Over-capacity and schedule reliability under scrutiny at TOC CSC Asia

Delegates at the 18th annual TOC Container Supply Chain Asia heard that container shipping lines were still engaged a battle to fill larger and larger vessels with potentially damaging consequences for schedule integrity and supply chain costs

London, 01.05.2014 – The impact of big vessels on global and regional container supply chains dominated discussion at the 18th TOC Container Supply Chain Asia Conference, at the Marina Bay Sands Hotel, Singapore.

In a keynote speech Mr Tan Chong Meng, Group Chief Executive Officer of PSA International, set the scene in a presentation entitled ‘Three Steps Forward, Two Steps Back’.

Mr Tan outlined the principal trends affecting container logistics on a global level. Bigger vessel sizes, such as the giant container ships now coming into service, and the move to create more effective carrier alliances are driving massive investments in container terminal design, construction and technology.

He characterised this situation as ‘80-20’, a world in which 80% of cargo is concentrated in alliances, while 20% of vessels are mega-ships. However, this is not without its disadvantages, he added. “It is very much three steps forward and two steps back.”

In particular, container vessels that now routinely measure 400 metres in length lead to far more “berth wastage”, Mr Tan added. Handling two ULCVs simultaneously often meant at least 90 metres of a berth was unusable, whereas with smaller ships, three could have been handled on the same length of quay.

A secondary problem, he added, was the effect of the cargo flows from the ultra-large vessels, especially when combined with cost reduction strategies such as slow-steaming and void sailings.

“We cannot say the liners are not doing the right thing by reducing these costs, but schedule reliability is getting worse and reached a new low of 64% of on-time arrivals in the fourth quarter of last year, and it doesn’t seem to be getting better, so how much worse will it get?” he asked.

This is compounded by the huge numbers of containers being loaded and unloaded in a single call, which is leading to far more complexity in yard operations and has a direct effect on landside flows in and out of terminals.

Also in the Opening Plenary Session Mr Mohammed Al Muallem, Senior Vice President & Managing Director, UAE Region, for DP World, updated delegates on Evolving Middle East-Asia Trade Dynamics. He stated that trade between Asia and the Middle East will likely experience a volume increase that will make it one of the fastest growing trade lanes in the world.

A growing population throughout the GCC countries, massive investments in industry and manufacturing and growing container exports from the region, particularly from the petrochemical industry, all point to increased demand on ports, shipping and logistics services. For well over a year now, he stated, DP World UAE region has been handling volumes of more than 1 million TEU every month and in 2013 handled a total of 13.6 million TEU, an annual growth of nearly 3%.

However, like Mr Tan, Mr Al Muallem noted that there were challenges to handling larger ships and maintaining schedule integrity for sailings. He suggested that this could be alleviated if some of the world’s mega-hubs, like Dubai and Singapore, worked more collaboratively. “We can’t just keep building more berths,” he said. “Another solution is for greater collaboration between mega-hub ports especially in terms of planning.”

He argued that the world’s major hubs could improve productivity and operational efficiency if they worked together from the planning stage. Such co-ordination was particularly important given the trend towards larger vessels, for which regional hubs had been making significant investments to upgrade, Mr Al Muallem added.

“The solution for us is for mega-hubs to sit together and ask ourselves how we can work together — especially in terms of planning.”   No let-up in freight rate war

Meanwhile, delegates were also given detailed analysis of the current state of the liner shipping markets. Analysts forecast no let-up in container overcapacity and the consequent freight rate war.

In a sombre assessment, Alphaliner executive partner Tan Hua Joo argued that Maersk’s order for 20 Triple-E vessels in 2011 was the beginning of a capacity “arms race” that is fast becoming “the very definition of a zero sum game”.

The newbuild order came during a lull in a bitter rate war that had developed after the false restocking recovery of 2010, Mr Tan said: “Maersk miscalculated that it could push some of its competitors out of the way, but eventually it was forced to form the P3 alliance – taking that step indicated there was something wrong.

“But the independents aren’t giving up either, and the ‘arms race’ triggered by the Triple-E orders is getting worse. The number of new ships is quite a scary picture, and next year it is going to get even uglier,” he added.

The P3 members will take on significant new capacity as Maersk accepts delivery of the remaining 16 Triple-E vessels and MSC and CMA CGM take delivery of their new ultra large vessels. Meanwhile, over the course of this year, the G6 members will be coming to the end of their new building programmes.

In 2015 and 2016, there is a large tranche of vessels of over 9,000 TEU due to be delivered, and Mr Tan questioned whether Maersk’s previous insistence that it would not need to place any orders for a number of years following the Triple-E deliveries would remain.

“How will Maersk react to their competitors getting all this new tonnage?” he asked. “At some point it will ‘pull the trigger’ again. “One of its reasons for forming the P3 was to try to keep its two major competitors in check, but they have since placed further orders – so one of the interesting aspects is going to be how the intra-alliance competition between members develops over the next couple of years.”

Market consolidation does not appear to offer much of a way out of this impasse, he maintained. Despite the Hapag-Lloyd/CSAV merger there were few such other options on the table, and there is little prospect of smaller carriers exiting the Asia-Europe trade, despite most of them suffering huge financial losses last year.   Reliability down

Container shipping line reliability has slipped to unprecedented low levels in recent months, according to research from maritime analysts SeaIntel. Fewer than half of all sailings on the Asia-Europe trade arrived at their North European destinations on time in February. SeaIntel chief operating officer Alan Murphy told delegates: “In the past three months, reliability in the industry has hit an all-time low – and the consistency of the products offered to the market has declined considerably.”

According to SeaIntel research, global reliability saw 81% of sailings arrive within one day of their advertised date in November, a level which dropped to 73.4% in December, to 69.5% in January and then down to 68.4% in February.

And on the Asia-North Europe westbound leg reliability was considerably worse. November saw an on-time arrival rate of 77.1% across all carriers operating on the trade, which declined to 72.9% in December, dropping steeply to 59.8% in January and then down to 49.9% in February. However, for consignees, the figure showed an even worse performance as hinterland haulage and intermodal services almost never made up time lost at sea. Globally, just 61.7% of boxes were delivered within a day of the date promised, which dropped to 55.8% in December, 51.4% in January and 47.3% in February.

However, on this measure, carriers’ performance on the Asia-North Europe trade actually outperformed the global average for most of the period. Some 66% of containers arrived on-time in December, dropping to 59.9% in November, down to 51.6% in January and then falling below to global average to 44.6% in February.

“Service consistency has simply gone out of the window,” Mr Murphy said, and added that the figures did not include the voided sailings which had been a feature of the Asia-Europe trades in the aftermath of the post-Chinese New Year slowdown.   And the carrier view?

From a carrier perspective Thomas Riber Knudsen, CEO, Asia Pacific, for Maersk Line, stated that the challenges of slower demand growth, overcapacity and poor freight rates are here to stay, but that the P3 Alliance planned between Maersk, CMA CGM and MSC will make a real difference in the market.

He rejected claims that it would commoditise the industry further and said that Maersk was committed to a programme of service and product differentiation.

Speaking in a panel discussion on Trade Route Intelligence and the Global Liner Shipping Outlook, Knudsen stressed: “P3 will not provide customers with the same service reliability and Maersk will continue to differentiate its services from its alliance partners. There will be no joint sales forces and marketing will be independent. There will be no uniform booking and information systems, no joint acceptance policies, no joint space allocation/management and no sharing of equipment, feeders, inland services and transhipment patterns. Finally, there will be no joint customer service and care plans.”

As for the industry as a whole, he warned: “The growth rates of 9-11% seen between 1994 and 2007 are gone for ever and the next five years are more likely to see volumes rise by 4-5% a year.

“And the incentives to invest in new tonnage will continue as a doubling in ship size can lead to a reduction in slot costs of 25%. But this increase in the size of vessels has led to a long term decline in freight rates with nominal prices falling by 1-2% a year in the 2000-2013 period,” he said. “At Maersk we will continue to focus on reducing our costs but not at the expense of our service offering. We see P3 as helping bring stability to the market as well as giving us greater flexibility, wider geographical coverage and the opportunity to come up with new products,” he concluded.   Supply chain costs

In a coruscating analysis Mark Holloway, Asia-Pacific customer services and logistics director at Diageo, one of the world’s largest drinks companies, revealed that container shipping line unreliability has cost the group around £3 million in extra inventory costs so far this year. Schedule reliability of eastbound Europe-Asia container services was so poor that he had to increase inventory by 34% in south-east Asia and build buffer stocks so his customers could remain supplied.

The Edinburgh-headquartered company, which produces brands such as Johnnie Walker, Smirnoff, Baileys, Captain Morgan and Tanqueray, has targeted the emerging markets of south-east Asia as key to its global growth strategy.

He said: “70% of the stock we import into south-east Asia originates in Scotland, and there are nine links in the supply chain from the point it leaves our factories to being landed in Thailand. Once it lands in Thailand I have complete security and control over my supply chain.” However, with some carriers he contracted he said the on-time arrival of ships at Singapore – where the majority of Diageo’s containers are unloaded before being transhipped to Bangkok – was as low as 35%.

Mr Holloway explained that the unexpected increase in sailing times of a day to a week led had directly to Diageo needing to boost its inventory by between 5% and 15% this year.

“I pay carriers to deliver on time and they don’t, but I still have to pay’” he said. “This is as a result of slow-steaming, and I understand why they need to do it, but they are, effectively, maximising their profit and loss at my expense.

“With almost every line, I see a consistency of late deliveries – but we don’t know a ship is going to be late until the last minute. Cuts in capacity and sailings have to be communicated transparently. At the very least, they could tell me what is going on,” he told delegates.   The TOC CSC Asia Conference and Exhibition 2015 will take place in Singapore on 21 - 22 April 2015 at Marina Bay Sands for the second year running.

For further information, please visit www.tocevents-asia.com

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