Liner Revolution Eats Its Own Children

Former Lloyd’s Shipping Economist contributor Andrew Craig-Bennett has written, in Splash24/7, one of the best thought pieces on the state of liner shipping. I have reproduced the article below, but it is worth following the link to the comments, too.

The liner revolution eats its children – Splash 24/7

What do you call a multi-billion-dollar global business in which the boards of directors of almost every large company in the trade, finding that they are losing money because they are making more of their product than they can sell at a profit, decide to make much, much, more of it?

Answer: liner shipping.

There are two possibilities: either the directors on those boards have the brainpower of jellyfish, or they thought they had a cunning plan.

The cunning plan was to cut their unit cost of manufacture of their product, carriage by sea for ISO containers, by building ever bigger ships and gaining economies of scale, to the point where competitors would just give up and get out of the business, at which point the last men standing, one of whom would be Danish, would jack the rates back up again and, combining their low unit cost with quasi-monopoly control, they would become immensely rich.

The cunning plan looked quite good to start with.

Ever since Temasek gave up on Neptune Orient Lines, and particularly since the Korea Development Bank threw in the towel and stopped propping up Hanjin, liner companies have been merging.

When businesses merge, it is said that the devil is always in the detail. The grinding of the gears that accompanies a merger makes the merging businesses less efficient for a while. Certainly this is true of those mergers which are brought about, not by the ability of the acquiring company to pay more for the target company than the target company’s shareholders think it is worth, but by what is politely known in East Asia as ‘administrative guidance’. These mergers never happen when times are good, only when times are dire, and they are accompanied by the gentle tinkling sounds of breaking rice bowls.

So far, so good for the cunning plan.

The liner shipping industry is experiencing the fate that some of us predicted for it when Directorate-General IV of the EU Commission hearkened unto the European Shippers’ Councils and decided that conferences were a bad thing. The upshot is likely to be that the world is left with perhaps half a dozen ‘full service’ containerlines, plus a number of regional trade liner companies sitting more or less comfortably in the niches that they have carved out for themselves.

This makes life particularly grim for the smaller fry; the multitudes of private and family companies, often highly geared, who are owners of tramp boxboats. Just a few years ago, these people thought they had found the golden ticket – all they had to do was to order bog standard boxboats, man them with warm bodies, and charter them to the big liner companies, who were no longer much interested in the dull business of running ships. Which was fine until the big liner companies built behemoths.

Today, the tramp containership owners are starting to discover what it was like to be an independent tanker owner in 1983… the year in which Elf Aquitaine scrapped the world’s second biggest ship, the ULCC Pierre Guillaumat – named after their chairman – at six years old. Who wants a panamaxboxboat, now?

Meanwhile, the next part of the cunning plan, seen by the staff of the big liner companies as ‘The Good Bit’, comes into play, as the surviving giant containerlinescan at last do what their staff have wanted to do for decades, and put the bite on the forwarders, by jacking up their rates and shutting them out.

But the problem with the cunning plan rears its ugly head. Owners of unwanted tramp boxboats can either scrap them, at tender ages, or do something else with them, just at the time when big forwarders, controlling worthwhile cargo volumes on certain routes, find themselves shut out.
The solution is obvious and not even difficult to put into effect– Non-Vessel Operating Common Carriers become Vessel Operating Common Carriers, by chartering ships, cheap, from the desperate tramp owners. The NVOCCs know all about the liner business; all they need to do is to hire a few operations people, appoint agents, and buy bunkers.

Presto! A whole new generation of liner shipping companies, carrying negligible debt or overhead, springs up like the dragon’s teeth and starts to out-compete the ‘legacy’ big shipping lines.

And thus the container revolution eats its children. Amongst the legacy liner companies, few are very old. They saw off the old guard of the conference carriers – even the boys in blue were once ‘tolerated outsiders’ – and soon they, in turn, will be swallowed up by, in effect, ‘virtual’ liner companies.

Who loses in this orgy of value destruction? At first glance, the banks, but the banks are bailed out by the taxpayers. Which is to say, gentle reader, that the people who lose are you and I.



What Will be the Impact when the Newly Extended Panama Canal Locks Open?

What will be the impact on shipping when the newly extended Panama Canal open today (26th June 2016)? Figure one below shows the physical changes to the dimensions of the old and new locks on the Panama Canal (time lapse video of the construction).

Fig 1 New Panama Canal Dimensions
Under the old dimensions, the widest containership that could pass through the Canal was one with a beam of 33m – Panamax (3,000 to 5,999 TEU). The ships are pulled through the old locks by “donkeys”, which are small gauge locomotives, and often a sea cadet on his first passage would be given a bucket of water and told to water the donkeys. Interestingly, there has not been any clear indication from the Panama Canal Authourity if the old locks will continue to be operated in parallel with the new locks. These old Panamax containerships make up around 16% of the current capacity of the containership fleet.

Fig 2 New and Old Panamax Containerships
As trade increased, and due to changes in trade routes, containerships wider than 33m were built. In theory, these older Post-Panamax containership (3,000 to 9,999 TEU – see figure 2) will be able to use the new locks, too. These currently make up 22% of the fleet.

The New Panamax (10,000 to 13,399 TEU) containership, also known as Neo-Panamax, currently makes up 18% of fleet by capacity, according to mapping, ship search and valuation provider, VaesselsValue, but it is expected that this sector will replace the old Post-Panamax.

It is expected that the old Panamax containerships will cascade downwards into the other sectors, and may even “interfere” with the Feedership trades (1,100 TEU), should the rates decline to comparable levels. This will most likely decrease the values of old Panamax vessels, and may lead to a new round of sales for scrapping.

Fig 3 Seatime Savings

The increase in capacity able to pass through the new locks and the sea-time savings (see figure three) for the larger ships will be significant, but the impact is hard to assess until the liners start using the new locks.

The top five New Pananax containership owners are shown below (figure 4).

Fig 4 New Panamax Owners

According to some studies, the opening of the new locks could double the volume of total trade (tankers, dry bulk carriers, containerships and gas) passing through the Panama Canal. So far, the emphasis has been on the liner trades and their use of the new locks on the Panama Canal, but the LPG and LNG gas carriers are expected to be significant users, too.

Posidonia: Lloyd’s List Briefing – Current State of Shipping

Sunday 5 June 2016.

The Lloyd’s List Briefing is now a traditional sharpener for Posidonia week. The event was presented by Richard Meade, the Editor of Lloyd’s List, assisted by head of the Greek desk, Nigel Lowry.

Christopher Palsen, the head of Lloyd’s List Intelligence research kicked off the event by setting the scene and offering his explanation of where shipping was, and why.

He posited that the dry bulk fleet now consisted of 11,149 ships, with a capacity of 784m dwt. With a substantial portion of the bulker fleet idle (average age 18.5 years), why had there been any ordering at all in this sector since 2008? The answer, in his opinion, was Chinese interests. Specifically, the five-year plan for 50% of imports into China to be carried by Chinese-owned ships. The result was a massive shipbuilding programme. This has flooded the market, but it has kept Chinese shipyards busy, and the cost of transport low. He also made the point that Chinese coastal (non-deep sea) shipping carries an estimated 2.5bn tonnes (of which 1bn tonnes is coal) on coastal ships. He admitted LLI had very little information on this fleet, except that it was very old, and was being replaced by modern deep-sea ships.

According to LLI, the global tanker fleet consist of 2,003 ships (this is too small for the whole fleet and is probably only the largest sectors – CJ) with a capacity of 367m dwt, of which 29m dwt was being used for storage. The orderbook stands at 64m dwt. He asked if there would be enough demand for all this tonnage?

According to LLI, there are 5,292 container ships, with a capacity of 19.8m TEU, with another 3.9m TEU on order. The key with this fleet is efficiency. He felt that there was significant growth potential in converting Chinese general cargo and break bulk cargoes into containised shipping.

On the economic demand side, Mr Palsen felt that the slower growth in China ( about half the past averages), was still robust. In his opinion, the drivers in the future will be India and other Asian countries.

On the energy side, according to Mr Palsen, around 85% of energy demand is supplied from hydrocarbons, and even if renewables grow fast as 15% pa, after a decade of growth, this would mean hydrocarbons still accounted for 75% of energy supply. He noted that shale gas production has resulted in the decoupling of the gas price and oil prices in US. It would appear that Saudi Arabia (by flooding the crude oil market) was winning the battle to kill off some smaller US opertors. But if the oil price rose again, would these fields come back onto the market?

Comment Piece in Loadstar: a Maersk Line IPO?

While the recent history of container shipping has been turbulent, to say the least, one of the weirdest constants has been the AP Møller-Maersk Group share price.

In private conversations with senior Maersk executives, it has become clear that while the plaudits of being a bellwether company are welcome, the glow recedes over time.

“We have retuned profits year after year to investors in an industry that often fails to do that, and yet our share price has stubbornly remained the same – one of management’s biggest challenges is increasing the share prices,” one candidly told me a few months ago.

Indeed, go back five years to 2011 and you will find Maersk’s share was Dkr10,390 ($1,594), while today it stands at Dkr9,255 ($1,422), and although there have been some highs and lows, the story is of a share price that almost appears etched in stone.

So, in the spirit of speculation that all blue-chip conglomerates attract, we wondered what would happen if the AP Møller-Maersk board took the radical, nigh-inconceivable, step of separately listing its container shipping unit – what it would look like in terms of the market, and how that might affect the corporation’s other divisions.

Craig Jallal, senior data editor at, says:

Since the start of the global economic downturn in 2008, AP Møller-Maersk has tried and tested many strategies to keep container division Maersk Line in profit. These range from the introduction of ever-larger vessels to lower the cost per teu, to the Daily Maersk, which offered guaranteed delivery times to entice shippers to stay loyal to its service.

On the operational side, Maersk Line was a one of the first to adopt slow-steaming and warm lay-up. But none of these strategies have produced the gains expected. For a while, the profits generated by Maersk Oil kept the group in the black, but with a prolonged downturn in the oil price and the dire state of the container sector, is there any point in being a conglomerate?

Maersk Group defines its business units as Maersk Line, APM Terminals, Maersk Oil, Maersk Drilling and APM Shipping Services (Maersk Supply Service, Svitzer, Maersk Tankers and Damco). In this article, we examine if there is any value and/or cost savings that would accrue from spinning-off Maersk Line as a separate entity via an IPO.

As such, Maersk Line would still be the largest container line by value, with a current fleet of 262 owned vessels with a value of $12.1bn (live vessels and newbuildings).

VV Chart 1



This is far larger than any of the currently listed public container companies (see table below, which includes liner companies and vessel-owning container companies). However, even including the likes of Seaspan fails to find a champion close to the value of the Maersk Line fleet.

We can take the speculation one step further and estimate the size of the market capitilisation of a publicly quoted Maersk Line, based on the currently listed publicly quoted container companies.

VV Chart 3

The table lists the public container companies by size of market cap. To estimate the potential size of the market cap of Maersk Line, we have used the median of the ratios of the above companies’ market cap to fleet values.

On this basis, a publicly-quoted Maersk Line might have a market cap of around $8.5bn. Of course, the potential range of market cap based on the range of ratios is very wide, ranging from a minimum potential market cap from $2.8bn and the maximum was $36bn. However, given Maersk Line’s relative prominence in the market, a reasonable estimate might be in the region of $20bn. This would make the company the largest of any other shipping-orientated company, apart from its parent AP Møller Maersk, and Carnival Cruise.

However, in comparison with other industrial sectors, a market cap of $20bn hardly registers in the rankings. Wal-Mart Stores, a major shipper using container services, has a market cap of $216bn. Analysis of the size of the dominant companies in each industrial sector shows there is domination by four or five companies. Therefore, to be on an equal to these companies in investors’ eyes, Maersk Line would need to have a market cap in the region of $100bn, which implies a fleet with a value of at least $50bn, or five times its current size.

To achieve such a size could not be done through purely organic growth. There would have to be a considerable round of mergers and consolidations (lots of fees for lawyers and bankers), but the end result would be a clear and easily sellable container shipping story for US investors.

Alessandro Pasetti, The Loadstar financial analyst & founder of Hedging Beta, says:

Maersk is very unlikely to consider a radical overhaul of its existing assets portfolio following a few years during which several non-core assets were divested. But Maersk Line continues to absorb a huge amount of capital and investors are wary of a prolonged downturn — these two elements do not bode well with value creation.

It could also be argued that its prospects weigh on the valuation of the entire Maersk group – so, how about a partial spin-off aimed at retaining control of its shipping line division?

Its quarterly results, released on Wednesday, show the level of invested capital in Maersk Line is a whopping $20.1bn, or 43.3% of the group’s total. Its return on invested capital (ROIC), which remains one of the group’s most important metrics, stood at 0.7%, which compares with 2.9% at group level and implies that the unit doesn’t make its cost of capital.

However, assuming it swings back to a normal level of underlying profitability, returns could be much higher, while its prospects as a standalone entity could be more appealing for investors. In this context, consider that in the first quarter of 2015, its ROIC stood at 14.3%, or 40 basis points above the group’s average.

Assuming Maersk Line’s worst days are over, it should be safe to assume that the unit could hit a normalised annual Ebit in the region of $1.5-2bn — its underlying profit was over $700m in the first quarter of 2015.

If we place on the unit an Ebit multiple of between 10x to 12x, the enterprise value (EV) of Maersk Line could range between $15bn and $24bn, while its equity value would sit between $11bn and $20bn, assuming it retains some $4bn of net debt on its books. As a reference, Maerk’s current EV is $39bn, while the shares of Hapag-Lloyd trade on a forward EV/Ebit multiples of 15.6x — so the upside could be greater.

One key element, possibly backing a value-accretive spin-off scenario, is that the value of several other assets – APM Terminals, Maersk Drilling, Maersk Tankers and Svitzer – remain subdued due to cyclicality, but also because they belong to a conglomerate that includes problematic shipping assets, although most of them currently earn much higher returns than Maersk Line and have significantly lower capital requirement, as the table below shows.

Source: AP Moller-Maersk

Source: AP Moller-Maersk

Maersk’s first-quarter performance in shipping was only slightly better than break-even. But it was far better than expected, helped by a 7% volume growth and better utilisation rate. If it hit rock bottom in the fourth quarter, now could be time to think creatively about the ultimate corporate structure of the group.

Admittedly it is quite difficult to see such a split taking place, but it’s a fascinating thought experiment.

Russian Article

Четырнадцатилетний контейнеровоз post-Panamax продан на металлолом

27.04.2016   Морской транспорт

Четырнадцатилетний контейнеровоз post-Panamax продан на металлолом Контейнеровоз Conti Taipei класса post-Panamax вместимостью 5447 TEU, построенный в 2002 году, был продан на слом. Как передает ТАСС, об этом сообщает American Shipper со ссылкой на данные сервиса по отслеживанию и оценке судов VesselsValue.

По данным издания, до сих пор средний возраст утилизированных post-Panamax составлял порядка 19,5 лет. Средний возраст контейнеровозов всех классов, отправленных на слом в 2014 и 2015 годах, составлял 22 года.

Тем не менее, случай Conti Taipei не является исключительным. По данным VesselValue, только за последние 6 месяцев вместе с Conti Taipei на слом было отправлено еще 3 контейнеровоза этого класса.

Все четыре судна были построены на «качественных» южнокорейских верфях, и на момент продажи до очередного специального освидетельствования оставалось не менее 12 месяцев. Все четыре принадлежали немецким судовладельцам и оставались без работы по меньшей мере 3 месяца перед продажей.

Аналитики VesselValue полагают, что рост цен на металлолом в последнее время может далее подтолкнуть судовладельцев к продаже на булавки все более «молодых» судов.

Is the sale of a 14-year old Post-Panamax Containership for Scrap a New Trend?

Is the sale of a 14-year old Post-Panamax Containership for Scrap a New Trend?

Craig Jallal, Senior Data Editor of mapping, ship search and valuation service VesselsValue, examines if the sale of a 14-year old Containership is the start of a new trend. To set the sale in context, the average age of all sizes of Containerships sold for scrap in 2014 and 2015, was around 22-years old. There have been relatively few Post-Panamax Containership sold for scrap, but the average age at the time of sale was around 19.5-years old. Therefore, the 2002-built, 5,447-teu Post-Panamax Containership Conti Taipei was sold relatively young, but this does not appear to be a one-off event. There have been three other 2002-built Post-Panamax Containerships sold in the last six months. All three were built at “quality” shipyards in South Korea, and at the time of sale their next Special Surveys were not due for at least twelve months or more.

Other distinguishing features were that all three vessels were owned by German companies, and had been inactive at least six to three months before the sale, according to the VesselsValue’s vessel tracking module VV@. Using the ship search VV+ module, it is possible to filter the Post-Panamax Containership fleet for similar ships i.e., built between 1999 and 2003, owned by a German company, and with Special Survey due before 1 May 2017. The VV+ search returns 17 candidate ships from a potential fleet of over 1,000 Post-Panamax Containerships.

Two of the 17 vessels on the candidate list have been in-active for at least eight months. These two ships are currently stationed among a group of islands close to the city of Zhoushan (near Shanghai) in China. These are sisters-ships, and are currently valued at USD 17m each, with a demolition value of around USD 8m. One of the above islands, Daixizhen Island, has also recently become the host to two more Post-Panamax Containerships. These are also sister-ships, with a current value of USD 16m, and a demolition value of USD 7m.

Now that the scrap price is firmer, it will be interesting to see if these relatively young Post-Panamax Containers ships are sold for scrap, too.

Hawaii residents renew fight for free market in shipping | Hawaii Reporter

Hawaii residents renew fight for free market in shipping | Hawaii Reporter.

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