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"Double-whammy" with more ULCVs

How will the dynamics of the Asia-North Europe trade change next year with the influx of so many ultra large container vessels?

Drewry Maritime Research thinks "the delivery of over 50 ULCVs in the next 15 months is a double-whammy for the alliances. Lower slot costs are a positive, but they will struggle to cope with the additional capacity in the Asia-North Europe trade and the 60 ships that will be cascaded elsewhere are a risk for the stability of other routes".

The company goes on to explain:

It is not just the formation of new alliances that will alter the landscape in the Asia-North Europe trade next year. The delivery of some 54 ships of at least 10,000 TEU which we anticipate will be deployed in the trade between October 2014 and December 2015, will have a huge effect.

They may help to bring carriers much needed lower slot costs, but at the same time they could alter the supply-demand dynamics and with them – spot freight rates; affect other trade lanes via the resultant cascade and alter the competitive balance between the alliances themselves.

It should be noted that our analysis this week is based on a certain number of assumptions, especially that the proposed alliances will all go ahead on time and that the vessels due for delivery will not be delayed.

The major carriers are running a fine line at the moment between deploying their largest assets to cut costs and ruining the dynamics of their most important trade lane. Although volumes on the headhaul trade have been stronger than anticipated this year, carriers have been unable to stop the rate erosion, with weekly rates dropping over 50 percent from their highs of $2,800 per FEU in early August to around $1,300 per FEU by late October.

With exact deployment patterns unknown, it is too early to accurately chart effective capacity on the trade, but with the ships currently in the delivery pipeline, weekly headhaul nominal capacity could increase by an estimated 12.8 percent by the end of next year. This is significantly above any anticipated cargo growth.

The delivery of vessels within the respective alliances is quite different. The G6 lines have no ULCVs due for delivery in 2015 and this is probably why they are feeling the pressure to invest in a new tranche of 18,000 TEU vessels in order to compete with Maersk, MSC, CSCL and UASC.

The Ocean Three lines are responsible for the largest injection of tonnage in the next 15 months. Some 21 ULCVs will be delivered, increasing the average size of ships deployed on the trade from 12,200 TEU to 15,500 TEU. The average size of ships currently deployed by the 2M lines is surprisingly small (11,900 TEU), given that Maersk utilizes sub-10,000 TEU ships on three of its weekly loops. However, by the end of 2015, this will rise to 14,300 TEU with the delivery of another 15 ULCVs.

Although the average size of ships deployed by both the CKYHE and G6 alliances will be about 12,200 TEU at the end of 2015. , the former lines will have another loop of 14,000 TEU in place. With relatively few big ships for delivery in 2016 and beyond, the G6 lines will be under pressure next year to compete on slot costs with their immediate peers.

The impact of the ULCVs is very clear by the end of 2015. The 2M alliance will have five weekly loops tonnaged at the 14,000 TEU level and above; CKYHE (4), Ocean Three (4) and the G 6 lines (three). A few of these services will be utilizing slightly smaller 13,000-13,500 TEU units. The resultant pressure to fill these additional slots will be huge given that the slot costs are usually realized at higher load factors (90%+).

The cascade of larger ships from the Asia-North Europe trade has affected some of the North – South trades for some time now. Increasing numbers of vessels are also now being deployed in Asia-USWC loops. In a short space of time, there are now nearly 40 vessels of at least 10,000 TEU operating on the transpacific (cascaded from Asia-North Europe) and of late, it is clear that some US ports have struggled to cope with the additional numbers of containers being discharged.

By adopting a logical approach for cascading (i.e. the smallest ships are replaced by new bigger ships one for one), we estimate that some 61 ships of between 8,000 TEU and 11,000 TEU will be cascaded in the next 15 months. The most likely trade recipients will be we believe – Asia-USWC, Asia-Mediterranean, Latin America and possible Asia to Mid-East. The average size of the ships to be cascaded is 9,300 TEU and the resultant impact on other routes such as Latin America could be significant.

Headquartered in London, Drewry is a specialist research and advisory organization for the maritime sector.

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