Ro-ro carriers have been able to manage capacity and market swings better than many, but shifting vehicle flows, fuel cost rises and a volatile market may make the coming years the hardest yet to balance, reports Jonathan Ward.
The global ro-ro and pure car and truck carrier (PCTC) market has managed to balance demand and supply remarkably well over the last decade, even in the wake of the financial crisis, subsequent volatile demand and the growth of new and sometimes fragmented trade lanes.
According to WWL Global Market Intelligence, the research arm of Wallenius Wilhelmsen Logistics (WWL), global fleet utilisation rose fairly steadily from just below 90% in around 2000 to a feverish 100% just before the market collapse of 2008. When the crisis hit, its impact was steep and deep, with demand dropping by half in some markets. Since those dark days, however, volumes have recovered steadily, and overall demand in 2012 looks set to match pre-crisis levels, with WWL predicting that capacity utilisation will be around 94%, in line with long-term market averages.
Today, there are 726 vessels in the worldwide ro-ro fleet with a further 40 under construction, according to Costantino Baldissara, president of the Association of European Vehicle Logistics (ECG) and commercial, logistics and operations director of the Naples, Italy-based carrier Grimaldi Lines. However, Grimaldi figures show that 48 vessels in the current fleet are already more than 25 years old, which Baldissara says leaves room to cut capacity should demand take a turn for the worse.
“The car carrier capacity market is balanced today,” he says. “Car carriers will strictly follow the capacity market evolution over the next years and in case of any demand downturn they would be able to restore the actual capacity balance by accelerating the decommissioning of older vessels.”
suggest that utilisation will continue to rise over the next few years, with the potential to reach saturation in 2014 or 2015. Some forecasts from carmakers suggest that capacity will even come up short by then, including that of premium carmaker BMW, which continues to enjoy strong export trade to markets such as the US and China. “We are predicting a capacity gap in 2015 or 2016 because of stable or lightly increasing demand and, on the other hand, less capacity in the market,” notes Mathias Wellbrock, head of outbound logistics at BMW.
Right to buy capacity?
So with a capacity tipping point approaching, should shipping companies be rushing out to buy more vessels? Perhaps, but the challenging and unpredictable economic environment has left carriers extremely nervous about such big investments.
“The shipping companies do not trust the market and are afraid to invest in new vessels,” admits Wellbrock.
The reasons for those fears are fairly understandable. The financial crisis in Europe, and uncertainties about the pace of economic recovery elsewhere in the world, have caused instability in equity markets and slowed demand growth over the past year, forcing shipping lines to adopt temporary capacity and cost-reduction measures, like slow steaming, to keep capacity in balance. Also, a slate of regulatory restrictions set to come into effect – including further tightening on a low sulphur emission zone in northern Europe and the North American coastlines – is a further factor that could impact shipping capacity and vehicle flows, particularly for short sea competing with land transport.
With these factors in mind, vessel operators are exploring alternative ways of maintaining capacity without the expense of new vessels. Höegh Autoliners, for example, which operates a fleet of 50 PCTC vessels, is extending three of them this year – from 180 to 200 metres – to increase carrying capacity by 15%. “This is an efficient way to add capacity,” says Gabriela Stojicevic, head of communications at the company. “Especially compared with ordering new vessels, which takes years from contract to delivery.”
Grimaldi’s Baldissara also suggests that some lines will simply elect to keep older vessels in service for longer, providing a temporary capacity boost until the economic outlook becomes clearer. Not everyone agrees with this approach, however. Newer ships tend be larger, more efficient and more flexible than older ones, says Kai Kraass, chief operating officer at WWL, which means the life extension strategy wouldn’t make sense for his company. Some lines scrapped vessels early as part of their response to the 2008 crash, too, meaning their current fleets are relatively young, further limiting their options to boost capacity this way.
Shifting flows show risk and opportunity
Beyond fluctuations in volumes, structural changes in the market are putting pressure on demand for ro-ro capacity. In some cases, as carmakers locate their assembly activities in low-cost regions, like Turkey and Mexico, many are increasing their use of seaborne transport to move vehicles to market. Similarly, the rapid growth of customer markets across Asia, South America and Russia has changed demand patterns along trade routes between these regions and the traditional manufacturing centres of Europe, the US and Japan.
At the same time, however, production shifts could reduce deep-sea demand or likewise boost short-sea volume. A good example is the planned shift in production for many Japanese OEMs looking to escape a strong yen to Mexico. Increasing vehicle assembly in Mexico for vehicles bound mainly for the US could reduce Japanese imports, but increase the need for short-sea north of the border.
Dennis Manns, vice-president of logistics at American Honda, for example, notes that short-sea shipping is a key transport option for vehicles that will come from its new plant in Celaya, Mexico when it opens in 2014, particularly if rail capacity is tight. “When you want to bring vehicles from Mexico into the US, you basically have two options; rail or short sea,” he says. “As a lot of carmakers are establishing operations in the region, there is likely to be significant development on the sea route.”
Even in established markets, carmakers are considering the expanded use of short-sea options as a potential replacement for some of their existing land-based transport modes. Cyran Vanderhaeghen, general manager of the vehicle logistics group at Toyota Motor Europe, for example, says his company is evaluating the use of short-sea options to get vehicles closer to their end customers in Europe, particularly for important markets with long coastlines, like the UK, Scandinavia and regions bordering the Mediterranean.
Fuelling cost pressures
Shipping lines aren’t currently struggling to fill their ro-ro vessels, and long-term contracts with their customers mean that freight rates have remained relatively stable throughout the recent economic upheavals. But that doesn’t mean it’s easy to make money out of them.
“Rates are lagging significantly behind costs,” says WWL’s Kraass. “They are not in sync with cost increases in operations and new building prices. We are working to cover part of that gap through efficiency improvement programmes.”
Fuel accounts for around a quarter of total costs for shipping lines, and rising fuel prices have added a significant cost burden in recent years. Whether carriers can pass these fuel costs on in their entirety to the customer depends on the detailed terms of their contracts.
“Costs have rocketed, mainly bunker cost which is a large part of our cost base,” says Höegh’s Stojicevic. “Though bunker clauses were part of contracts, they did not cover all that extra cost.”
Stojicevic also points out that unexpectedly popular trade lanes, such as those due to demand for European high-end cars in China, still don’t necessarily lead to high enough rates to cover costs, which is one reason the company suspended car shipments on the lane over the summer, although it continued with truck and high-and-heavy shipments.
“The rates to ship cars from Europe to China are still too low to cover the transportation cost,” says Stojicevic. “We are always there to look at new solutions for our customers’ transportation needs, but we must also ensure that rates are at a sustainable level, where we can maintain a high-level service over a longer term.“
The pressure to reduce fuel consumption is compounded by customers’ increasing interest in adopting the most environmentally friendly transport options available. Environmental regulations are likely to further increase costs for shipping lines, particularly the forthcoming tightening of the limits on the sulphur content of marine fuels, which are likely to put further upward pressure on fuel prices.
A secondary effect of rising fuel prices is the loss of some of the methods shipping lines might once have used to increase their service flexibility. “In the past, you might have used faster steaming as a way of boosting capacity,” says Kraass. “With high costs and new environmental legislation, that isn’t going to be an option anymore.”
Bigger ships mean services that are less frequent too, which can make things harder for some carmakers. In North America, Honda manufactures the majority of vehicles locally but still imports a number from Japan. “As our import numbers are smaller, we might be looking for frequency of turn,” says Honda’s Dennis Manns. “That might not be such a priority for some of our competitors.”
Significant fuel efficiency increases are nevertheless possible, and bigger, newer ships can help. At Höegh Autoliners, for example, Stojicevic notes that a combination of fleet renewal, technical changes and modifications of operating practices have allowed it to reduce CO2 emissions per nautical mile by 17%. For deep-sea trades, the opening of the expansion to the Panama Canal, scheduled for the end of 2014, will create the opportunity for larger post-Panamax vessels. Japanese line NYK has already placed orders for four PCTCs built to these specifications, with delivery expected in 2014 and 2015.
Riding the waves of change
Shipping lines must also contend with rising economic volatility. Markets may be recovering, but they are doing so at different rates in different regions and with unpredictable bumps and changes along the way. “Month-by-month volatility has certainly risen,” says Toyota’s Vanderhaeghen. “And on top of that, you increasingly have sudden changes, from financial crises to government interventions, that can suddenly change vehicle flows.”
Volatility makes it harder for shipping lines to ensure the right capacity is in the right place at the right time, or that capacity is utilised as efficiently as possible, all of which adds cost to their operations.
“In Europe, everything is volatile right now,” says Grimaldi’s Baldissara. “Northbound flows might be stronger than southbound today, but that can switch in a month, and flows are often more unbalanced than they were in the past. You are living more on a day-by-day or week-by-week basis, and that makes it complicated to plan in a way that makes the best use of your ships, or which gives your customers the best level of service.”
Many in the market expect volatility to remain a fact of life for the future. Operating profitably in this environment will require shipping companies to improve their own flexibility and to get better at forecasting. Most have invested significantly in both these areas in recent years. “Constantly updating the demand, tonnage planning and capacity modelling is absolutely vital,” says WWL’s Kraass. “These days, we receive updated forecasts from our customers every month, and we combine those with our own magic to create our own forecast for demand over the next six to 12 months. We are continually updating our forecasts as new information becomes available.”
Collaborative, long-term relationships between carmakers and shipping lines are seen as weapons in the battle to manage the challenges of volatility. According to Kraass, deeper collaboration will be key to gaining further opportunities to strip cost out of shipping operations. “There are many ways we can work together with our customers to improve efficiency,” he says. “For example, we can build more flexibility into the contracts, so instead of saying ‘we expect the vehicles to spend 15 days in transit on a vessel and a further five days to get from the plant to the port’, we can reach agreements to keep the total transit time to 20 days but leave more flexibility and ability for optimisation with the operators.”
He adds that faster, smarter hinterland operations, especially the efficient loading and unloading of large vessels, also represent opportunities for shipping lines, together with their suppliers, to improve efficiencies by allowing more travel time without extending overall transit durations.
At BMW, Wellbrock notes that close collaboration with shipping partners has been instrumental in overcoming the challenges of recent financial crises. “In 2009, reacting to the volume fall at the time, we sat together and updated our sailing and lead-time expectations to reduce fixed costs and keep a stable service. In 2010-2011, with the extremely high volumes, especially in the Chinese market, we were in a situation to react to this scenario in cooperation with our partners.”
Going forward, says Wellbrock, BMW needs “regular meetings in order to convince the shipping lines to risk moderate investment in 2013 and avoid a capacity gap in 2015-2016”.
For construction equipment maker JCB, closer collaboration with shipping lines is also considered to be important for making sea transport work, according to Joannes Van Osta, the company’s general manager for group transport and logistics, although its priority is more about gaining access to markets than the need to secure capacity. “The market is certainly more volatile than it has been in the past, but our forecasting has become better too, and we know it is essential to share that information with our carriers as soon as we have it,” he says.
Van Osta says JCB is increasingly moving to longer term agreements with its shipping lines in the quest for stability in process and service levels. Like the carmakers, JCB is also exploring new opportunities to replace road transport with sea freight. For example, the company has recently opened a new short-sea route to move machines from the UK to North African markets, replacing a long road and ferry route through France. “You have to be ambitious enough to open up discussion with the shipping lines to see if it is possible to make new ideas like that work,” says Van Osta.
JCB has also increased its use of containerised transport for smaller and mid-range machines, from 2% of shipments five years ago to 10-15% today. Again, Van Osta says the ability to access a broader range of services and destinations was a key incentive for this change.
A safe pair of hands
Overall, the future looks robust for the ro-ro market. While some shipping executives worry privately about what the long-term effects of localisation in markets like Russia or Mexico might mean for deep-sea shipping, others suggest that the evolving structure of the industry, with its increasing globalised production and consumption, will only serve to further boost demand, even if it fluctuates on different lanes as production footprints and consumption patterns change. For deep sea, and some short-sea routes, there is simply no alternative way for carmakers to ship their products to market.
Even in the short-sea market, where marine transport must compete with road or rail alternatives, the quality, cost and environmental benefits of sea freight are increasingly appreciated by carmakers. “Quality-wise, no other transportation mode can beat sea vessels,” says Toyota’s Vanderhaeghen. “Whether you look at transportation damage, cost or environmental performance, ships perform very well, so it’s a mode we are trying to maximise.”
“Basically, we feel our services to the relevant markets are currently in reliable hands,” concurs BMW’s Wellbrock.
While other parts of the logistics market, such as road transport and container shipping, have arguably been characterised by boom and bust, with capacity swinging between shortages and excesses, the ro-ro shipping lines have had more success in managing capacity challenges.
Some manufacturers have expressed admiration for their stability in comparison to other modes. One automotive industry executive, who asked to remain anonymous, suggested this professionalism is more ingrained in the makeup of shipping lines. “As the shipping lines tend to be big companies, they often have the right attitude to quality and service built into their DNA, which is something you don’t necessarily find with the more fragmented road transport companies.”
But whether at road or at sea, the continuing changes in vehicle flows, together with stricter environmental regulation and a global market riven with economic risk and volatility, are likely to make managing capacity and costs in the coming years anything but smooth and easy sailing.