Container Shipping Container Shipping Industry: Facing Another Difficult Year Industry Outlook: Negative Executive Summary 15 June 2012 Ruangwud Jarurungsipong ruangwud@trisrating.com Nopalak Rakthum nopalak@trisrating.com After passing through a tough year in 2011, the container shipping industry is going to continue a hard time in 2012. The industry is facing many challenges. Although global container traffic continued to grow in 2011, the growth rate was lower than in the previous year due to the volatility of the world economy. World economic turmoil, especially worsening economic conditions in the European Union (EU), continues to stifle global trade and shipments. In addition to weaker demand for shipping services, the worldwide container fleet continues to grow, as shippers have already ordered new ships. Moreover, big shipping companies have ordered more large-sized ships. Therefore, fleet capacity will continue to rise during the next few years. Carriers need to efficiently manage fleet capacities. Otherwise, industrywide overcapacity will push freight rates down. Another important factor that shapes the shipping industry is the price of bunker fuel oil, which is a major operating cost. In 2011, the surging bunker oil price hammered the operating performances of shippers throughout the industry. Rising fuel oil prices will threaten the industry, especially as market conditions remain unfavourable.
Container shipping industry fluctuates along with world economy Shipping demand is related to world economic conditions and trade. Globalization, economic development, and the regional demand-supply imbalances for commodities have driven seaborne shipments. However, events such as terrorist attacks, political instability, or social unrest can negatively affect demand for maritime transport. Before the global financial crisis hit in 2008, the growth rate for global container trade had averaged approximately three times the growth rate of world gross domestic product (GDP) in 2002-2007. Worldwide container shipping volumes grew at an average annual growth rate (AAGR) of 12.6% during 2002-2007, while world GDP grew by 4.4% in the same period. In 2011, demand for container shipping slowed as the world economy decelerated. World GDP in 2011 rose by 3.9%, down from the growth of 5.3% in 2010. Global container trade grew by approximately 6.5% in 2011, down from the 10.9% traffic growth in 2010. Container traffic is expected to grow by a smaller amount in 2012, mainly due to the sluggish economic conditions in the EU. According to Drewry Shipping Consultants, an independent maritime advisor, global container traffic is forecasted to rise by 5.4% in 2012. From the latest projection by the International Monetary Fund (IMF), world GDP is expected to increase by 3.5% in 2012 and 4.1% in 2013. Moreover, world trade volume in 2012 and 2013 will increase modestly. The IMF projects global trade will grow by 4.0% and 5.6% in 2012 and 2013, respectively. Asia: major source of shipping demand Container traffic in Asia remained busier than other regions of the world in 2011 due to stronger economic growth, which drove intra-asia trade. In 2011, the Shanghai port remained the busiest port in the world in terms of container traffic, followed by the Singapore, Hong Kong, and Shenzhen ports. Chart 1: World Container Ship Capacity Thousand TEUs 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 18 16 14 12 10 8 6 4 2 0 % Container Ship Capacity % Growth Source: Alphaliner TRIS Rating 2 15 June 2012
In 2011, total container throughput for Shanghai was 31.7 million 20-foot equivalent unit (TEUs), a 9.0% rise from 29.1 million TEUs in 2010. Singapore container throughput increased 5.3% to 29.9 million TEUs from 28.4 million TEUs in 2010, while Hong Kong had total container traffic of 24.4 million TEUs, up 3.0% from 23.7 million TEUs in 2010. Table 1: World Ranking of Maritime Shippers, by Shipping Capacity (May 2012) Operator Ranking TEUs Share (%) APM Maersk 1 2,645,645 16.1 Mediterranean Shipping Co 2 2,217,081 13.5 CMA CGM Group 3 1,331,218 8.1 COSCO Container Line 4 704,349 4.3 Evergreen Line 5 649,231 4.0 Hapag Lloyd 6 645,767 3.9 APL 7 611,571 3.7 CSCL 8 576,369 3.5 Hanjin Shipping 9 541,466 3.3 MOL 10 484,614 3.0 NYK Line 11 422,178 2.6 OOCL 12 419,557 2.6 Hamburg Süd Group 13 414,373 2.5 Yang Ming Marine Transport Corp. 14 352,406 2.1 K Line 15 348,566 2.1 Top ten 10,407,311 63.5 Total 16,394,474 100.0 Source: Alphaliner Increasing ship capacity in 2012-2014 will intensify competition On a worldwide basis, container ship fleet capacity in 2011 expanded to 15.4 million TEUs, up 7.9% from 2010. The large vessel segment (over 4,000 TEUs) has been increasing, and now accounts for 65% of total capacity. Total vessel capacity may increase in the next few years because shipping companies ordered new vessels aggressively in 2010. Carriers optimistically expected that the industry was firmly in a recovery period in 2010. However, in 2011, worldwide economic uncertainty, amid the high levels of excess shipping capacity, again became a serious concern for the industry. Consequently, operators have postponed some new ship deliveries from 2012 to the next two years. In March 2012, Alphaliner projected that the worldwide container fleet will grow by 8.1% in 2012, 10.6% in 2013, and 3.2% in 2014. Alphaliner indicated that the capacity of the new vessels entering shippers fleets during 2012-2014 will be approximately 3.9 million TEUs or 26% of the outstanding capacity in 2011. The new ships will be primarily in large size, with capacities greater than 4,000 TEUs. Large vessels will comprise 67%, 69%, and 70% of industry capacity in 2012, 2013, and 2014, respectively. TRIS Rating 3 15 June 2012
Table 2: Orders of New Container Ships Ship Size by TEUs 2012 Deliveries 2013 Deliveries 2014 Deliveries 2015 Deliveries Ships TEUs Ships TEUs Ships TEUs Ships TEUs 100 499 0 0 0 0 0 0 0 0 500 999 10 8,191 2 1,750 0 0 0 0 1,000 1,499 45 49,043 7 7,449 0 0 0 0 1,500 1,999 14 24,990 29 50,298 0 0 0 0 2,000 2,999 7 18,412 26 66,780 1 2,808 0 0 3,000 3,999 20 71,435 27 98,465 0 0 0 0 4,000 5,099 49 220,439 59 272,561 3 14,371 0 0 5,100 7,499 19 115,952 21 139,136 4 26,400 0 0 7,500 9,999 29 247,887 57 508,054 25 225,524 3 26,400 10,000 18,000 55 715,278 49 654,840 28 403,316 24 327,216 Total 248 1,471,627 277 1,799,333 61 672,419 27 353,616 Expected slippage 25 80,000 20 60,000 5 20,000 Total after slippage 223 1,391,627 297 1,859,333 66 692,419 Source: Alphaliner (as of Mar 2012) Rising bunker prices will still threaten the industry The rising price of fuel oil will harm the financial performance of shippers, as bunker cost is a major operating cost. In the first three months of 2012, the average fuel oil price in the Singapore spot market increased to approximately US$115.5 per barrel, from US$100.8 per barrel in 2011. By March 2012, the average fuel oil price increased to US$117.7 per barrel, from US$82.4 per barrel in January 2011. The fuel oil price is currently higher than the record high in 2008 and it is expected to remain at this high level. The rapid increase in bunker cost has negatively affected the shipping business and is expected to threaten the shipping industry further as the market conditions remain unfavourable. To cope with the rising bunker cost, ocean carriers can raise the bunker surcharge subsequently. However, a surcharge that is too high can discourage shipping demand. Chart 2: Fuel Oil Price in Singapore Spot Market 120 111.5 117.7 100 US$/Barrel 80 60 40 20 35.1 0 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Source: Thai Oil PLC TRIS Rating 4 15 June 2012
Freight rates remain under pressure from market imbalance Container freight rates exhibit a cyclical pattern, due to significant changes in industry demand and/or supply. On top of the recent global economic difficulty, freight rates decreased in 2011 because the capacity management discipline of carriers weakened and carriers fought for market share. In the first quarter of 2012, however, shipping operators successfully rationalized their capacities and increased freight rates. The Shanghai Containerized Freight Index, one widelyfollowed freight rate indicator, showed a big hike as of March 2012. The index soared to 1163.96 at the beginning of March 2012, from a low of 853.61 in December 2011. Taking into account the successful freight rate hikes in March 2012, Drewry forecasts that freight rates (including fuel surcharges) on the East-West trade routes will rise by 13.7% in 2012. However, if the carriers fail to manage their fleet capacities, overcapacity may push freight rates down. Charter rate dropped in the second half of 2011 Carriers with fleets containing more company-owned ships normally have higher control and greater flexibility in areas such as scheduling, lifting, and sailing frequency. However, these carriers face huge capital requirements. Although shippers with chartered vessels can more easily avoid the high investment costs, they are at the mercy of huge swings in charter rates, uncertain vessel availability, and fleet planning requirements. Over the past decade, the charter rate for a 1,700 TEU ship has ranged from US$4,000 per day to US$32,000 per day. In 2011, the rate gradually increased from approximately US$8,000 to US$12,000 in the first six months. Since the second half of 2011, the rate fell dramatically, ending at approximately US$6,500 by the beginning of 2012. The rate remained unchanged over the first three months of 2012. Maritime shippers receive support from Thai government After the financial crisis in 1997, the Thai government provided corporate tax waivers to help Thai shipping firms compete with regional operators. Originally, most Thai shipping companies did not fly the Thai flag because they did not receive tax benefits. Rather, they preferred to set up a separate firm and register the ships in countries that offered tax-free status to the shipping industry. However, despite the tax waivers granted by the Thai government, shipping companies still prefer to register their ships elsewhere, as the process of obtaining corporate income tax refunds in Thailand takes too long. International standards for shipping carriers Vessel quality must meet or exceed international safety and environmental standards. The International Maritime Organization (IMO) is a United Nations organization that regulates vessel standards. A ship that does not meet all of IMO s standards may be charged higher insurance TRIS Rating 5 15 June 2012
premiums. Generally, there are two types of marine insurance: hull & machinery, which covers the ship body and equipment; and protection & indemnity (P&I), which covers accidents and cargo damage. Other than these types of insurance, shippers may choose to purchase specific kinds of insurance, such as war risk insurance and business interruption insurance, which cover unexpected events. Maritime shippers rated by TRIS Rating (Jun 2012) Company Abbreviation Rating Outlook Regional Container Lines PLC RCL BBB- Negative TRIS Rating Co., Ltd., Tel: 0-2231-3011 ext 500 Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand, www.trisrating.com Copyright 2012, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html. TRIS Rating 6 15 June 2012