A New Network of the Top Three Container Lines

The world economy is complex, and no-one can accurately predict when shipping cycles of boom and slump will happen. However, analysis of cycles of freight rates and the ordering of new ships over the last 150 years has shown some seventeen cycles and two serious Depressions. These patterns of trading are very definitely cyclic, the difficulty is in knowing the length of the cycle. The ‘Rule of Thumb’ in the shipping industry is seven years from peak to peak, but some cycles have lasted only five years and others almost ten years. One has to also factor in many exceptional circumstances such as countless wars, closures of the Suez Canal, seafarer and docker strikes etc that extend the length of each cycle.
One credible method for the shipowner to prevent him going bust during low freight rates is to always ‘spot’ charter on a rising market and when the peak is reached sell off his older owned vessels and then take out long time charters to ride out the trough part of the cycle. The well tried principle of buying cheap and selling high has very much to recommend itself. The last shipping boom was during the years 2004 to 2008 when astronomic profits were made in all types of shipping – container, dry bulk and tanker – and more than enough to fuel a huge ordering spree of new ships that seriously depressed freight rates from 2009 to 2013. However, using the ‘Rule of Thumb’, the next peak in freight rates will be reached anytime between 2014 and 2018 and more likely during 2015/16. Ninety percent of world trade is carried by the international shipping industry, with world seaborne trade having almost quadrupled in the forty years from 1968 to 8.2 billion tonnes in 2008. A world slump then set up in late 2008 and world seaborne trade during 2009 fell back to 7.7 billion tonnes, a fall of six percent in one year. Container, dry bulk and break bulk cargo had also tapered off during the same period to 5.2 billion tonnes, a fall of almost six percent, and oil shipments had also tapered off from 2.73 billion tonnes to 2.65 billion tonnes, a fall of over three percent. This was the first drop since 1983 in container shipment volumes after growing at a very impressive average annual rate of ten percent over the previous two decades, the container trade actually contracted by more than nine percent to a total volume of 124 million TEUs shipped. No wonder that the profits of the big ten container ship owners went into freefall during 2009 to 2013. Maersk Line made an unprecedented loss of $600 million in the first quarter of 2011. After heavy financial losses in 2009, CMA-CGM was forced to access a $500 million bank loan to survive, a condition of which was that new private investment must first be found. This was eventually found from the Turkish owned Yildirim Group after several abortive attempts, and CMA-CGM somehow managed to stay in business. Slow steaming and the lay up of a significant proportion of their new ships helped, with several brand new giants of their ‘Explorer’ class of 13,344 TEU capacity laid up or delivery postponed for a year. World idle container ships increased from 3.1% at the beginning of 2009 to 6.9% a year later.

There are other reasons for growing financial losses, such as the increase in pirate activity in the Gulf of Aden and the Malacca Straits. All ships are required to have three insurance policies today, a war risks policy, a P. & I. policy for cargo risks, and a hull insurance policy for hull risks. Seriously overloaded containers of well over the thirty tonnes operating maximum lead inevitably to stack collapses, and many undeclared high explosives in containers continued to take a toll of big container ships in all of the oceans of the world, resulting in big hikes in hull insurance and P. & I. insurance policies. Hull fractures such as that to the Mitsui container ship MOL Comfort on 17th June 2013 in the Indian Ocean in heavy seas while on a loaded voyage from Singapore to Jeddah cause huge insurance claims and hikes in insurance rates. The stern half of the hull sank in four thousand metres of water with all of its containers, and the forward half and most of its containers was eventually towed into a Middle East port a month later by lines attached to the anchor chains. However, there were huge resultant claims on both the hull insurance and P. & I. policies.

In September 2011, Maersk Line introduced its Daily Maersk Service to serve the important Far East route together with several severe rate cuts designed to hit competitors. The Daily Maersk Service ports in Europe were principally Rotterdam and Algeciras, together with six Chinese ports in the Far East. Their biggest competitors MSC and CMA-CGM replied with big rate cuts with the result that all of the main container lines made large financial losses in 2011 compared to profits in 2010. Evergreen, Cosco, ‘K’ Line, Yang Ming and Hanjin formed the CKYH Alliance, and the G6 Alliance was formed between APL, Hyundai, MOL, Hapag-Lloyd, NYK and OOCL to hit back at Maersk. Eastbound G6 ports are Gothenburg, Bremerhaven, Rotterdam, Jeddah, Singapore to reach six Chinese ports including Shanghai. Westbound G6 ports include six Chinese ports, Singapore, Jeddah, Tangier, Rotterdam, Bremerhaven and Gothenburg.

Global marine finance loan volumes sank to an all time low point in 2012 of five billion dollars, compared to a buoyant $82 million of loans in 2007. The actual number of deals completed by banks and finance companies to shipowners in 2012 was fifteen, compared to a massive three hundred deals in 2007. Evergreen bucked the trend of not ordering new ships, coming in at the bottom of the market with low shipbuilding prices to order ten new container ships each of 13,800 TEU capacity in April 2012. Evergreen had shrewdly withheld for several years from ordering any new container ships, and they obtained rock bottom prices of $115 million for each ship compared with the high prices of $180 million paid by their competitors at the peak in early 2008. The Taiwanese container line placed the orders with Hyundai, with a subsidiary of the Korea Development Bank providing the finance.

Project 3 Network

The main Europe to Asia container trade is only profitable on the return leg from Chinese ports with a cargo of full containers with Chinese manufactured goods, toys, and other items such as cheap retail clothing for our supermarkets and shops. The cost of container transport on this the most important container route in the world is only one percent of the cost of the goods. It makes economic sense on the non profitable outward voyage to China to send Scottish salmon and cod to be filleted in China and then return it to Europe for sale, and to fill up many of the empty containers with waste paper to be recycled in China to produce Chinese printed books. The Asia to Europe trade was so crucial to the bottom line of the top three container companies of Maersk Line, Mediterranean Shipping Company (MSC) and CMA-CGM of France, that a method of reducing capacity and increasing profitability was essential.
The Project 3 (P3) Network Alliance was announced on 18th June 2013 to take effect in April 2014 and the second quarter of 2014. It should be stressed that this Alliance covers only a portion of the top three container fleets capacity and not all of their container ships. The Alliance applies to 255 container ships operating in 29 loops on the important Asia to Europe, Transatlantic and Transpacific routes. Project 3 will have little or no effect on the glut of container ship capacity that has been depressing global freight rates, but will enable the top three container fleets in the world to substantially cut their operating costs on Asia/Europe, Transatlantic and Transpacific. The main thrust is to only employ the very biggest i.e. up to 18,800 TEU ships on these three routes, and cascade their smaller container ships into their other worldwide routes that cover every country in the southern hemisphere and the rest of the world. The Project 3 agreement remains subject to the approval of various competition authorities, a 45% share of the liner market will raise questions to EEC regulators of market domination and the abuse of domination.

Project 3 will have a container ship capacity of 2.6 million TEU capacity, with Maersk having a 42% share with 1.1 million TEU capacity, MSC having a 34% share with 900,000 TEU capacity, and CMA-CGM having a 24% share with 600,000 TEU capacity. However, the planned Alliance poses a major challenge for ports and terminals on the important three routes and serving the giant container ships of the pooled network and its many loops. Many of these ports struggle to fit the high technology systems at their terminals e.g. driverless straddle carriers and stackers as used in the Port of Rotterdam that can load and unload an 18,800 TEU ship in less than a day. Critics of the Project 3 say that this capacity of 2.6 million TEU is just too small a percentage of the total worldwide container ship capacity of 17.240 MTEU. However, they miss the point, in that P3 is designed to ensure the future survival of Maersk Line, MSC, and CMA-CGM as container shipping companies and in the top three positions. After serious financial profitability results at all three giants, and with Maersk Line categorically stating that all future new ship ordering will be for their very profitable big oil and gas tanker fleets, something had to be done about their container ship profitability.

P3 Partners Total Capacity

P3 Network Terminal Ports

Project 3 Network is more than just a pool of the top three container shipowners in the world, since it is a network with a joint vessel operating centre to be set up by the three partners for the 255 ship fleet. Port terminals to be served will be selected by the senior managers of the three companies sitting down together, but this will be difficult as Algeciras (the 17th biggest container port in the world) is virtually a one company port for Maersk Line. Maersk Line calls ten times per week at Rotterdam (the sixth biggest port in the world) and Bremerhaven (the 14th biggest port in the world) but not at Hamburg, and MSC prefers Antwerp over Rotterdam. If consensus cannot be reached over the European ports, loops will have to operate in the North European and South European ports as well as at the Far East ports.

On 1st August 2013, the Chinese Transport Ministry issued guidelines to its ports, on how to receive the 18,800 TEU ‘Triple E’ class of Maersk Line and the 16,000 TEU vessels of MSC and CMACGM. Chinese ports occupy the top five container positions in the world and a total of six Chinese ports will be used by P3. The Chinese authorities are more anxious to receive these gigantic container ships in order to export their manufactured goods than they are to receive loaded 400,000 dwt ore carriers arriving from Brazil, resulting in many of the latter having to be part unloaded elsewhere before sailing for a Chinese port. The average capacity of the P3 Alliance vessels will be 10,200 TEU capacity, compared to only 6,600 TEU capacity of the G6 Alliance and 6,100 TEU capacity of the CKYH Alliance. The P3 Alliance thus has a big commercial advantage in the size of vessel used, all of which will be able to berth in the big European, Chinese and Far Eastern ports.

The Rationale Behind Project 3

The P3 Network Alliance brings together 45% of liner shipping capacity, creating a leader in the market and towering over its nearest competitors of the G6 Alliance with 25% and the CKYH Alliance with 20% of the market. The three partners in P3 calculate that only by working together to achieve economies on a mega scale with 16,000 to 18,800 TEU capacity container ships can the real prize of long term profitability be achieved. P3 is very necessary in the face of widely fluctuating freight rates, huge increases in fuel and insurance, overcapacity on the Europe to Far East route, and unpredictable demand. In order to extract profitability in the month following the P3 announcement, ‘spot’ rates doubled to $1,360 per TEU on the Far East route, with Maersk Line aiming for a further $300 per TEU increase, and MSC and CMA-CGM were aiming for a further $500 increase. Competitors outside P3 such as OOCL were aiming for a rate increase of $550 per TEU, and it was pleasing to report that capacity had been reduced by two percent on the Far East route during the same thirty day period. Trade levels on this important route decreased by 5% in 2013 compared to those in 2012.
The P3 Network Alliance partners will still compete financially against each other on freight rates, as will the other two Alliances, G6 and CKYH. The ending of the Conference System sent shockwaves through the liner industry, but this was nothing compared to the very severe slump suffered from 2008 to 2013. Maersk Line and CMA-CGM made tiny profits in 2012 equivalent to just one percent of their turnovers, and something radical had to be done to improve the bottom line. The P3 Network Alliance partners carry enormously valuable cargoes in one year, out of all proportion to the value of their ships or their profits, and this P3 Network Alliance mustl bring shipowners, shippers and terminal operators together to make a detailed assessment of the entire structure of the container liner industry. As Project 3 (P3) depends on the success and profitability of the biggest container ships, we will now look at the biggest container ships in each of these three fleets in turn.

P3 Partners Biggest Ships

MAERSK LINE

Maersk Line had humble origins when founded on 16th April 1904 by Arnold Peter Moller (1876-1965) in Svendborg in Denmark with a small coastal steamer purchased six months later. Over a century later, the biggest container fleet in the world also has the biggest ships in terms of capacity in service. The ‘Triple E’ class of 18,800 TEU capacity are named for Economies of Scale, Energy Efficiency and Environmental Improvements. Their huge main engines produce 20% less carbon dioxide than the previous largest ‘PS’ class. The ‘Triple E’ ships so far in service are Mærsk Mc-Kinney Møller, Maersk Madison, Maersk Magelby, Maersk Maribo, Maersk Marin, Maersk Marstal, Maersk Mary, Maersk Matz and Maersk Mayview. A further eleven units will follow and all have service speeds of 22 knots and lengths of 399 metres, beam of 59 metres and draft of 30.3 metres.

The eight units of the ‘PS’ Ultra Post Panamax class of 15,570 TEU capacity are Emma Maersk, Evelyn Maersk, Estelle Maersk, Edith Maersk, Elly Maersk, Eugen Maersk, Eleonora Maersk and Ebba Maersk. Rickmers of Germany also have eight ‘E’ class of 13,092 TEU capacity on charter to Maersk including Maersk Evora and Maersk Elba. Greek owners have eight large container ships of 6,350 TEU capacity on charter to Maersk including Maersk Kolkata and Maersk Kalamata. The largest class of the P&O-Nedlloyd fleet taken over in 2006 by Maersk was the P&O Nedlloyd Southampton class of 6,690 TEU capacity, renamed as the ‘K’ class of Maersk Kalmar, Maersk Kampala, Maersk Karachi, Maersk Kiel, Maersk Klaipeda, Maersk Kyrenia, Maersk Kithira and Maersk Kimi with service speeds of 24.5 knots.

When I completed a major historical book on Maersk Line in 2005 for ‘Merchant Fleets’, their newest and largest ships were the ‘G’ class of 7,688 TEU capacity, known as ‘Super Post Panamax’ size. This class of six was completed by the company’s Lindo yard at Odense in Denmark as Gudrun Maersk, Georg Maersk, Grete Maersk, Gunvor Maersk, Gerd Maersk, and Gjertrud Maersk. Many of the earlier class of Post Panamax ships of 7,226 TEU capacity completed from 1996 are still in service as Axel Maersk, Anna Maersk, Arnold Maersk, Arthur Maersk, Adrian Maersk, Albert Maersk, Caroline Maersk, Chastine Maersk, Columbine Maersk, Carsten Maersk, Clementine Maersk, Cornelia Maersk, Charlotte Maersk, Clifford Maersk, Cornelius Maersk, Sally Maersk, Sine Maersk, Sovereign Maersk, Susan Maersk, Svendborg Maersk, Skagen Maersk, Sofie Maersk, Soroe Maersk, and Svend Maersk. Maersk Line has an annual turnover of $60 billion, comparing favourably with that of some large oil companies.

MSC

Mediterranean Shipping Company S.A. was founded in 1970 by Gianluigi Aponte with one coastal vessel. The largest container ships in service today with the Italian owned but managed from Geneva company are two dozen vessels of 14,000 TEU capacity completed between 2009 and 2011 by the Daewoo and Samsung yards at Keoje Island in South Korea with service speeds of 25 knots. They are named as MSC Daniela, MSC Alexandra, MSC Ariane, MSC Aurora, MSC Beatrice, MSC Bettina, MSC Camille, MSC Capella, MSC Clorinda, MSC Danit, MSC Emanuela, MSC Eva, MSC Francesca, MSC Gaia, MSC Irene, MSC Kalina, MSC Lauren, MSC Luciana, MSC Melatilde, MSC Paloma, MSC Rosa M, MSC Sindy, MSC Sonia and MSC Teresa, plus the chartered in MSC Bari, MSC Genova, MSC La Spezia and MSC Savona. MSC also has chartered container ships of 16,000 TEU in service, and it has placed so many orders for new container ships recently that its orderbook is the largest among all container ship carriers. It is interesting to note that MSC distinguishes between owned ships with names of girls and chartered ships with city or place names.

The previous largest MSC container ships completed from July 2005 were in the range of 9,200 TEU to 11,300 TEU. These vessels were completed by the Hyundai and Samsung yards and included the owned MSC Pamela, MSC Susanna, MSC Asya, MSC Candice, MSC Esthi, MSC Ines, MSC Joanna, MSC Luciana, MSC Sylvana, MSC Sola, MSC Sindy, MSC Madeleine, MSC Maria Elena, and MSC Pina as well as the chartered in MSC Bruxelles, MSC Chicago, MSC Fiorenza and MSC Lisbon. The first MSC Super Post Panamax container ships of just over 8,200 TEU capacity were completed from 2004 as the owned MSC Maeva, MSC Lucy, MSC Rita, MSC Judith, MSC Heidi, MSC Rosalba, MSC Rania and MSC Rachele together with the chartered in MSC Texas, MSC Beijing, MSC Busan, MSC Charleston, MSC Paris, MSC Tomoku, MSC Toronto, MSC Valencia and MSC Vittoria. The daily fuel oil consumption for this size of container ship is around half of that for the Very Large container ships of 12,000 to 18,800 TEU capacity, the biggest ships burning on average 225 tonnes of fuel oil per day at 25 knots.

CMA-CGM

Compagnie Maritime d’Affretement was established over 35 years ago on 13th September 1978 by Jacques R. Saade, and joined forces with CGM French Line in 1996 to create CMA CGM. When I completed a major historical book on CMA-CGM and French Line in 2007 for ‘Merchant Fleets’, the largest company container vessels were fourteen vessels of 9,415 TEU capacity with ‘Opera’ names e.g. CMA CGM Fidelio, and sixteen vessels of 6,627 TEU capacity with ‘Composer’ names e.g. CMA CGM Berlioz. CMA CGM Fidelio, named after the only opera written by Beethoven, was christened by British yachtswoman Ellen MacArthur in a special ceremony at Marseille, the home of the company, before beginning service on the French Asia Line (FAL) service to the Far East. They were followed by fifteen units of a larger 11,400 TEU capacity class and mostly named after constellations and stars, and completed between 2009 and 2011 as CMA CGM Andromeda, CMA CGM Aquila, CMA CGM Callisto, CMA CGM Cassiopeia, CMA CGM Centaurus, CMA CGM Columba, CMA CGM Gemini, CMA CGM Hydra, CMA CGM Leo, CMA CGM Libra, CMA CGM Lyra, CMA CGM Musca, CMA CGM Pegasus, CMA CGM Thalassa, and CMA CGM Titan. These Ulsan built ships are enormous ships of 131,331 grt and operate on various loops of the FAL services to the Far East.

They were eclipsed by eight ships of the ‘Explorer’ class of 13,880 TEU capacity and of 153,022 grt. They were all built by the Daewoo yard in South Korea and the first five were named CMA CGM Magellan, CMA CGM Christophe Colomb, CMA CGM Amerigo Vespucci, CMA CGM Corte Real, and CMA CGM Laperouse. Three more vessels were increased in size to 396 metres in length and 16,000 TEU capacity and were completed in 2012/13 as CMA CGM Marco Polo, CMA CGM Alexander von Humboldt and CMA CGM Jules Verne. They are of unusual design with a tall accommodation and bridge unit ‘midships to give better visibility for maneuvering these long giants, and their red, white and blue funnel placed further aft.

Postscript

Project 3 has been formed because of the dire state of the container industry. As rates begin to swing upwards again in a cycle towards a possible boom time in 2015/16, ‘spot’ charter rates are rising very fast as more shipowners realize that a period of sustained high rates is probably approaching. China Shipping Container Lines (CSCL) and United Arab Shipping Company (UASC) both have container ships of 18,000 TEU on order, and these will operate in a joint service with Evergreen. COSCO have sixteen container ships in service of 13,500 TEU capacity, half of them on charter from the Seaspan Corporation. Thus, it is not only the P3 Alliance that will benefit from the upswing, but also the G6 Alliance, the CKYH Alliance and other alliances such as the CSCL – UASC – Evergreen alliance. Chinese goods already completely dominate the Far East to Europe trade, and China has two huge container fleets with which to operate in it, COSCO and CSCL, thus the P3 Network is very necessary for the top three container lines to compete with them.

Project 3 Network will do nothing to solve the glut of overcapacity on the important Far East route. There were 215 Post Panamax container ships in service in 2008 in the 6,000 to 12,000 TEU capacity and an equal number have since been completed. There are 140 Very Large container ships in service today or on order in the 12,000 to 18,800 TEU capacity range. This stacks up to a severe glut in capacity with smaller container ships being sent to the scrap yard at the early age of fifteen to sixteen years.

In the past, when good gains had been made by container ship owners in freight rates, these have not been sustained as within one or two months shippers have switched container lines and forced rates back down again. The advent of P3 Network Alliance and the other solid alliances such as G6 and CKYH among the top twenty container lines will make the switching much harder, and thus give shipowners longer periods of sustained high freight rates.

It is now up to individual container ship owners to follow the ‘Rule of Thumb’ of the countless cycles of boom and bust of the past to know when a cycle is rising to a peak of high freight rates and act accordingly i.e. ‘spot’ charter on a rising market and then sell off many of their older owned vessels at the peak followed by long term charters to ride out the trough part of the next cycle. If container ships were only ordered at the bottom of the cycle and not to blindly keep up with their competitors in a mad race to bankruptcy, then these continual gluts in capacity would never happen.