13th Annual Northeast Cargo Symposium

Ocean Freight – Are the

mega alliances finally

established?

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November 6, 2014

Comments by John G. Reeve

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Agenda

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Background on Alliances

Current Situation

Implications for the Future

Vessel Sharing Alliances are operational, not

commercial agreements

An “operational” agreement between ocean carriers for the sharing of space on vessels – no authority to discuss or agree on freight rates

By necessity, container terminal operations are also included as well as feeder services

Carriers retain separate sales, pricing, and customer service functions

Been around for a while – e.g. Maersk/Sea-Land/P&O/Nedlloyd agreement in early 1990’s

Early days of containerization (1960’s) saw development of full scale carrier consortia/joint ventures (e.g. OCL, ACT, ACL)

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Vessel Sharing Alliances:

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2M

Current “Global” Vessel Sharing Alliances

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Maersk and MSC

Covers FE/Europe, Transpacific, and Transatlantic

2.1 million TEU capacity¹

Average vessel: 10,800 TEU

Ocean Three

CMA CGM, China Shipping, and

UASC

Covers FE/Europe, Transpacific… Transatlantic possible

1.5 million TEU¹

Average vessel: 9,000 TEU

G6

APL, MOL, Hyundai, OOCL, NYK, and Hapag-Lloyd…CSAV pending

Covers FE/Europe, Transpacific, and Transatlantic

1.8 million TEU capacity¹

Average vessel: 8,000 TEU

CKYHE

Cosco, K Line, Yang Ming, Hanjin,

and Evergreen

Covers FE/Europe, Transpacific, and Transatlantic

1.9 million TEU¹

Average vessel: 7,600 TEU

These alliances control 97% of major trade east-west capacity²

¹ Capacity deployed in FE/Europe and FE/No. America trades – source: Alphaliner, September 2014 and IHS Maritime

² Journal of Commerce

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Source: Drewry World Container Index

No growth in freight rates on major container

trades…lower costs critical to survival

Trend in Major Liner Trade Headhaul Freight Rates(Index: Year 2000=100)

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Asia to USWC Asia to Europe Europe to USEC

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Key drivers for alliances

“Commoditization” appears to have won

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Lower cost vessel operations – scale economies of mega ships

Broad service scope – multiple sailings in key port combinations

Barriers to entry

Some joint consultation on future capacity

A Marriage of Opposites?

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Maersk and CMA CGM seem to have benefitted

financially from their mega ship strategies

Operating Profit Margins for Major Carriers(first half 2014)

But there may be more to profitability than big ships…

Source: Alphaliner

Vessel costs and fuel now account for

almost half of major operators’ expenses

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Source: A. P. Moller Maersk Annual Report, 2013.

Breakdown of Major Containership Operator Costs

26%

11%

5%27%

21%

10%Marine Terminals

Inland Transportation

Equipment

Vessels

Fuel

Sales & Admin.

Containership economies of scale are

impressive…but only up to a point

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2,500TEU

4,000TEU

6,000TEU

8,000TEU

10,000TEU

14,000TEU

18,000TEU

TCE* Fuel

Containership Cost per TEU Slot Mile(cents per TEU mile)

* TCE denotes “Time Charter Equivalent” that includes vessel operating costs (e.g. crew, maintenance, insurance, etc.) and capital costs.

Fuel costs based on $480 per ton MFO in October 2014.

Source: Reeve & Associates analysis

Bunker prices have recently dropped…however,

this impact will be tempered by MARPOL Annex VI

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Further Implementation of MARPOL Annex VI in 2015

Container lines have announced Low-Sulfur Fuel Surcharges to offset costs from implementation of IMO Emission Control Areas (Northern Europe and 200 miles from American and Canadian coasts) that require carriers to switch to fuel with a sulfur content of 0.1 percent in 2015, from the current 1.0 percent limit within ECA’s

Carriers required to burn MDO (currently around $800 per ton) versus MFO ($480 per ton) within the ECAs

High Sulfur Marine Fuel Oil Average Price

Source: Journal of Commerce

Outlook on energy prices is extremely uncertain…LNG a

good bet for Jones Act carriers

Major surges in handling volumes

Carrier consolidation via alliances forcing terminal consolidation

Increased requirements for port and terminal capacity

Slowing container velocity, increased dwell time in ports

Lower vessel schedule reliability

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Mega containerships are significantly stressing

marine terminal operations

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Terminal operators ought to be able to afford

necessary investments

Operating Margin of Major Container Terminal Operators(FY 2013)

Source: Alphaliner

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Implications for the future…

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Alliances are here to stay

Possible adjustments to future memberships but major changes unlikely

May slow down further mergers/ acquisitions between major carriers

Alliances’ quest for scale economies will continue to drive ship sizes upward

Ports/terminals must adjust to meet alliance/megaship requirements

Downward pressure on freight rates will continue from excess capacity and strong competition…within alliances as well as without

Outlook

Thank you