Changes in International Container Shipping and Port Environment
Changes in International Container Shipping and Port Environment
Changes in International Container Shipping and Port Environment
2.
2.1
2.1.1
To comprehend the changes that have occurred within liner shipping and ports over the
previous two decades, it is necessary to understand the context in which these changes have
taken place. The core factor has been an increased acceptance of international trade as the
primary engine of economic growth and development. This has been an ideological shift, as
many economies including the Asian giants of China and India have in the past pursued
development strategies that have emphasized self-sufficiency and import substitution.
Recently however, there has been a growing consensus that success will be achieved through
global economic integration.
As a result of this globalization trend, world trade volume has continued to grow with the
gradual removal of trade barriers under the World Trade Organization (WTO), and through
Regional Trade Agreements (RTA). From 1950 through to 1990, the relationship between
economic growth and growth in the value of international trade remained almost constant.
FIGURE 2-1: RELATIONSHIP BETWEEN WORLD TRADE GROWTH AND WORLD ECONOMIC
GROWTH OVER THE POST-WAR PERIOD
Trade Growth to World Growth Ratio
2.50
Forecast
2.00
1.00
0.50
1950-1963
1963-1973
1973-1990
1990-2000
-3-
2000-2005
2006
2007
2008
As shown in Figure 2-1, the value of trade during this period grew at approximately 1.5 times
that of the world economy. However, from 1990 to 1998 there was a significant upward shift,
as the value of trade grew at a rate of over twice that of the world economy. In the following
period from 2000 to 2005, the ratio returned to that of the previous 40 years, suggesting a
moderation of the effect on the globalization on trade growth. However, 2006 saw strong
growth in world trade, rising by approximately 8 per cent in excess of twice the rate of
global economic growth in the same year. IMF forecasts for 2007 and 2008 indicate that
strong growth in world trade will continue, with the ratio of trade growth to economic growth
remaining over two in both of these years.
Although world trade has, on average, grown more strongly than the global economy, trade
growth has also been more volatile. Table 2-1 shows that, during the period 1998 to 2006,
annual growth reached a high of 10.4 per cent in 2000, but this exceptional performance was
followed immediately by negative growth of in 2001. Differences between regions in the rate
of trade growth are also both high and variable.
TABLE 2-1: GROWTH OF WORLD MERCHANDISE EXPORTS BY SELECTED REGION
1998 1999 2000 2001 2002 2003 2004 2005 2006
World
4.7
4.7
10.4
-0.6
3.4
4.8
9.5
6.0
8.0
North America
4.6
6.9
9.6
-5.0
-2.7
1.1
8.0
6.0
8.5
9.0
-0.4
4.4
5.0
1.9
6.0
13.0
8.5
2.0
Europe
5.5
3.3
9.3
2.4
1.9
1.8
7.0
3.5
7.5
Commonwealth of
Independent States
0.9
-8.8
11.8
4.5
8.7
12.8
13.0
4.5
3.0
Asia
3.8
7.3
14.2
-3.4
11.2
11.4
14.5
10.0
13.5
-4-
2.1.2
During the 1980s, a large portion of growth in the container trade, recorded at an annual
average rate of 7.8 per cent, could be attributed to an increase in the container penetration
rate. In this period, much of the cargo that previously travelled in loose form was converted to
containers; at the same time ports developed infrastructure, and acquired handling equipment
to cater for the increasing number (and growing size) of container vessels. However,
international container trade has continued to increase at a rate far exceeding that of maritime
trade as a whole long after this effect has begun to wane.
Figure 2-2 shows worldwide growth in maritime and container trade volumes over the period
1987 through to 2006. Total international maritime trade volumes grew at an average of 4.1
per cent per annum over the period, with the result that by 2006 total seaborne trade was at
almost double 1990 volumes. Containerized cargoes by contrast have grown at an annual
average rate of 9.5 per cent over that same period, resulting in a five-fold increase in container
movements.
FIGURE 2-2: GROWTH OF WORLD MARITIME TRADE (1987-2006) (INDEX: 1987 =100)
750
650
550
Containers
450
350
All Maritime Trade
250
150
50
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Growth over the past few years has been exceptionally strong. Figure 2-3 shows that the
average rate of growth in the number of containers handled in the worlds ports exceeded 10
per cent over 2000-2005 periods, with growth in 2006 again reaching double-digit levels.
-5-
Recent estimates by Drewry Shipping consultants are that container trade growth in 2007 has
again been strong, with world container traffic expected to reach 142.9 million TEU3.
The period between 2004 and 2005 was a strong one for the liner shipping operators, with
container volume in excess of ship capacity for the majority of the period. However,
traditional winter lows, and a surge in capacity with the delivery of the large vessel ordered at
the height of the boom, initiated a reduction in rates towards the end of 2005. This reduction
in freight rates had a serious impact on the financial performance of ocean shipping
companies, where almost all posted weaker profits for the last half of 2006, with some
reporting losses.
To accommodate the drop in container rates, liner companies in late 2006 began to reduce
capacity by removing strings on several trade lanes and/or slowing their vessels to absorb
excess tonnage. This response by shipping lines was an effort to minimise the cost impact
from the massive capital investment in super post-Panamax vessels. However, the low freight
rates experienced in 2006 have persisted in the face of strong growth in volumes in 2007.
Efforts at rate restoration appear to have had little effect on rates; attempts to balance
supply/demand on the trans-Pacific route in the second quarter of 2007 produced little
movement in freight rates.
FIGURE 2-3: WORLD CONTAINER TRADE GROWTH (1980-2006)
12%
10%
Change
8%
6%
4%
2%
0%
1980-1990
1990-2000
2000-2005
2006
This is the number of full containers shipped, not the number of handling movements in port. Drewry Shipping Consultants
2007, Annual Container Market Review and Forecasts 2007/8.
-6-
Drewry has indicated that given the continued strong growth, the outcome of 2008 shipper
contract negotiations could change this (Drewry, 2007a) However, a great deal of new
capacity is scheduled for delivery over the next few years, and this will keep downward
pressure on rates. The effect of the delivery of this new capacity will be exacerbated by the
fact that it will not be balanced by scrapping of old tonnage. The relatively rapid increase in
the container fleet has meant that container ships are, on average, significantly younger than
other major components of the world fleet. Whereas the average age of the world merchant
fleet at the end of 2006 was 12 years, the average age of the cellular container fleet was 9.1
years. (UNCTAD, 2007)
2.1.3
Another shaping factor of the ESCAP ports and shipping scene has been the series of
transformations that have occurred in the geographical distribution of container trade. In the
1970's, Asia's container trade was dominated by Japan, which was the focal point for both the
EuropeAsia and trans-Pacific trade. However, by 1985 this had changed dramatically, as
diversification of Asian container trade entered a more mature phase. Container volumes from
Hong Kong, China; Taiwan Province of China and the Republic of Korea comprised over 40
per cent of the Asia total, while Japan's share declined to 31 per cent.
By 1995, another profound change had occurred. The decade 1985-1995 saw container
volumes through the ports of ASEAN countries increase six-fold, and by the end of the
decade they collectively handled approximately one-third of the Asian total.
During the 1995-2005, the principal change was emergence of the China market. The number
of containers handled by the mainland ports of China increased from 1 million TEU in 1983
to 43.6 million TEU in 2005 a remarkable sustained growth rate of approximately 31 per
cent a year. As a result of this spectacular growth, the Chinese container market (excluding
Hong Kong, China and Taiwan Province of China) has overtaken Japan and the United States
of America (United States) as the world's largest container market.
The spotlight is now clearly on India, where progress towards market reform and an open
economy continues. Productivity growth is strong and container volumes are expected to
grow strongly. In a bid to ensure future growth, India is also looking to strengthen the overall
logistics chain by improving port and landside infrastructure and integration. A number of
major port projects are underway such as the new container port at Krishnapatnam Port, and
the construction of a rail line linking India and Myanmar.
2.1.4
Figure 2-4 shows the container trade intensity (defined as containerised trade including
both imports and exports but excluding transhipment generated per thousand head of
-7-
population) for various regions in 20054. The influence of the level of economic development
on container trade intensity is clear; as shown in the figure, container trade intensity is
highest in regions dominated by developed economies, such as North America and Europe
and Central Asia, where over 100 containers of trade is generated for every 1,000 people. The
lowest amount of container trade generated was in South Asia, where the combination of low
levels of economic development and historically inward-looking approach to development in
India has resulted in less than 2 containers per 1000 head of population in 2005.
FIGURE 2-4: TEU TRADE PER 000 POPULATION WORLD BANK REGION
2.2
International liner operators have been faced with a changing regulatory environment in many
countries in the recent past. This has included new regulations enforced by the United States
with the Ocean Shipping Reform Act (OSRA) in 1998, and recent rulings on Regulation
4056/86 by the European Commission. In addition to recent amendments to the two major
The regions used in this and similar figures and tables in this report are those used by the World Bank in its publications.
Definitions of these regions can be found in a number of World Bank publications, such as World Development Indicators
2007.
-8-
anti-trust regimes, changes to an array of competition policies by other nations within the
ESCAP region have clearly influenced the environment within which shippers and carriers
operate.
2.2.1
The European Union competition regime consists of two block exemptions from anti-trust
policy; an exemption that covers the activities of conferences; and an exemption that covers
the activities of consortia. Regulation 4056/86 enables the Commission to apply Articles 81
and 82 of the EC Treaty directly to the maritime sector. This mechanism provides a block
exemption for liner conferences; however price-fixing and supply (particularly across modes)
are regulated within conferences. The consortium block exemption, Regulation 870/95,
823/2000, and most recently Regulation 611/2005 recognise improved productivity and
quality of liner transport services by rationalising the activities of member companies.
Both of these have been subject to recent reviews. The Commission has extended the
consortium block exemption (by Regulation 611/2005) but abolished the general conference
exemption as of October 2008.
The United States regulatory regime differs from the European regime in a number of
important respects. Historically, the United States has favoured open conferences, ensuring
easy entry and exit with conference arrangements, whereas European regulation has been built
around closed conferences. The United States regime has been relatively interventionist, with
high information disclosure requirements and strict filing obligations. Regulation of liner
shipping in the United States is effected by specific industry regulation (the Shipping Act
1984 as amended by the Ocean Shipping Reform Act 1999), whereas in Europe it is affected
by block exemption issued under general competition law. The United States regime is
accepting of the extension of shipping line collaboration to intermodal movements; in
contrast, the EU has been consistently hostile to such extension. Despite these differences,
both jurisdictions have in recent years taken steps that have weakened conference influence,
and there is a common view that the two major global regulatory regimes are converging
(Fitzgerald, 1999).
2.2.2
Australia
Australias competition policy regime is embodied in the Trade Practices Act 1974. The
Trade Practices Act outlaws various types of anti-competitive conduct, including misuse of
market power and price fixing by competitors. The competition policy regime relating to liner
shipping is specified in Part X of the Trade Practices Act, with shipping conferences receiving
limited exemption. A recent review by the Productivity Commission recommended abolition
of Part X, but the government decided instead to narrow its scope of application, excluding
discussion agreements from the protections offered by it.
2.2.3
China
-9-
Indonesia
In principle, the activities of liner shipping conferences are subject to Law No. 5/1999
Prohibition of Monopolistic Practices and Unfair Business Competition. This law became
effective in March 2000 and contains anti-competition provisions and establishes a
Commission on Business Competition Supervision.
2.2.5
Japan
The Marine Transportation Law provides that an agreement between shipping lines on freight
rates, routes, sailing and/or loading, shall be exempted from the provisions of the Act
Concerning Private Monopoly and Maintenance of Fair Trade. There have not been
significant changes to the Japanese regulatory framework on international liner shipping since
those made in 2000 through amendments to the Marine Transportation Law. The two
principal changes made at that time were the establishment of a procedure to allow: 1)
authorities to take certain actions against a party to a conference agreement if it is unduly
restrictive of competition; 2) the Ministry to revise or abolish conference agreements if they
do not meet certain requirements. However, according to Article 29 of the Marine
Transportation Law, the Ministry will not grant the exemption approval if it can be proved
that the shipowners substantively reduce competition, unduly increase freight rates or apply
unfair methods of transaction
2.2.6
New Zealand
Outwards liner shipping is exempt from sections of the Commerce Act 1986 covering
restrictive trade practices and price control. However, outward shipping is subjected to
regulation under the Shipping Act 1987. The Shipping Act 1987 recognises that the
commercial relations between shippers and carriers should be self-regulating providing that
there is a satisfactory balance of advantage between the parties.
2.2.7
Republic of Korea
The Maritime Transport Act provides that an ocean-going cargo transportation business may
enter into a contract concerning freight rates, vessel allocation, cargo transport and other
transport conditions and engage in joint activities. The Republic of Korea exempts
conferences and other forms of agreement practised in liner shipping from anti-trust
prosecution, on the grounds that such agreements make a positive contribution in terms of
freight rates, service stability and the maintenance of order in shipping markets.
- 10 -
2.2.8
Singapore
Until recently, the operation of shipping conferences had not been regulated in Singapore.
However, the introduction of generally applicable anti-trust legislation created a situation in
which traditional conference behaviours would have been illegal. A review undertaken by the
Competition Commission of Singapore resulted in a wide-ranging block exemption that in
practice means that any activities permitted by either the European or the United States
legislation will be legal in Singapore.
2.2.9
Thailand
2.3
Containerisation has witnessed a progressive increase in maximum vessel size. By the mid1970's, the 1000 and 1500 TEU ships of the first and second generation were being replaced
by ships of 2000+ TEU, signalling a trend of gradual increase that led eventually to the 4000+
TEU Panamax vessels which most major lines ordered in the early 1990's. However, as
shown in Figure 2-4, the rate of increase in vessel size accelerated during the mid-1990s, as
lines increasingly decided to focus their trans-Pacific services on the west coast of the United
States, and as a result were able to deploy vessels too large to transit the Panama Canal
(post-Panamax vessels). By 1996, vessels of around 6,000 TEU had appeared on the scene.
This rapid increase in containership size has continued unabated, and vessel size has
continued to grow to the point where vessels exceeding 11,000 TEU are now in service.
The containership order book is now dominated by large vessels: container ships of over 7000
TEU accounting for 39 per cent of the capacity currently on order (see Table 2-2). Planned
investment seems to be particularly strong for ships with a capacity of 10 000 TEU and
above. Over the next 3 years, the world container ship fleet greater than 4000 TEU is
expected to grow by 19 per cent per annum, opposed to 7 per cent per year for ships under
4000 TEU. According to Containerisation International the largest vessels on order at the
end of 2007 were 13,300 TEU ships for CSCL, with the first due for completion from the
Samsung Heavy Industries yard in December 2010 (Containerisation International website,
accessed 12 Dec 2007). In recent reports Samsung Heavy Industries is believed to building a
400 metre floating dock on which to construct the first of the 16,000 TEU ships, and is likely
to be operating early in 2009.
- 11 -
TEU
12,000
10,000
8,000
6,000
4,000
2,000
1980
1985
1990
1995
2000
2005
2007
2010
2012
2015
Year
TABLE 2-2: GLOBAL CONTAINER SHIP FLEET AND EXISTING ORDERS AT JULY 2007
Size Class (TEU)
< 500
500-999
1000-1499
1500-1999
2000-2499
2500-2999
3000-3999
4000-4999
5000-5999
6000-6999
7000-7999
8000-8999
9000-9999
10000+
Total
Existing Fleet
No of
Ships
438
752
611
486
302
348
317
354
239
114
49
93
36
5
4144
000
TEU
136
549
722
826
692
947
1082
1553
1300
740
360
767
336
68
10077
Ordered
No of
Ships
13
155
170
120
21
137
80
217
59
121
6
95
38
77
1309
- 12 -
Orders/Fleet (TEU)
000
TEU
3
128
202
207
46
362
273
944
310
788
42
798
355
857
5315
2 per cent
23 per cent
28 per cent
25 per cent
7 per cent
38 per cent
25 per cent
61 per cent
24 per cent
160 per cent
12 per cent
104 per cent
106 per cent
1260 per cent
53 per cent
The average size of new vessels entering the fleet in 2006 grew by 3.6 per cent to 3732 TEU.
There are divided opinions on where vessel size will go from here. A review by LSE suggests
that the limit using a single engine, given the marine propulsion technology currently
available, would be for a 12,500 TEU vessel with installed power of 81,000 KW and a speed
of 23.5 knots (Payer, 2002). Beyond that, it appears likely that twin engines and propellers
will be needed: this will reduce the ability to lower unit costs by increasing vessel size.
However, there are no insurmountable technical barriers: concept designs already exist for
ships over 18,000 TEU (see Table 2-3). Certainly there does not appear to be any clear
indication that the trend to even-larger container ships has as yet run its course. The limits to
growth, if there are any, will be market-determined.
TABLE: 2-3: SPECIFICATION OF VERY LARGE CONTAINER SHIPS
Ship
TEU capacity
Malacca-max
Emma Maersk
(project)
(in operation)
18,154
11,000
Length (m/feet)
400 / 1,312
397 / 1302
Breadth (m/feet)
60 / 197
56 / 184
Draft (m/feet)
21 / 69
15.5 / 51
Depth (m/feet)
35 / 115
30 / 98
243,600
156,907
25
25.5
Deadweight
(tonnes)
Vessel speed
(knots)
It has been argued by some analysts that the search for economies of scale is inexorable, and
will continue to drive vessel size increases. Larger ships typically have a lower cost per TEUmile than smaller units with the same load factor:
Samsung demonstrated that a vessel of 12,000 TEU on the Europe-Far East route would
generate an 11 per cent cost saving per container slot compared to an 8,000 TEU vessel,
and 23 per cent when compared to a 4,000 TEU unit.
Drewry Shipping Consultants (2001) also made similar calculations to point to potential
cost differences of around 50 per cent between a Panamax unit of 4,000 TEU and a
mega post-Panamax unit of 10,000 TEU (Notteboom, 2004).
- 13 -
One source estimates that savings of up to 16 per cent could be made on the AsiaEurope route through the deployment of vessels of up to 18,000 TEU (the so-called
Malacca-max vessels). (Containerisation International, 2002)
Adding post-Panamax capacity can give a short term competitive edge to pioneer
implementers putting pressure on the followers in the market to upgrade their container fleet
and avoid unit cost disadvantage.
But some commentators have pointed to other considerations which may serve to set limits to
this seemingly inexorable increase in container ship size. They point out ultra-large container
ships can be deployed efficiently on the major trade lanes, provided they are full. However,
many carriers have not been able to realize a continuous high utilization of available slot
capacity on their bigger vessels. Drewry warns however that over investing in vessels of 10
000+ TEU for simple fear of being left behind on the AsiaEurope trade lane is a level of
risk that should perhaps be reviewed. By the time vessels are delivered, trade boom would
have to have lasted for at least five to six years to sustain trade.
Moreover, shipping lines have made a significant investment in establishing competitive
networks to satisfy the service requirements of global shippers, such as a weekly departure at
each port of call. Upgrading the vessel size on a specific route takes considerable time and
demands massive investments.
It is clear that the largest ships will be deployed only on the Asia-Europe and, to a lesser
extent, the trans-Pacific route. However, as the existing fleet in the major East-West trades is
replaced by larger ships, many vessels of 3,000-4,000 TEU on East-West routes are expected
to migrate to north-south trades a phenomenon which has already been witnessed at the end
of 2005 (BRS, 2006).
The view taken in this study is that vessel size on trans-Pacific and Europe-Asia routes will
continue to increase, and that by 2015 super-post-Panamax vessels will be dominant on these
major east-west routes. It is expected that on the Asia Pacific route more vessels of greater
than 8,000 TEU will be the norm. This has been supported by introducing the Emma Maersk,
and her recently constructed sister ship Estelle Maersk, to the Asia-Europe trade lane. Some
indication of the way the market is reading developments can be gleaned from the fact that
major port operators have been trying to upgrade port facilities to accommodate super-postPanamax vessels, aiming to become hub ports even though the cost of such development is
very high. Others feel constrained to match these efforts just to keep in touch.
2.4
Financial performance
The financial performance of the container shipping industry is chronically weak when
compared to other industries. This has been related to a combination of the capital-intensive
nature of operations, and high risk regarding revenue. Shipping remains a very capitalintensive industry where some assets are owned, and others are leased. As a result, there
exists a wide variability in cost base which contributes to the short-term instability in this
industry (Brooks, 2000).
- 14 -
The 1990s and early 2000s in particular saw severe price competition affect the profitability
of the entire liner shipping industry, and container carriers significantly under-perform
financially.
Despite the efforts by shipping conferences5 to achieve rate stability, a significant decline in
rates has been observed since the mid 1990s on most major trade routes. This was due to a
combination of different factors. These have included the introduction of large ships,
increasing competition from non-conference carriers, the imbalance of container volume in
trade routes, and difficulties in securing continual cargo volumes. For example, imbalance in
trade, together with other factors, caused a significant decline in the freight rate of 42.2 per
cent between 1995 and 2000 in westbound freight on the trans-Pacific route (North America
to Asia).
After a further decline in the period of 2001-2002, liner shipping companies enjoyed some
respite during 2003 and 2004, when rates increased by nearly 25 per cent during a cargo
boom reflecting world economic recovery. As a result liner shipping companies performed
relatively well financially in those years
However, rates have since softened: rate increase came to a halt in late 2005, and suffered a
sharp decline in 2006. Moreover, the order book for new container vessels is at a record high.
There is a widespread expectation in the industry that the next few years will be more
difficult.
Howe Robinson and Company indicated at the 2006 Container Summit that current low
charter rates for container vessels are expected to continue through to 2009, due to the excess
supply of tonnage (3 per cent greater than demand) in 2006. While north-south and feeder
trades have experienced an undersupply in new vessels, the East-West trades- with the
deployment of new very large container ships (VLCS), are seeing supply outstrip demand
significantly.
Rates have in fact continued to decline in the first two quarters of 2007, although at a slower
rate than in 2006.
Year to date and third quarter figures for 2007 have produced healthier financial results for
most ocean carriers, up from end of year 2006 results. However, high oil prices, the
devaluation of the United States currency, flattening freight rates and new ship supply coming
Shipping conferences agree on and set freight rates different regions of the world. Shipping conferences, besides
setting rates, adopt a wide number of policies such as allocation of customers, loyalty contracts, and open pricing
contracts amongst others. In many jurisdictions, shipping conferences are exempt from the application of competition
laws; however this position is changing to promote greater competition and choice for exporters (OECD 2003).
- 15 -
onto the market could impact future profitability. Capacity is expected to grow by roughly 13
per cent next year, while demand is expected to be around 10 per cent (Finance Asia Top 100
Index, 2007).
However, Drewry forecasts that the modest recovery in rates in the third and fourth quarters,
due mainly to higher rates on the Far East/Europe trade lane (Drewry, 2007a), followed by a
period of rate stability in 2008. This view appears to be broadly consistent with that of
Containerisation International (2007). The general view appears to be that the main shortterm threat to profitability will come from cost pressures rather than rate declines: Analysts
seem to agree that container lines are likely to see strong revenue growth in 2007 but they are
equally in agreement that, uncontrollable costs are the main obstacle preventing satisfying
profitability. (Containerisation International website, accessed 13 Dec 2007).
Longer term forecasts through to 2013 are for a slight softening of rates in nominal terms,
implying a decline in real terms of between 3 per cent and 5 per cent per annum (Drewry,
2007a). Carriers will therefore face a real challenge in increasing productivity rapidly enough
to hold profitability at present levels.
2.5
2.5.1
Increasing consolidation
The combination of competitive, economic and operational forces has created new and
expanded challenges for liner shipping companies, while advances in global communications
and logistics management have increased performance expectations of all transport
enterprises. Part of the response to changes in the competitive environment, and changes in
customer expectations, has been new forms of collaboration, some broader and more diffused
than traditional conference arrangements, others narrower and deeper.
Discussion agreements broad but loose arrangements covering most operators in a trade
and global alliances dominated the scene during the 1990s. However, as was pointed out in
section 2.2 above, they have come under increasingly under pressure from regulators, first in
Europe and recently in Australia.
A more significant development has been the formation of global alliances. Cooperation
between liner companies in different forms of partnership, such as slot purchase and
exchange, vessel-sharing agreements, and joint services have been an essential feature of the
industry for a long time. These arrangements have served as a means to secure economies of
scale, to broaden the range of services that a shipping line can offer and to spread risk
associated with investment
However, these forms of carrier cooperation tend to be on a trade-specific basis. In recent
years there has been a growing trend towards carrier alliances on a global basis, with carriers
entering into partnerships that cover their operations worldwide, offering significant
additional advantages in container logistics, while allowing shipping lines to retain their
distinctive marketing identities and ownership. Alliances have also provided members with
easier access to more loops or services with relative low cost implications.
- 16 -
But despite these advantages of alliance formation, they have not become a stabilizing factor
in liner shipping, due primarily to the organizational complexity and perceived intra-alliance
competition which undermines trust between carriers involved. At the same, competition
policy enforced under a variety of regulatory regimes has reduced the effectiveness of
conference and alliance operations, as discussed in section 2.2.
Another more radical approach to securing the benefits of cooperation is through mergers and
acquisitions. Merger and acquisition have been prominent in the container shipping industry
since the 1990s, and there has recently been a new wave of activity.
FIGURE 2-6: SHARE OF TOP 20 LINERS IN TOTAL GLOBAL CELLULAR CAPACITY (1988-2007)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1988
1996
2000
2005
2007
Carrier
Maersk
MSC
CMA CGM SA
Evergreen
Hapag-Lloyd AG
Cosco
CSCL
APL
OOCL
NYK
Average
TEU 2007
1,638,898
1,200,668
694,239
620,610
491,954
426,814
418,858
399,896
351,542
331,083
657,456
- 17 -
TEU 1991
220,000
30,000
66,000
131,000
57,000
97,000
0
100,000
na
107,000
80,800
Growth Index
7.4
40.0
10.5
4.7
8.6
4.4
na
4.0
na
3.1
10.4
Although the majority of the carriers acquired have been second- or third-tier operators, some
significant carriers, including APL and DSR-Senator, were taken over by NOL and Hanjin
respectively. P&O Containers and Nedlloyd Lines merged in 1997 to create P&O Nedlloyd
Container Line, which later took over Blue Star Line and Tasman Express Line. Evergreen
became the second largest carrier in the world, in terms of TEU slots under its control,
through the takeover of Lloyd Triestino in 1998. In 1999, Maersk Line acquired the
international shipping operations of Sea-Land to form a company controlling 9.2 per cent of
the world container shipping fleet. After a decrease in merger and acquisition in early 2000's,
a renewed interest was led by US$ 2.8 billion takeover of P&O Nedlloyd by AP MoellerMaersk in 2005. After full integration, the enlarged Maersk and its associate companies has a
fleet of approximately 1.8 million TEU (Drewry, 2005). More recently, the parent company
of Hapag Lloyd has taken over the container shipping interests of CP Ships. Eimskip
purchased Kursiu Linija and 65 per cent of Containerships in 2006. CMA_CGM itself the
product of the merger of two major lines has grown to the position of the worlds third
largest container line partly through a string of purchases, including ANL, Delmas,
MacAndrews and Cheng Lie Navigation Co; CMA CGM has is reported to have agreed to
buy ANL's Californian-based transpacific partner, the United States Lines reported to be
operating at a loss and in financial difficulty (Lloyds List DCN, 2007).
Mergers and acquisitions has been a major contributing factor to the increase in market share
of the leading container lines, as shown in Table 2-4. In 1988, the top twenty container lines
controlled approximately 35 per cent of the total global capacity. (This and subsequent similar
statistics are based on the shares of cellular container ship capacity only). This figure slowly
increased, until by 1996 it had reached around 50 per cent of total global shipping capacity.
Additionally, between 1996 and 1998 the share of the top twenty lines increased to 70 per
cent as the merger wave began in earnest. Since then there has been a further increase, and
more than 82 per cent of total global capacity is now controlled by the top twenty lines
(Figure 2-6).
However, not all growth and consolidation has been due to mergers and acquisitions. The
most notable TEU growth in the 1991 to 2006 period has been from CMA CGM, HapagLloyd, A.P. Moeller-Maersk and MSC. While acquisitions have played a major role in the
growth of the first three of these, MSC has managed to increase its capacity largely by
organic growth.
By any standard, the liner shipping industry is far more concentrated than it was a decade ago,
and it is likely to become more so in the future. But it is important to retain a sense of
perspective. By comparison with other capital intensive industries operating in a global
market for instance, oil production or the manufacturing of aluminium the container
shipping industry is still very fragmented. In these industries, the focus is typically on the
market share of the top four operators, rather that the top twenty, and concerns about
concentration typically emerge when this ratio exceeds 70 per cent. In the liner shipping
industry, the share of the top four lines Maersk, MSC, CMA CGM SA and Evergreen,
stood at around 38.5 per cent in December 2007 (Containerisation International website,
accessed 12 Dec2007).
- 18 -
2.5.2
During the last decades, successive waves of Asian economic development have brought with
them progressive changes in structure of container shipping networks in the inter-continental
trades to and from Asia as well as in the intra-Asian trades. In the early 1970s, intercontinental shipping networks serving Asia concentrated largely on the Japan; Hong Kong,
China; and Singapore. Trans-Pacific services terminated in Japan, and the Far East/Asia
services hubbed over the ports of Hong Kong, China and Singapore en route to Japan. As the
economies of the Republic of Korea and Taiwan Province of China grew, an increasing
number of lines began providing shipping services to these locations, initially in conjunction
with services to Japan, and later with additional dedicated services. Kaohsiung and Busan
were later developed as regional hubs and significant volumes of regional cargoes began to
emerge on short-sea routes linking these new centres to Japanese main hubs. The spread of
intermodal services in the United States then led to a decline in service transiting the Panama
in favour of land bridging from West coast ports to the Midwest and even to East Coast
destinations.
With rapid economic development in South-East Asia during the 1980s and early to mid
1990s, increasingly complex feeder services were introduced to link the regional ports to key
hub ports of Hong Kong, China, Singapore and Kaohsiung. Shipping lines also began to
experiment with additional calls at South-East Asian ports including Port Klang and Laem
Chabang. Additionally, local routes were also developed linking Japan and East Asia initially
to Singapore, then to other South-East Asian ports. With further growth in South-East Asia, a
new strategy for serving the East Coast of the United States was introduced, with vessels
proceeding from Asia via the Suez Canal. This route proved to be attractive for cargoes from
Taiwan Province of China and Hong Kong, China.
In the latter half of the1990s, with the rapid growth of Chinese container trades, Chinese ports
were included into new feeder shipping networks, adding further complexity to the Asian
shipping system. Intense networks were developed between Pearl River delta ports and
Hong Kong port. Busan and Japanese ports increased feeder links with Shanghai, and
the central and the northern regions of China. Chinese cargoes bound for Japan, the Republic
of Korea and Hong Kong, China mixed with feeder cargoes destined for transhipment at these
locations. A number of shipping services between South-East Asian ports and Chinese ports
were also developed.
Continuing pace and rapid growth in Chinese cargoes, improved handling facilities at the
ports of China and congestion in the port of Hong Kong, China led major lines to trial direct
calls at Chinese ports, collecting cargoes previously transhipped over Hong Kong, China port
or Japanese ports. This trend subsequently consolidated, with mainline services making direct
calls at an increasing range of mainland ports. As shown in Figure 2- , the overwhelming
majority of services on both the trans-Pacific and the Asia-Europe routes now make direct
calls at ports on the mainland of China.
- 19 -
Number of Services
70
60
50
40
30
20
10
0
Total
China
mainland
ports
Hong
Kong,
China
Taiwan
province
of China
Greater
China
Japan
Korea
SE Asia
Japan
Korea
SE Asia
Europe-Asia Services
70
Number of services
60
50
40
30
20
10
0
Total
China
Hong
Kong,
China
Taiwan Greater
province China
of China
- 20 -
2.6
Fuel management for containerships is a concern given that fuel costs make up a high
proportion of fixed operating costs. Figures from Germanischer Lloyd show that fuel accounts
for 63 per cent of operating costs for an 8000 TEU ship opposed to just three years ago where
it accounted a third of the annual operating expenses (Lloyds List DCN, 2007).
The price of bunker fuel is closely linked to the price of crude oil, so recent record crude oil
prices have inevitably been reflected in increased fuel costs to shipowners. Current bunker
prices are close to $500 a tonne. This compares to $295 at the beginning of 2007 and around
$150 per tonne in the period between 2000 and 2005. The result is that the rising cost of fuel
has prompted carriers to react by slowing vessel speeds in order to burn less fuel which in
turn has created the need for additional vessels to maintain schedules. Maersk for example has
announced that it will add four vessels to the Asia Europe service in 2008 to allow vessels to
reduce their operating speeds while maintaining a weekly call frequency.
As operating costs climb relative to the fixed costs of vessel acquisition, shipowner decisions
on the deployment of capacity, especially on long haul routes, are also occurring. Iin the face
of an unprecedented rise in operating costs particularly fuel MOL has elected to reduce
capacity on the trans-Pacific earlier than in previous years (MOL Website, accessed 13 Dec
2007). Future signs do not indicate a reduction in oil prices anytime soon. UNCTAD reports
that
It is interesting to note that the US National Petroleum Council in a report entitled Facing
the Hard Truths about Energy, warns that there will be a shortage of oil and gas by 2015.
(UNCTAD, 2007).
Given the expectation is that high fuel prices are here to stay, the focus for the shipping
industry in the short terms is for new ship design to improve fuel efficiency.
2.7
Reducing emissions
Emissions from shipping operations have become a focus of attention, both within the
shipping industry and at a global level. Specifically targeted for reduction have been sulphur
dioxide and carbon dioxide (because of its contribution to global warming and climate
change).
The IMO has played a role in assisting industry to manage their responsibility by enacting
legislation which aims to prevent and control pollution caused by ships, universally know as
MARPOL. Annex VI of MARPOL, limits Sulphur oxide and Nitrogen Oxide from ship
exhausts and caps sulphur content of fuel oil. It has been reported that legislation has
prompted carriers to issue European shippers low sulphur fuel surcharge (LSFS), in
addition to normal bunker surcharges in order counter act some of the bunker fuel cost.
(Lloyds List DCN, 2007)
The IMO have also enforced Sulphur Oxide Emission Control Areas (SECA). This legislation
requires special mandatory measures be taken for the prevention of pollution in areas needing
higher levels of protection due to their ecological or socio economic significance.
- 21 -
No mandatory instrument covering greenhouse gas emissions has yet been enforced by the
IMO. A study was conducted in 2000 and is currently undergoing an update in preparation for
the Marine Environment Protection Committees next meeting in March of 2008. However
the EU is becoming impatient and has threatened to act unilaterally if the IMO does not move
quickly.
Maritime emissions is not yet covered by the Kyoto protocol and the EU is currently drafting
legislation to include shipping emissions as part of its Trading Emissions scheme to go
through as early as January 2008.
Recent advances in technology offer the potential to deliver a reduction in the level of
emissions through reduced energy consumption, the use of innovative fuel products, and
engine and ship design improvements to maintain efficiency and reduce drag. Ocean carriers
have been working to improve ship design, and to switch to the use of low sulphur bunker
fuels despite the cost.
Several carriers including Evergreen, APL, NYK and Wallenius Wilhelmsen Line
have moved to reduce the environmental impact of their operations by using fuels that
are lower in sulphur than that currently mandated by IMO, subsequently providing a
reduced impact on the environment..
NYK and APL are experimenting cold-ironing techniques on their vessels, where ships
in port plug into a shore side power supply to remove the need for auxiliary engines
while at berth. The cost of converting an existing ship is believed to be up to
USD 1,000,000 per ship.
Other initiative involves technology known as sea water scrubbing to remove sulphur
and particulates. Krystallon sea water scrubbers have been recognised by the
International Maritime Organisation (IMO) and EU as a solution to reducing emissions
and are an accepted method for compliance.
K-Line retrofitted five vessels to curb a high proportion of pollution normally generated
from the ships in an effort to comply with the United States west coast clean air rules.
K-Line have also agreed to a green lease agreement transforming the ITS facility at
Long Beach to an environmentally friendly facility.
The Wallenius Wilhelmsen Line vessel E/S Orcelle (Green Flagship) is designed to
produce no emissions into the air or sea by using renewable energy sources, including
the sun, wind and waves.
Maersk recently launched Quality and Energy Efficiency in Storage and Transport
(Quest) technology, to halve the energy used to cool refrigerated boxes.
2.8
Port development
Globally, container ports are struggling to expand capacity fast enough to keep pace with
trade requirements. Drewry estimates that there may be a serious terminal capacity shortage if
additional plans are not confirmed soon and warns that utilisation rates could raise from 72
per cent in 2006 to 97.5 per cent by 2012. The imbalance between supply and demand in the
- 22 -
container terminal sector could have devastating consequences if new capacity projects are
not developed quickly. (Drewry, 2007)
2.8.1
Private investment
Increased private sector participation in ports has been one of the most widespread, and in
some areas controversial, areas of change. The form which this increase has taken has varied
greatly from port to port. The most extreme form was pioneered in the United Kingdom of
Great Britain and Northern Ireland, where whole ports, including land, were sold on freehold
to private sector interest. Few other countries have chosen to follow the British model.
However, some ESCAP countries, for example Malaysia, have adopted models that closely
resemble it with the sale of the port business at Johor. The main difference however, is that
government retains a golden share, and the arrangement is through a long term lease rather
than a freehold sale.
The more common activities are concessions for parts of ports, such as individual terminals or
clusters of terminals. As many commentators have indicated, this is not novel, and has long
been a popular form of port development in many parts of the world. However, for ESCAP
countries, particularly those in Asia, that have historically funded port works solely from
public funds, this is a new development.
Other countries (China provides the most conspicuous example) have chosen the joint venture
route, maintaining a continuous involvement in the port facility whilst accessing private
sector funds and expertise. In still other instances, ports have retained responsibility for, and
revenues from, basic infrastructure, while contracting out the management of the facility,
usually for a period much shorter than that of a typical concession. As a result of this
liberalisation for entry into selected port service sectors, private firms have begun, in some
instances, to operate in competition with and alongside port authority operations.
In other developments an increasing number of port investments are being made by
organisations such as financial institutions, investment groups, infrastructure funds and other
private equity type investors. In the past two years such investors have included AIG,
Goldman Sachs and Macquarie, perhaps the attracted by the strong and sustained growth of
the container trade and the potential to gain additional revenue from transhipment cargoes
(UNCTAD, 2007).
Given the expected growth of trade, most ESCAP countries have terminal expansion and
development projects that are either planned or currently underway within the ESCAP region.
Many of these involve private sector investment. Some of these which have been driven by
demand and high GDP growth in developing countries are highlighted below.
2.8.2
India
The Indian Government has proposed a 12.4 billion ports upgrade plan to enable India to keep
pace with growth in traffic (Port Strategy, 2007). Examples of plans in the pipeline include:
the deepening and widening of the main harbour for Jawaharlal Nehru Ports to cater to
larger vessels entering the port
- 23 -
China
Shanghai, Qingdao, Shenzhen and a number of other Chinese ports are now among the busiest
in the world.
DP World signed agreement with Qingdao Government to develop a new container
terminal at green field site at Qingdao, China. The terminal, to be 100 per cent owned
by DP World, is expected to commence operations by 2008/09.
Phase II of the Port of Shanghai Upgrade is now underway and by 2010 is planned to
provide the river mouth with a navigable depth of 12.5 m with Phase III of the
Waigaoqiao Container Terminal project aiming to boost the cargo capacity of the
terminal
In the port of Tianjin, 385 million will be invested in the development of a fourth berth.
The new facility is to be commissioned by 2012 and will be built in the ports Dongjiang
area as a free trade zone (UNCTAD, 2007).
HPH and PSA have also committed to a number of expansion plans in the region with
the joint venture as investment of choice in order to expand. HPH has signed 2 joint
venture agreements to construct 2 new container berths in Huizhou port in southern
China while PSA is developing a new terminal in Donguan, which is expected to be
operational by 2008. (Drewry, 2007)
CMA CGM has also recently signed an agreement to invest in the construction and
development of a USD307 million container terminal at the port of Haicang, Xiamen.
CMA CGM will take a 30 per cent stake in a development consortium together with,
Hong Kong-based New World Services Holding Ltd and Xiamen Haicang Investment
General Company. CMA CGM expects the facility which it intends to establish as a
transhipment hub for southern China to be operational by 2009 (Containerisation
International website, accessed 29 Nov 2007).
Cosco is highly focused in domestic investment and has also announced a number of
further investment projects in Hainan, Fuzhou and Yangzhou.
- 24 -
2.8.4
Vietnam
DP World has commenced construction of a terminal in Saigon, with APM also planning to
develop a terminal in port Cai Mep, Saigon scheduled to open mid 2009.
HPH and PSA have once again chosen to use joint ventures in the region. HPH entered into
an agreement with Saigon Investment Construction & Commerce Company Limited (SICC),
to build, develop and operate a container terminal in Ba Ria Vung Tau Province. PSA entered
into a joint venture with Saigon Port in Vung Tau to create a major hub for Indochina. The
first phase should be operational by 2009 (Drewry, 2007b).
2.8.5
Russian Federation is also expanding capacity in a number of ports. Construction work began
on a container terminal in the port of Ust Luga in early 2007 to relieve congestion at St
Petersburg. Two berths are expected to be complete by the end of 2007 and operations to
begin in 2009. Eurogate will have a 26 per cent share in the project, which will make it one
of the very limited foreign investment interests involved in The Russian Federation. Other
0expansion plans are also in train for Novorossiysk, with a new port to be built a Nakhodka.
Turkey continues to expand capacity via privatisation. HPH as part of a consortium has
agreed to develop and operate the Port of Izmir (Drewry, 2007b).
2.9
Terminal operations
2.9.1
One of the major implications for port operators resulting from the developments of the last
decade or so has been the shift in balance of power between shipping lines and ports. This
shift has been in favour of shipping lines.
Greater volumes that are now controlled by a single line or alliance mean that the capacity of
an individual line can seriously affect the business of even a major port. One of the most
dramatic examples was Maersk's Lines transfer of business to the port of Tanjung Pelepas.
This decision of a single shipping line cost Singapore, the world's premier hub port,
approximately 15 per cent of its total business. Similarly, Hapag-Lloyds takeover of CP
Ships has seen redirection of container cargo from Fraser River Port to the Port of Vancouver.
According to CI-Online this saw a 70 per cent decrease in the first half of 2006 for Fraser
River Port and a 21 per cent gain for Vancouver.
One of the main considerations in this, and a number of other recent shifts, is control. An
increasing number of lines are seeking dedicated terminal facilities and direct control over
landside operations. As a result, a change in the basic paradigm of port-carrier relations has
been observed. The traditional paradigm that ports serve local trade, and shipping lines come
to the cargo is no longer the case. Under the emerging paradigm, shipping lines serve
regional, largely non-local trade, where the cargo is moved, by feeder or intermodal services
to the ship.
- 25 -
2.9.2
Private investment in the port sector has given rise to what has been termed the global
terminal operator. Historically, national firms of the country in which the port was located
provided the port service. The emergence of major global players has changed this radically.
In its recent detailed analysis of global container terminal operators, on which this section
draws heavily, Drewry defines the global terminal operator as an organisation with container
terminal interests in more than one geographical region (Drewry, 2007b).
In 2006 the global terminal operator share of world container throughput was just over 61 per
cent. In same year, the top five companies handled 50.7 percent of total world throughput.
These companies were: Hutchison Port Holdings (HPH); AP Moeller Terminals (APMT);
PSA Corporation (PSA); Dubai Ports World (DPW); and Cosco. In terms of geographical
spread, global operators accounted for the larger share of container traffic in the Northern
Europe and South East Asia regions in 2006 (Drewry, 2007b).
Mergers and acquisitions are playing an important role in driving further concentration at the
global level. DPW acquired P&O Ports in 2006, placing DP World in the top three global port
operators. After being out-bid by DPW for P& O Ports, PSA decided to invest in HPH,
securing a 20 per cent stake in 2006 (Drewry, 2007b). Purchasing the stake allowed PSA to
expand operations outside of Singapore and Europe, by acquiring access to port facilities in
Asia, particularly in the key growth markets of China and India.
2.9.3
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60
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Global Terminal Operator - Home
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Global Carrier