24 EXIM newsletterI N D I AMumbai, New Year Special Supplement 2017

Changing Dynamics of Global Container Shipping: Implications for India

Top five trends in global container shipping

1. Sluggish demand growth

Gone are the days of high trade growth. The fast pace of growth in international trade from 2001 to 2008 was arrested by the global economic downturn of 2008-09. According to UNCTAD Stats, global exports increased from $6.2 trillion in 2001 to $16 trillion in 2008, but after 2009 growth was abysmally low with exports increasing to just $16.6 trillion in 2015, although they had peaked at $19 trillion in 2014. Some other factors such as a large consumer base created within China, which adversely affected the export growth, were also responsible for this slowdown.

Fig.1 Global container throughput (2001-16)

As far as container trade is concerned, the growth story moved in tandem with the global trade. Global container handling at the ports almost doubled from 248 million teus in 2001 to 524 million teus in 2008 whereas it reached only 682 million teus by the end of 2015, an increase of just 158 million teus in seven years. In 2015, the global container throughput increased by a mere 1.1%, which is the lowest growth registered after 2009. However, at the regional level, the handling at the South Asian ports increased by 5.3%, much higher than the global average and better than many regions. South Asia seems to be

the shining star in the gloomy environment of pessimism. The global share of container handling at South Asian ports has increased from 2.9% in 2013 to 3.4% in 2016 (Drewry estimate).

2. Vessel upsizing and cascadingTo reap the benefits of economies of scale (to achieve lower per unit cost), carriers are

increasingly preferring larger, energy-efficient ships. As a result, the average ship size has increased from 1,893 teus in 2001 to 3,832 teus in 2016. The increase in ship size is visible on a trade-route level as well.

Fig 2. Average vessel size on Asia-North Europe and all major East-West routes

The average vessel size on order also increased from 5,400 teus in 2010 to 8,000 teus in 2016. With larger ships in the fleet, carriers are bound to deploy the largest vessel on the largest trade, i.e., Asia-North Europe. For example, 18,000 teus ships are being deployed on Asia-North Europe and the existing 14,000-teus ships are being cascaded to Asia-Mediterranean route. Similarly, 8,000-9,000 teus vessels are being cascaded to the South American and some of the African trades. Given the weak demand scenario and that most of the smaller East-West and North-South trades do not require vessel upsizing, the increase in ship sizes on these trades is by compulsion and not choice. This trend will continue at

— By Dr Subrata K. Behera, Manager – Ports & Containers Research, Drewry Maritime Services

Global container shipping has undergone substantial transformation in recent years especially after the downturn in 2008-09. Although the trade volume has improved

since then, the pace has remained much slower than in 2001-07. On the other hand, shipping capacity has increased manifold. For instance, the containership

fleet size increased four times from 5.2 million TEUs in 2001 to 20 million TEUs in 2016. This article discusses the top five trends and dynamics of container shipping

in recent times and analyses the implications of these global trends on Indian container business.

(Source: Drewry Maritime Research)

(Source: Drewry Maritime Research)

26 EXIM newsletterI N D I AMumbai, New Year Special Supplement 2017

least until 2019 as 118 ships of more than 14,000 teus are in the orderbook for delivery by then. Meanwhile, the opening of the widened Panama Canal provides some relief. Next year will see the continued restructuring of loops between Asia and the US East Coast via the Panama Canal, and this will be a relief for carriers as they can deploy excess ships of 8,000 teus that cannot now fit into Latin American strings.

3. Industry consolidationWith unstable demand and surplus capacity, maintaining decent utilisation remains a gigantic task for individual carriers forcing themto come together to create various vessel-sharing agreements. Hence, alliances are being formed to survive, and not out of choice. In other words, an alliance is not formed to correct the market imbalances, but for sustenance. However, the future alliance (2017) has not been finalised yet and many terminal operators and shippers will be awaiting news of the final outcome, especially after Hanjin’s collapse. It seems that HMM joining the 2M alliance is by no means a done deal, even though the alliance membership was part of the re-structuring agreement with Korea Development Bank. Hanjin’s liquidation process also makes the position of the proposed THE Alliance a lot weaker, and it is likely that another company will be asked to join the alliance instead of HMM.

4. Rock-bottom freight rates and bad financial health of the industryA wider gap between demand and supply over a prolonged period has resulted in rock-bottom freight rates on all major trade routes, resulting in low revenue for the carriers. Even with the low bunker price, per unit cost stands higher than the revenue. Drewry’s estimate published in its quarterly Container Forecaster, states that the industry incurred a cost of $720 per teus in 2Q16 to generate revenue of $685 per teus. Unless a carrier has huge cash reserves, it is prone to fail – a fact proven by the recent court receivership filed by Hanjin. Essentially, the Hanjin issue is merely a side-show for the industry since second-quarter financials prove that a severe trough is affecting all players in the industry. Average industry EBIT margin during the quarter was minus 5%. According to Drewry’s recent estimate, industry revenue for 2016 will be $18 billion less than a year ago. Should the freight rates remain at the bottom, we may see more Hanjin-like situations.

5. Rising pressure on ports to keep the business going

Ports are finding it extremely challenging to keep pace with increasing vessel sizes and formation of new alliances. Bigger ship sizes mean longer berths, deeper draughts, larger cranes and container yards at the terminals. This also means quick and efficient ship-to-shore and evacuation operations to attain low turnaround time. In order to retain the existing

customers and services by the alliance, let alone gain new customers, many terminals are losing their existing customers. Ports and terminals are feeling the pressure for infrastructural upsizing which is not an easy task, especially in the low demand and trade scenario. Apart from finance, availability of adequate land for expansion is a major factor affecting their competitiveness.

Indian container trade in changing global dynamics

As discussed above, South Asia is one of the fastest growing regions for container trade. In India, the trade has grown in double digits on average over the last decade baring the global downturn of 2009.

Recent trends in container handling

Growth in port handling at Indian ports was just 2% in 2015 (11.9 million teus). Although this was above the global average of 1.1%, it was the lowest annual growth for the country since the 2009 crisis. According to the data available until August 2016, India’s throughput grew by 11.2% year-on-year, partly driven by higher domestic cargo movements and increasing transhipment volumes even though the global economic scenario has been bleak and imports by many developed countries remain low. MSC has contributed considerably to this growth as it has been using Mundra as its transhipment hub for the region. Future growth will depend largely on global economic development, which will result in strong or weak demand from Europe and North America, the major export destinations for India.

Fig 3. Container handling at Indian ports

Increasing vessel size at Indian ports

Cascading of ships to smaller trades is the need of the hour. This phenomenon has led to an increase in the average vessel size calling at Indian ports to 5,500 teus in September 2016. Please note that this calculation includes mainline services and excludes feeder and coastal services. For instance, the average vessel size calling at JNPT was 3,873 teus in 2010, which reached 6,017 teus by October 2016. Similarly, the average vessel size at Mundra increased from 4,403 teus to 6,525 teus during the same period.

(Source: Drewry Maritime Research)

28 EXIM newsletterI N D I AMumbai, New Year Special Supplement 2017

This trend is likely to continue and will add pressure on the existing infrastructure of the terminals. JNPT, which operates at utilisation of 100%, will find it challenging to handle larger vessels although commissioning of Bharat Mumbai Container Terminal (PSA) will provide some respite.

Fig 4. Rising average ship size at JNPT and Mundra Container port capacity expands, but bottlenecks in hinterland connectivity remain.Container handling capacity at Indian ports stood at 20.4 million teus by the end of 2015. However, many new and expansion projects are planned or are under execution. Drewry estimates that by 2020 Indian ports will have the capacity for handling 33.2 million teus, having increased at a CAGR (2015-20) of 10.2% — the highest in the world and much higher than the global average of just 2.9%. Some of the major projects in the pipeline are Bharat

Mumbai Container Terminals (BMCT-PSA) at JNPT, and expansion at Mundra and Ennore. We might see additional capacity coming up in the near future under the most deliberated “Sagarmala” project.

Fig 5. Historical and future port handling capacity in India

Even though the handling capacity on India’s coastline has been rising, adequate connectivity is required to fully utilise the additional capacity. Dedicated Freight Corridor (DFC) project was conceived with this in mind. The western DFC aims at connecting the industrial zone in India’s north and north-western hinterland to ports on the west coast. Once this project is commissioned, time-bound and seamless connectivity between the ports and the industrial hub will help in reducing the cost of transaction. However, the project seems to have been delayed due to issues such as land acquisition, contract management and feeder route upgrades and terminal development. n

(Source: Drewry Maritime Research)(Source: Drewry Maritime Research)