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2017 – AN EVENTFUL YEARShipping Industry at a Crossroads
JANUARY 2017
Bill Mongelluzzo, Senior Editor, JOC Group [email protected]
(562) 428-5999
@BillMongelluzzo
2017 – AN EVENTFUL YEAR | JANUARY 2017
The issues • The Unhealthy State of Ocean Shipping
• Global Shipping Alliances in Transition
• Port Performance – Adjusting to Big Ships and Powerful Alliances
• A Good Year for industrial Real Estate
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2016 – AN EVENTFUL YEAR | JANUARY 2016
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The Unhealthy State of Ocean Shipping
2017 – AN EVENTFUL YEAR | JANUARY 2017
2016 Was a bad year for ocean carriers
• Carriers in 2016 collectively lost about $10 billion (Alphaliner)
• Supply exceeded demand (again)
• Seven straight years of capacity growth in global liner shipping (Ron Widdows)
• More capacity coming on line in the next few years; 3.1 percent growth in 2017 (Bimco)
• Maersk has 20 vessels of 10,000-25,000 TEU capacity on order
• New entrant into trans-Pacific, Korea Line, to deploy 21 ships in 2017
• Having survived a meltdown in Korea, Hyundai Merchant Marine aims to control 5% of global liner capacity by 2020
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Over-capacity in shipping could last several more years
• Carriers by 2020 will be deploying more than 100 vessels of 18,000-TEU capacity or higher (McKinsey)
• Yet demand projected to increase globally only about 3.2% per year next few years
• By 2020, capacity will still exceed demand by as much as 13% (Boston Consulting Group)
• Maersk predicts balance supply/demand in 2022
• Days of container volumes growing 3X to 4X growth in GDP are over (Seroka)
• After more than a decade of double-digit annual growth rates, carriers, and ports, must get used to a low-growth industry of 2-3 percent per year (Lars Jensen)
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Say good-bye to service for now
• Question: How do carriers grow?
• Answer: By stealing cargo from other lines (Widdows)
• That means service suffers, but shippers don’t seem to mind
• Carriers’ worst fears have been realized: their industry has become a commodity
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2017 – AN EVENTFUL YEAR | JANUARY 2017
For carriers, though, the worst of the bleeding may be over
• For 2017-18 contracting season, carriers are targeting $1,500/FEU to West Coast
• That is much better than 2016 rates that dropped as low as $750 to West Coast
• Carriers just may pull it off
• Carriers emboldened by loss of 7% trans-Pac capacity with Hanjin’s demise
• Shippers want reliable carriers that will be around for awhile and are willing to pay higher contract rates
• 2016 spot rates ended with 20% spike to $1,923/FEU West Coast and $3,100 East Coast
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2016 – AN EVENTFUL YEAR | JANUARY 2016
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Global Shipping Alliances in Transition
2017 – AN EVENTFUL YEAR | JANUARY 2017
Global shipping alliances are in transition
• Alliances going from four at present (2M G6, CKYHE, Ocean3)…
• …to three larger, more powerful alliances with more leverage over ports, terminal operators and BCOs (4/1/17)
• 2M – Maersk and MSC with HMM sharing slots (20% of trans-Pac)
• Ocean Alliance – CMA CGM, Cosco, Evergreen, OOCL (40% trans-Pac)
• THE Alliance – Yang Ming, MOL, “K” Line, NYK, Hapag-Lloyd/UAS (40% trans-Pac)
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2017 – AN EVENTFUL YEAR | JANUARY 2017
GRIs Lift Trans-Pacific Rates
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Ocean Alliances to Dominate Trans-Pacific
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Alliances will leverage their control over trade lanes
• Each alliance will have as many as 15 weekly services to North America
• This will create logistical challenges for ports, especially LA-LB
• Containers on same vessel could belong to five or six lines
• Primary purpose of alliances is to reduce operating costs, not improve service
• By controlling 88% of trans-Pac capacity, Big 3 alliances will make it difficult for independent lines
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Trans-Pacific contract rate expectations
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2016 – AN EVENTFUL YEAR | JANUARY 2016
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Port Performance –Adjusting to Big Ships and Powerful Alliances
2017 – AN EVENTFUL YEAR | JANUARY 2017
Port Performance: Impact of big ships
• 2016 was a year of recovery for SoCal ports. Laden container volume through largest US port complex up 5.7% through November (port numbers)
• West coast ports suffered greatly during labor disruptions of 2015-16, but short-term loss of market share was minimal
• Longer-term trend, though, has been negative. Loss of cargo share began with 2002 ILWU-PMA contract negotiations
• Since 2013, LA-LB share of US imports declined from 39% to 36.6% (PIERS)
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Message going forward: Improve performance
• Shipping patterns in trans-Pac are set
• Ports that maintain market share in low-growth environment will be ones that most efficiently handle big ships
• This involves staying ahead of curve in infrastructure development and cargo-handling processes
• LA-LB already leaders in infrastructure development: deep harbors, large terminals, on-dock rail
• Spending $6.6 billion in coming decade on terminal modernization and landside access
• On-dock/near-dock rail crucial for LA-LB
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Port Productivity WillRule The Day
2017 – AN EVENTFUL YEAR | JANUARY 2017
It’s all about process improvements from now on
• Mandatory trucker appointment systems, modern gate technology (GeoStamp) and data-sharing throughout supply chain
• Neutral chassis “pool of pools” must be improved
• Redevelop PierPass, which has been successful on many fronts but needs some vital changes to win widespread support from port community
• Must turn big ships in four days, avoid yard congestion and turn trucks in 60 minutes or less
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Port performance must involve all stakeholders
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• Cargo surges, 10,000 container moves per vessel call (highest in world) must be seamlessly handled in LA-LB
• Is terminal automation the answer? Not for every terminal, but for some (Nye)
• Will consolidation hit terminal operators like it did shipping lines? Possibly
• Who will run Pier T in POLB and APL terminal in POLA?
• Will there be consolidation and other fundamental changes in harbor drayage? Possibly
• Reliable, “machine-like” productivity essential at marine terminals
2016 – AN EVENTFUL YEAR | JANUARY 2016
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A Good Year for Industrial Real Estate
2017 – AN EVENTFUL YEAR | JANUARY 2017
It has been a good year for industrial real estate
• Absorption of warehouse and distribution space has been on a bull run for two years now
• It should continue well into 2017 (CBRE/JLL)
• Demand for industrial space continues to exceed new deliveries
• Q3 2016 nationwide, 67.9 million SF absorbed vs 51.3 million new SF delivered
• 49 of the 53 industrial markets tracked by CBRE nationwide registered positive net absorption
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Availability of industrial space near WC precariously low
• LA County: 0.9 percent vacancy; Oakland & East Bay, 2.4%; Kent Valley & Pierce County, Wash., 1.8%
• Developers and tenants responding by moving further inland to locations like Inland Empire and Lehigh Valley. IE’s vacancy rate 4 percent
• Nationwide vacancy rate about 5 percent, or half what it was in depth of economic recession
• So, what is driving the boom market in industrial real estate?
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Diversity is the name of the game in industrial real estate today
• Diversity in types and functions of distribution facilities
• Traditional big-box import facilities, regional distribution, intermediate facilities between import facilities and urban markets
• Traditional distribution for large urban regions is still strong. Class A big-box warehouses (750,000+ SF)
• But also e-commerce fulfilment that can handle shipments at the package level for last-mile delivery
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Market is strong, but not overheated
• Rents for warehouse and distribution facilities went up 5.2% to $6.47/ SF nationwide in 2016
• Similar increases anticipated in 2017
• Due to tightness in market, Class A facilities still most desirable but Class B facility in right location will suffice
• Having struggled through the lengthy economic recession of 2008-09, developers and investors are measured in their development plans
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2016 – AN EVENTFUL YEAR | JANUARY 2016
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Conclusions
2017 – AN EVENTFUL YEAR | JANUARY 2017
Conclusions • The next 18 months will be a period of profound change in port and shipping industry
• International trade is maturing. Much of the outsourcing that was to happen has happened
• 2-3% annual growth in container volumes will be the norm
• It’s how the cargo moves that will be the exciting part of the equation
• Carrier mergers and acquisitions will continue (Maersk/Hamburg Sud in 2017; the three Japanese lines will merge by mid-2018)
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2017 – AN EVENTFUL YEAR | JANUARY 2017
Conclusions • Big ships and powerful alliances will place big demands on ports and terminal operators
• Modernization of terminals must continue; super post-Panamax cranes are being purchased as we speak
• Landside infrastructure from terminal gates to warehouses and distribution centers 50 miles away must be improved
• Equally important, cargo-handling processes and information technology must digitize an industry that is still very manual in its operations
• It will be interesting, and hopefully fun!
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2017 – AN EVENTFUL YEAR | JANUARY 2017
THANK YOU!
Bill Mongelluzzo
Senior Editor, JOC Group Inc.
(562) 428-5999
@BillMongelluzzo
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