about the threat to sea life (dead whales draped across the bows of giant ships), owners hiding behind “flags of convenience,” ships and seafarers being abandoned in strange ports, the lawlessness and lack of jurisdiction on the high seas, and the heroism of the merchant navy in war and peace. But most of all she laments the plight of the overworked, underpaid and underappreciated merchant seaman. Why would anyone go to sea these days, she asks. Why indeed? 

The romance of the seas is all but lost. The lone hero of the book is “Captain Glenn” – Glenn Wostenholme, Kendal’s master and Maersk’s senior captain and a fellow Brit, who is torn between the romantic, tradition-laden past and the brutal, all-business present. It is Captain Glenn who gets the final word in the book, but I won’t spoil it for you. You’ll just have to read it for yourself.

The Box

It all begins with the box, of course. Without the box, there are no container ships, no container lines, no dramatic increase in world trade and no drastic reduction in shipping costs. Containers have reduced the cost of shipping from point A to point B by as much as 80 percent and in the process made jobs available in places where there were none, made fresh fruits and vegetables available all year round, and reduced the cost of just about everything for all of us. “Shipping is so cheap,” says George, “that it makes more financial sense for Scottish cod to be sent ten thousand miles to China to be filleted, then sent back to Scottish shops and restaurants, than to pay Scottish filleters.”

Regular readers of this column know that the person responsible for creating the modern container trade was Malcom McLean, a North Carolina trucking company owner who was looking for a cheaper and more efficient way to ship goods over long distances. Together with his partner Keith Tantlinger, they came up with the first prototype shipping container in 1955. McLean was the entrepreneur who went on to found Sea-Land Services, now a part of Maersk. Tantlinger was the engineer who made a key contribution – the “twistlock” – which made the containers stackable and secured them to ship, truck and flatcar beds. 

Over the next 20 years, the dimensions of the typical container became standardized: eight feet high by eight feet wide by twenty or forty feet long. Now you could have ships stacked with containers ten rows high, railcars carrying piggybacked containers, and storage yards piled high with empty boxes. Before the advent of containers, everything was breakbulk – individual pieces that had to loaded and unloaded one at a time at every stop, inventoried, and sent on their way – an incredibly expensive and slow process.

Containers are measured in TEUs – twenty-foot equivalent units. When you see a small box sitting on a long truck trailer, that’s a standard twenty-foot container, or one TEU. Most containers are forty feet long, or two TEUs. Container ship capacity is determined by the number of TEUs it can carry, so a vessel like Maersk Kendal that has a capacity of 6,000 TEUs can carry 3,000 forty-foot boxes or 6,000 twenty-foot boxes.

Most containers are made in China (surprise, surprise), with the biggest manufacturer, China International Marine Containers, reporting a 41 percent profit decline this year due to the slowdown in container movements. You can have your own twenty-footer for about $3,000. A forty-footer will set you back $6,000. For a refrigerated unit, expect to pay twice that.

The classic book on the history of the container trade is titled, appropriately enough, The Box, by Marc Levinson. Its subtitle is “How the Shipping Container Made the World Smaller and the World Economy Bigger.” In it, Levinson asks the question: “What is it about the container that is so important?” and goes on to answer with: “Surely not the thing itself. A soulless aluminum or steel box held together with welds and rivets, with a wooden floor and two enormous doors at one end: the standard container has all the romance of a tin can. The value of this utilitarian object lies not in what it is, but in how it is used. The container is at the core of a highly automated system of moving goods from anywhere, to anywhere, with a minimum of cost and complication on the way.” 

There are more than 30 million of these “soulless” boxes floating around the world today. Each of them can carry up to 60,000 pounds of bananas, iPads, Christmas toys, golf clubs, airplane parts, arms – you name it. And it doesn’t matter what you’re shipping – the price is the same no matter what’s in the box. 

Bigger Is Better

So how are container lines doing these days? In a word, lousy. Like most of the industry, overcapacity and the slow economic recovery – particularly in Europe – have squeezed rates, down to as low as $500 per TEU. Breakeven is about $1,000, depending on the route. In its recent earnings report, Neptune Orient Lines (parent company of APL) reported average rates on the key Asia-Europe trade route of $781 per TEU. For Asia-U.S, West Coast, the figure was $1,030.

As a result, most companies are losing money, and while there have been no bankruptcies to date, a number of container lines are teetering on the brink.

The biggest company is Maersk. It owns or operates roughly 10 percent of the world’s container fleet. Maersk squeezed out a profit in the second quarter despite a 13 percent decline in average freight rates. It did so through a combination of service efficiencies (read “cuts”) and lower bunker prices. In an effort to cut costs even further, Maersk and the next two largest container lines – Mediterranean Shipping Company and CMA-CGM – recently announced their intention to combine services on three key trade routes: Asia-Europe, Trans-Pacific and Trans-Atlantic.

The new alliance, to be called the P3 Network, is designed to “optimize operations” by providing customers with “more stable, frequent and flexible services.” The goal is more efficient utilization of vessel capacity. P3 will be run from a joint vessel operating center, although all three lines will continue to have fully independent sales, marketing and customer service functions. It is expected to be operational by the second quarter of 2014. 

Alliances like P3 are not new, of course, but the scale of this one is unprecedented. It is tacit acknowledgment of the growing pressure from declining volume growth and industry over-capacity.

Meanwhile, orders for new and ever-bigger vessels continue to climb. Why? Because operators are convinced that bigger is better, that larger, more fuel-efficient vessels will bring down the average cost per TEU. To prove the point, Maersk has ordered 20 new Triple-E class container vessels, each capable of carrying 18,000 TEUs – the biggest ships in the world. The first of these, the Maersk McKinney Møller, left a South Korean shipyard in July for its maiden voyage on the Asia-Europe route. Maersk says the new ship will consume 35 percent less fuel per TEU than its other vessels.

Other owners are following suit. United Arab Shipping Company announced in August the signing of a more than $2 billion contract with Hyundai Heavy Industries for five 18,000-TEU vessels and five 14,000-TEU vessels. UASC hailed the vessels as “amongst the largest, most technologically advanced and most environmentally friendly container vessels ever built.” And Hong Kong-based Seaspan in January ordered five 14,000-TEU vessels, also from Hyundai Heavy, utilizing its patented SAVER fuel-efficient hull design and an additional four 10,000-TEU, SAVER vessels from a yard in China. All of these vessels will hit the market in late 2014 and early 2015.

Rolling the Dice

It’s a gamble, all right, but one where the odds look good. By that time the global economy should be firmly back on its feet with a commensurate growth in trade volumes. Older, less efficient vessels will be discarded. But who am I to predict the future? I’ll leave that in your good hands.