June 2009 - Shipping lines strike a balance
The maritime carriers are meeting their customers’ requirements in spite of the recession.
The short and deep-sea shipping panel comprised Jan Eyvin Wang, president and CEO of EUKOR Car Carriers Inc., Paul Donaldson, manager director, Trans Rak International and Peter Menzel, director, Car Carrier Group, K Line (Europe). The session was moderated by David Cardle, managing director of Frazer-Nash Associates.
Cardle opened proceedings by asking what the deep sea operators were doing to cope with the current downturn. “There is a lot of speculation and rumours but also some truth in the news about what is happening and what we are doing at the moment,” replied Peter Menzel. “There are around 150 car carriers laid up at the moment. Half of these ships have been idled for a couple of months and the over half for over three months. This number represents roughly a quarter of the world PCC fleet. Some of these ships, less than 10%, have only a basic crew on board for maintenance purposes. They can be reinstated but reinstatement will take a long time. The remainder can be reinstated at very short notice.”
“These lay-ups are occurring pretty much all over the world in locations where it is safe for them to anchor. We are taking every opportunity to get rid of tonnage over 25 years old which, for a long time, should not have been on the sea. The unnatural demand in 2007 and the beginning of 2008 meant that these vessels were required. The other big issue is returning charter tonnage. Because of high demand, charter rates and tonnage by speculative owners have been unhealthy, and we now see the possibility of returning to a more normal and sustainable level.
“What we have tried to avoid is cancelling services, laying off staff and closing offices. We realise we have a commitment to our customers – cars are still being shipped although volumes are substantially down – and we are trying to operate as economically as possible. The OEMs have cooperated very well with us and have sometimes reduced transit times and frequencies.”
“In our group we are trying to adapt capacity as quickly as we can,” added Jan Eyvin Wang.” You can do it by slow steaming, idling or scrapping or whatever but the key thing is to align capacities, demand and supply as quickly as possible. What you don’t want to do is sail half empty around the world because then you lose money and it will be a question of how long you survive. Container operators are not scrapping to the same degree as us. We need to have high utilisation just to be able to reinvest.”
Paul Donaldson entered a plea for the transportation of cars in containers. “Containers gave rise to globalisation. It doesn’t matter whether they hold cars or white goods or computers; everything in the last 50 years has been moved in containers. The container is the most intermodal product. It can move on road, rail and sea and can go literally anywhere. There are not many RoRos up the high street! For the shipping companies this is an opportunity to get additional cargoes. We are not in competition with the RoRo operators, this is complementary business. We do not move 6,000 cars in one go from quay to quay. Containers will move niche cars and smaller volumes, literally from door to door, and they have a place of their own.” Chris Godfrey of Nissan asked from the floor whether there was a case for mixing cars and containers on the same vessel. “It is difficult to load containers onto most of the car carriers because of the deck strength but a typical car carrier today is much more flexible,” answered Peter Menzel. “It can carry high and heavy cargo. On certain trades the percentage of car volumes may be less than 50% while on others it is 90%. The diversification taking place within the car carrying industry is quite enormous.” David Cardle said that he saw protectionism as a big threat, particularly to the deep-sea operators. “I am very much concerned,” said Jan Eyvin Wang. “In Asian economies you want a more open, global trade but even in Japan, China and Korea you have closed markets to a large extent. The volumes of cars shipped in 2008 will not return for several years. We may see what we call a Nike recovery. A slowly increasing swoosh after a deep drop. I think we are looking at 2013 or 2014 before we will see 2008 volumes.
“Protectionism may be driving this to some extent, it depends how quickly the European economy grows. If it remains slow, and soft, protectionism will probably increase. As a global shipping company Europe is not everything to us. There are a lot of exports to emerging markets in the Middle East, Africa, China and South America, so we are not dependent on Europe rebounding. We are more dependent on the US market recovering than we are on Europe. We see the European markets recovering more slowly because of the time is takes Europe to adjust and adapt to capacity.”
Stuart Warren of CAT Group posed a question from the floor. “Looking at the collaboration between the deep-sea and the short-sea carriers, do you see much evidence of greater hub and spoke activity especially given the lower overall volumes which would tend to encourage that system?”
“Certain hubs have developed naturally, especially in the Mediterranean and Northern Europe,” replied Peter Menzel. “At the moment things are in slight disarray because of the decline in volumes and certain spokes are just no longer sustainable. We have to look further ahead and I believe that in the future a hub and a spoke system will definitely come into play again.”
“Having previously worked for UECC, a short-sea operator, there was more collaboration when the capacity was very tight compared to today,” observed Jan Eyvin Wang. Today we have ample time, so rather than discharging in one port and returning, in a deep sea operation we have time to call into more ports because there is not so much urgency to bring the vessel back to the mother port in Japan or Korea. As a general concept, it is a very important alliance. We don’t do short-sea service in Europe, we rely on partners such as UECC. The challenge in Europe is that it is very expensive to ship cars over small distances. It costs as much to ship a car from Spain to Norway as it does from Korea to Norway.”
“We are talking about outbound logistics,” stressed Paul Donaldson. “I would rather see the container used on both outbound and inbound logistics. If 25% of the world’s containers are moving around empty along with 25% of the world’s trailers how do you combine that into a palletised movement in one direction and a car move in the other? That could be the hub and spoke. That’s what the container was built for. It was designed to carry multiple products in multiple directions and multiple modes. Collaboration will come from that. Whether we work with a RoRo operator or a vehicle manufacturer or a packaging company, the box is king to some extent.”
At this point, Tom Jacobson of Alljoinedup asked a question from the floor. “How do you manage to square the circle between the lower capacity and the need to maintain lead times, and have any new initiatives emerged as a consequence of the downturn?”
“The major step for us was to optimise overlapping services and to reduce capacity without reducing frequency and transit times,” replied Peter Menzel. “We have combined three different services on the transatlantic trade into one. Still serving the same range of ports, we have been able, by slightly redesigning the same frequency, to take capacity out of the market and save on bunker and port costs.”
“We ship just over 3.5 million car units a year globally and in January this year our volumes fell by about 50% from December,” said Jan Eyvin Wang. “In February it was more or less the same and then things started to pick up again. I think we have seen the worst of the downturn but the volumes will not come back for quite some time. “In November last year I would have said that frequency and transit times were key issues and we would live by them and operate accordingly. In January and February our customers asked if we would mind not shipping because they had nowhere to store the cars. So it’s not necessarily driven by contracts, it’s driven by the relationships we have with our customers. Here in the UK there was no space in any port. What do you do with the cars? We were even asked from Asia to go to Europe via the Cape because the OEMs needed time to clear up the inventory. If we go to a European port today, land is not the issue any more.
“When you are part of the supply chain, which we are, you are really just an extension of the assembly line. It is a question of how quickly you want the assembly line to work. That is why we have collaboration with the customer.”
“Are you seeing any signs of either Chinese or Indian companies becoming interested in deep-sea or short-sea car shipping?” asked David Cardle. “It’s not just an interest, they are there,” emphasised Peter Menzel.” The Chinese have their own car carrier fleet. You cannot stop the Chinese, you have to find ways of collaborating.”
“Over time the Chinese will be exporting,” Jan Eyvin Wang pointed out. “Their main focus now is south-east Asia. There are some exports from India handled by us to the Mediterranean and other locations. As China develops and grows, some of their shipping companies will want to share in that business. That is natural. There is a lot of transplant capacity in India and China. GM will now export there from the US and Hyundai is exporting from India to Europe. It is not only Chinese and Indian-owned plants which will be exporting, it will be about global companies with global footprints.”
Johannes Fritzen of K Line asked Jan Eyvin Wang from the floor what the maximum size of car carrier was likely to be in the future. “The dimensions of the car carrier fleet are increasing, he said.” Capacity used to be 5,000 cars, now it is 6,000 or 7,000. We are taking delivery of vessels which can carry 8,000. Typically, a car carrier was limited in length to 199.5 metres. Now they are up to 232 metres. Hence Grimsby is not on the map anymore along with so many other ports. We see a trend towards average size of the vessel increasing but it becomes difficult once you go above 8,000 cars because of the length and the availability of certain ports. When you load in certain Asian ports, specifically in Japan, you don’t want to be longer than 200 metres because then you can load three vessels at a time rather than two.
“We will be operating twelve 8,000 capacity vessels. It is not necessarily the vessel itself which is of interest. The unit cost is equally important. If you build a car plant producing half a million rather than 100,000 cars the unit cost goes down dramatically. I can send an 8,000 unit vessel with 80% utilisation and still make money but I cannot send a 6,000 unit vessel at 80% and make money. The unit cost is just so much lower when you talk about size. That doesn’t mean it always has to be full. We are reaching a ceiling when it comes to frequency and transit time issue. Even though we operate around 90 ships a day, the number of large car carriers of 8,000 units is twelve. For us to go beyond that is not logical.”
“During this difficult period, have any of the shipping companies had any government aid to see them through?” asked David Cardle. “This is an oligopoly,” Wang replied. “You have six or seven big players in the world. The reason there aren’t anymore is because there aren’t any more customers. These companies are so financially sound that they are not in line to receive aid. In Korea, the government is financially supporting weak companies. It divides companies into four categories. Category A doesn’t get any help, B may or may not get help, the Cs either get cash or are merged with an A or B company and the D company is told to go bankrupt. EUKOR is classed as an A company.
“What is happening now is that the Asian players are able to buy capacity and brands at a historic low level. The shift eastwards is going to be dramatic. We thought it would take ten or fifteen years, it will probably take two to three. You can draw a parallel with the new building market for vessels. A lot of people in Europe today have invested heavily in container carriers as a means of safeguarding their pensions. Now they want to cancel and they are getting out of these deals by forgoing their equity. These vessels, however, are still being built and they are being bought cheaply by Chinese, Indian, Korean and Japanese shipping companies. Suddenly, their ability to compete against the traditional carriers is greatly enhanced.”
“The shipping industry is suffering at the moment but is generally in fairly good health,” added Peter Menzel. “If the current situation were to continue for another two years we might be talking about something completely different, but we all believe that things will recover even if it is slow. We can live with that.”
“Ships are steaming more slowly,” observed David Cardle. “After the recession will we see them go back to full speed?”
“I would very much like to go back to full speed because it means I can lift my capacity per vessel by 7% or 8%,” replied Jan Eyvin Wang. “The optimal speed is 18 to 19 knots and we are going down to 15 or 16 knots. If you go below that it is like running a brand new car in first gear. You can’t do that forever, it would kill the engine. Steaming at full speed of course increases bunker consumption and C02 emissions.”
“Slow speeds were not necessarily introduced with a view to the poor global economy,” added Menzel. “The policy was in place before, when bunker prices skyrocketed and that was during a period when the economy was still fairly strong. With the optimisation of services we might include a few more ports and we have to create quite a clever schedule. You don’t want to arrive on a Sunday because it costs you twice as much as on a weekday.”
“Is the trans-Asian rail network a threat to shipping lines or are you seeing moves towards rail because of security issues?” asked David Cardle. “Rail will grow, particularly in the emerging markets and certainly in India and Russia,” advised Paul Donaldson. “The Trans-Siberian railway from Vladivostok to Moscow spans some 13,000 kilometres and the distances in India are huge. Road infrastructure is not terribly good in those areas, particularly in China. This is where our growth has been over the last twelve months, in the internal distribution rather than via the deep-sea operators.
“China’s domestic market will absorb most of its car production over the next two or three years and then it will become a major exporter. India will also become a major exporter. It is already perceived as the major small car manufacturer for the world with Suzuki, Maruti, Hyundai and Tata all producing little cars which will eventually be exported elsewhere. Containerisation is growing. The danger is that one organisation goes off in one direction on its own and doesn’t talk to anybody else.”
“Rail can support us and help to optimise our network,” added Peter Menzel. “It can help us to minimise port calls and it is more a support function than a competition. Yes, the Trans-Siberian railway has taken some cargo away but, in percentage terms, it is really nothing. It more complements sea transport rather than competes with it.”
“For the last six years we have been interested in shipping companies providing a small cross-channel ferry with a capacity of perhaps 300 cars,” said Howard Nash of GEFCO from the floor. “If anyone had one now it would probably be the most sought-after piece of equipment. We are not the only company which has been asking for it. Is there anything for the future which may have been learnt from this recession?”
“Today is the right times to ask that question because capacity is available and you can tailor a service back and forth as long as it makes money,” replied Jan Eyvin Wang. “The question is, is it viable financially. The short-sea used car trade from Japan and Korea to China is a booming market. The Chinese economy is still growing and we have shuttles going back and forth. It’s a longer distance than cross-channel but we work closely with the OEMs and we established a service based on a certain volume and a certain rate level which makes sense for all parties.”
“Port costs and handling costs are rising and for a volume of 300 cars the cost per unit would probably be very high,” observed Peter Menzel.
(appears in autoMOTIVE Logistics Leaders magazine)
