Liner Paradise: a new eraBIPC 2020

20th October, 2020

Tim PowerManaging Director, Drewry

PRIVATE & CONFIDENTIAL

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2009 and 2020: compare and contrast

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Freight rates: 2008-10

In 2009, freight rates collapsed on the Asia – Europe trade and fell by 32% on the Transpacific trade

-

500

1,000

1,500

2,000

2,500

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Headhaul rates 2008-10

Transpac EB Asia Europe WB

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Spot the difference

Asia – Europe rates rose sharply in Q4 2019 before eroding to Q2 2020 and recovering. Transpacific rates were stable and are now rising rapidly

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$2,200

$2,400

$2,600

$2,800

World Container Index - Assessed by Drewry$ per 40 ft container

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Container shipping fundamentals

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Liner fundamentals

Factor Effect Comments

Economies of scale Structural overcapacity Lines always build bigger vessels to exploit economies of scale. This leads to continual overcapacity

Perishability Push for short-run contribution – rate erosionUnused capacity cannot be stored. Lines cut rates in order

to boost utilisation

High operational gearing Push for short-run contribution – rate erosionLines’ networks represent a high fixed cost burden. The

logical response is to maximise utilisation

Commoditised service offering

Limited differentiation of product; price competition Price is the principal competitive weapon

Fragmented industryNo coordination of capacity

development, intense competition

Too many carriers and no dominant carriers to establish market stability

Inelastic demand curve Falling rates have a limited effect on demand

Seafreight is a negligible element in the landed cost of manufactured goods and makes no difference to end

market demand

The liner industry has been unable to make sustainable profits…

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Liner fundamentals

…but it could, with two changes. Have these changes happened?

Factor Effect Change? Comment

Economies of scale Structural overcapacity Economies of scale run out

Lines will build to match demand not to chase economies of scale.

Pursuit of share is less important

Perishability Push for short-run contribution –rate erosion No Unchanged

High operational gearing Push for short-run contribution –rate erosion No Unchanged

Commoditised service offering

Limited differentiation of product; price competition Unlikely Unchanged

Fragmented industry No coordination of capacity development, intense competitionIndustry

consolidation

A small number of large carriers is able to match capacity to demand and

promote increased tariffs

Inelastic demand curve Falling rates have a limited effect on demand NoRising rates have a

limited effect on demand, supporting profitability

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Changes

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Economies of scale: vessel sizes

0

5,000

10,000

15,000

20,000

25,000

19921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020

Averageship size

Maxship size

Maximum vessel sizes have rocketed since 2005

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Economies of scale: costs

Scope for vessel economies of scale in 2009 was large; now looks much less. Total system costs show no economies of scale.

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

8,000 10,400 14,857 17,333 20,800

Liner % Ports and terminals % Combined %

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Market concentration: lines

Substantial increase in market concentration since 2016, 50% at the level of Top 5.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Containership fleet share (%)

Top 3

Top 5

Top 10

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Market concentration: alliances

The concentration of major lines into the three alliances on the main East – West trades has created the structure for effective capacity management

Shipping Lines Previous Alliances 2016 Shipping Lines NewAlliance

MaerskP3 Alliance (denied) 2M Alliance

Maersk2M Alliance (with

mergers)MSC MSC

CSCLCSCL / UASC Ocean 3

Hamburg Süd

UASC CMA CGM

Ocean Alliance (with mergers)

NYK Line

Grand Alliance

G6 Alliance

COSCO

OOCL CSCL

Hapag-Lloyd OOCL

NOL

New World Alliance

Evergreen

MOL NOL

APL APL

Hyundai Hapag-Lloyd

THE Alliance (with mergers)

COSCO

CKYH AllianceCKYHE Alliance

UASC

K-Line Yang Ming

Yang Ming MOL

Hanjin NYK Line

Evergreen Independent K-Line

HMM

Hamburg Süd Independent Independent Hanjin

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Liner growth rate

GDP multiplier has declined steadily since 2000 and is no longer a driver of container volume growth. Long term outlook growth is modest with downside risks

0

2

4

6

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Estimated teu to GDP multiplier with 5-year averages, 2000-2020

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Conclusions

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Conclusion

• Scope for economies of scale is now limited. The liner arms race will abate

• Concentration at the company level and in major alliances has created the conditions in which capacity can be matched effectively to demand

• Stable utilisation will promote higher rates and margins

• Likely changes in trade patterns pose significant risks to growth in deep-sea liner trades

• Low growth should make lines more cautious about capacity expansion

Fundamentals have improved but demand growth outlook is uncertain

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슬라이드 번호 1슬라이드 번호 2Freight rates: 2008-10Spot the difference슬라이드 번호 5Liner fundamentalsLiner fundamentals슬라이드 번호 8Economies of scale: vessel sizesEconomies of scale: costs Market concentration: linesMarket concentration: alliancesLiner growth rate슬라이드 번호 14Conclusion슬라이드 번호 16