Carriers’ stock of ready-to-cascade Asia-Europe containerships is almost empty. New ULCVs will force the cascade into a potentially more destructive second phase of bigger ships moving into North-South lanes.
It has been 10 years since the launch of Maersk Line’s E-class ships that sparked an evolutionary leap in containership sizes. The maiden voyage of the Emma Maersk in September 2006 hyper-inflated the maximum ship size overnight from 9,200 teu to 15,550 teu, although Maersk significantly understated the capacity at the time at around 11,000 teu.
The introduction of these leviathans and the proceeding arms race to catch up that has pushed the ceiling closer to 20,000 teu, has had huge consequences for the industry, one of the biggest being the huge deployment headaches they have given carriers. With the biggest ships effectively locked into the Asia-Europe trade due to port handling limitations elsewhere carriers have had to be creative in shuffling ships into new trade lanes.
It is fair to say that carriers have not been entirely successfully in cracking the cascade conundrum over the past decade since the arrival of Emma and her sisters. The phasing of ex-Asia-Europe ships into new lanes has routinely destabilised the new homes and has been a major contributing factor towards persistently low freight rates. The slowdown in demand that coincided with the arrival of the ULCVs (Ultra Large Container Vessels) exacerbated the industry’s overcapacity and has meant that for years carriers’ deployment decisions were less than optimal. Deciding where to use their biggest assets has most often been based on necessity rather than demand – the lack of alternatives means they are generally hoping for the least bad decision.
The 10-year anniversary of Emma Maersk’s arrival also marks the point at which the first phase of the cascade could be said to be over. Drewry’s latest Container Forecaster reports that the average size of vessel on the Asia-North Europe trade is nearly as big as Maersk’s E-class units at 14,600 teu, and there are now only seven sub-10,000 teu ships left on the route (see Figure 1). Having nearly exhausted the stock of <10K ships on this route carriers are going to have to look to re-deploy even bigger units to make way for the influx of ULCVs that are on their way. And there are a lot of them – by the end of 2017 another 600,000 teu worth of >18,000 teu ships are scheduled for delivery with 1.3 million teu in total due before 2020.
While the pressure to cascade ships is intensifying thanks to the new ULCVs, carriers in the Asia-North Europe trade now have less low-hanging fruit they can easily pick off and redeploy elsewhere. Table 1 shows that aside from the dwindling number of <10K ships there aren’t many obvious candidates in the next few upper size ranges. As of September there were only 19 ships below 13,000 teu – sum of nearly 200,000 teu – deployed in the trade, which is only a third of the potential new ULCV capacity hitting the water by the end of next year. Extra demand will cover some of the shortfall but to achieve headhaul ship utilisation above 90% next year carriers will probably need to clear out everything below 13K and a sizeable chunk of the 13-14K fleet.
Table 1: Breakdown of Asia-North Europe deployment by ship size, September 2016
Source: Drewry Maritime Research – Container Market Annual Review and Forecast 2016/17
The problem then becomes where to put those ships. Scrapping is not really an option as there are only 15 ships in the 8-10K segment that are more than 15 years old with the oldest built 19 years ago. The oldest ship beyond 10K is the Emma Maersk at 10 years. Therefore, the choice for carriers is either to idle or continue to cascade into other tradelanes.
Quite a few of the >8K ships have been moved into the growing South Asia and Middle East trades, while the expanded Panama Canal has provided a new release valve to cascade similar sized ships in the Asia-US East Coast corridor. The cascade spreads even wider and the chart below highlights the >8K and >10K ships that are now deployed to/from Latin America and Africa.
Figure 2: Number of big ships serving selected North-South regions, as of July 2016
Source: Drewry Maritime Research – Container Market Annual Review and Forecast 2016/17
Inevitably, the pressure exerted on the East-West trades feeds through to the North-South trades by default. The chart below shows that the inflation to the average size on some North-South routes has been quite staggering. For example, since 1Q13 the average ship size on the Europe-South Africa trade has grown by 92%, while for Asia-West Africa the growth rate was 79% and for Asia-East Coast South America it was 64%. Some of that will have been through newbuilds going directly into the trade, but most will be down to the cascade.
Figure 3: Average nominal teu of ships deployed on selected North-South trades
Source: Drewry Maritime Research – Container Market Annual Review and Forecast 2016/17
The introduction of bigger ships into these trades when the demand growth hasn’t been there to support them has inevitably forced a trade-off. In both the Europe-South Africa and Asia-ECSA trades the number of direct weekly services has halved since 1Q13. As more big ships are cascaded down to North-South trades carriers will face increasing pressure to reduce the number of weekly loops, which in turn will raise the requirement to work together (in order to maintain coverage) and could possibly be the trigger for North-South alliance partnerships.
