From financial crises to environmental disasters, the ro-ro market has weathered an almost perfect storm in the last few years. With tougher emission rules in the offing and new-building at a low, Chris Lewis looks at the likelihood of finding calmer waters on the horizon.
The one thing that can be said with certainty about the global ro-ro market following unprecedented recent events, is that it will never be the same again. Sluggish economies in the US and Europe conspired with the Japanese tsunami–not to mention revolutions in the Middle East–to deliver a seismic shock to supply and demand.
And while recovery is under way, the Eurozone crisis and worries over the US economy could easily knock improvements off course. Tougher emission rules for shipping could also have a profound effect on operators’ costs and may lead to the premature retirement of portions of the world fleet. While the coming years may bring an overall tightening of capacity across the global ro-ro market, the pattern of world car trade continues to shift more towards developing markets in Asia and South America.
Lothar Krieger, a car carrier analyst at Hamburg-based shipping management and research firm Ernst Russ, says new ship purchasing by operators remains at a very low ebb, with only a handful ordered in the past two years. And even with full Japanese production expected to be up and running this autumn, Krieger says it will take time to bring cars to ports and get them shipped. However, Krieger adds: “In our view, the recovery from the financial crisis and the tsunami will be relatively speedy. By September 2011, pre-tsunami car production levels will have been achieved and 2012 should not be less in volume terms.” While Krieger admits uncertainty in the US, the general forecast is for capacity to remain nearly balanced from autumn 2011 into 2012, if not tight. “At the same time, freight rates will not increase much, with the result that owners’ bottom lines will only improve slightly because of bunker and other operational costs,” he says. Even if rates rise, some carriers will struggle. Ford Trading Company logistics manager Donald Carpenter points out that long-term contracts will shield OEMs for a while, as many rates were negotiated when the market was weak. A notable capacity shortage appears highly unlikely. At the time of writing, Ernst Russ points out that there are still vessels idle in the Far East. Meanwhile, the rest of the fleet “is certainly not utilised 100%” and could handle extra volume. In a report to its clients in mid-May, Ernst Russ said that it was difficult to establish exactly which vessels were idled but they were thought to be mainly medium-sized ships. “We understand it is mostly midsize vessels with capacity for 3,000-5,000RT (the measurement for car equivalent units), with those of 6,000RT or bigger still in service.”
Krieger puts the number of idle vessels at under 20 per large carrier, with an overall figure for the three major Japanese operators–NYK, MOL and K-Line–at around 50 vessels. Also, while it may be possible to find business elsewhere in the world, current high bunker prices make it too expensive to send empty vessels there. Currently, Krieger estimates that the average supply of capacity to the market is perhaps a third lower than the levels of the last few years. “Carriers and ship owners are making an effort–enforcedly–to reduce capacity and swing back to a more balanced demand-supply situation. Unfortunately, carriers or ship owners will likely get it wrong, as so often. It is difficult to foresee what will be needed in three years time.”
Shipping lines reign in capacity
According to Krieger, K-Line has made the first move in arranging cold lay-up of its pure car and truck carriers (PCTCs), with two 4,000RT vessels stored in Indonesia. However, he says that the line is also considering further lay up of another three 4,000-4,800RT vessels. Peter Menzel, director of the European car group at K-Line, says the company is not rushing to order new tonnage and has few new ships scheduled for delivery in 2012 or 2013. The cost of new-buildings, along with low margins has put lines off. “It’s very hard to make a business case for new ships,” he says. Rudolf Luttmann, Mitsui OSK (MOL) director of car and ro-ro, says that MOL has been adjusting its global capacity to account for the changed economic conditions. “During the crisis all vessels older than 25 years were scrapped and no new orders placed. However, deliveries are still taking place up to 2013.”
Luttmann says that by the end of 2011, MOL’s total deep-sea and short-sea fleet will consist of 123 pure car carriers (PCCs) and PCTCs, with a midterm target to stay at this level. Head of communications at Höegh Autoliners, Gabriela Stojicevic says that most of the vessels idled in March 2011 have been reactivated. However, general market overcapacity is expected to continue through 2012, which will depress charter rates, particularly for smaller and medium-size vessels. Stojicevic adds: “With the information we have at hand today, we can see that new-buildings will peak in 2011 with 40 vessels expected to be delivered, while in 2012, 29 new vessels are expected. We expect a supply-demand balance by 2013, however, the market is regaining momentum and the order book for 2013 is only seven new ships.”
Jan Eyvin Wang, CEO of Norwegian shipowner Wilh. Wilhelmsen, says the company moved quickly to reduce its fleet when the recession first bit, but now has 11 new-buildings coming online by the end of 2012 for WWL–which it owns together with Wallenius Lines–and its Eukor subsidiary, jointly owned with Wallenius, Hyundai and Kia. “Our lifting capacity will be greater in 2012 than it was prior to the recession,” Wang states.
Ernst Russ understands that Eukor has also taken a number of vessels from Japanese carriers, as the Korean manufacturers are still growing exports. “Both big Korean carriers seem to be doing well and have sufficient cargo–Eukor may be even better than Glovis,” Kroger adds.
A more complex network
In the longer term, while manufacturers are trying to manufacture as much as possible in local markets, more models are being developed in other markets that increase the need for transport, according to Krieger at Ernst Russ. “We expect to see more cross-trading and smaller trades, as more factories are built in smaller market areas,” he says. Imports to China are also strong, to the benefit of European and US manufacturers, while trade between South America and the NAFTA region has performed well. Imports to South America are also strong, particularly to Brazil and Chile. Emerging markets continue to play an important role in the future planning for shipping lines, with China in particular already demonstrating a steady appetite for German luxury cars. But shipping lines also see export potential. “It can be expected that China will start to export more volume as soon as the domestic market cools down,” adds Luttmann.
The strong Japanese yen will encourage carmakers to accelerate the transplant of production capacity and export more from other countries such as India, Thailand, Indonesia or Mexico, according to both MOL and Höegh. “As a result, PCC trade patterns should become more complicated and diversified than before. We need to be flexible to meet new trade patterns in order to expand business worldwide,” says Luttmann.
Some customers of the shipping lines have already noticed a reduction in shipping capacity on certain of these lanes. Ford’s Carpenter reports that space challenges have gradually been increasing, with tightness on most major routes and shortages between North America and the Middle East. “There has been a rise in demand, coupled with widespread dislocation of the worldwide shipping system by the earthquake,” he says. “Ships have not been arriving from the Far East, which in turn means that there is a shortage of capacity to other areas.” Ford’s pattern of trade has changed significantly of late. “Exports are up globally,” says Carpenter, adding that Ford has growing exports from India and Brazil. Höegh Autoliners also expects demand for cars and construction and agricultural machinery to grow in markets like India and China, which will increase the demand for sea transport from Europe to Asia. K-Line has now greatly diversified its business outside Japan, with increasing services in markets like China, India and South Africa. Menzel even expects that China will eventually surpass Japan in trade volume. Wang, however, while still optimistic about China, believes imports may not sustain their current growth. “We do see some levelling off of sales to China, though. Exports from Europe have been very strong in the past two years and we think they may level off a little,” he says.
Indeed, as much as Chinese imports have grown, neither they nor the volumes in fledgling ro-ro markets, like India, represent anything as significant as flows from Japan to Europe and North America, or Europe to North America, all of which remain subdued.
“Generally, we feel that 2011 will remain quiet, but recovery on the PCTC market should be noticeable in the first part of 2012,” says Krieger. “In the longer term we are increasingly optimistic, as the lack of new vessels and the expected increasing cargo volumes will cause a shortage of space.” One factor that Carpenter believes can help the industry in such uncertain times is a greater focus on forecasting, something he feels Ford has improved recently. The company now shares its production and market predictions several years ahead, not only with shipping lines but other players like forwarders and modification centres. “In fact, we’re told by the carriers that we’re one of the best in the industry at doing this,” says Carpenter. “And to be forewarned is to be forearmed.”
A quick recovery from earthquake
But there are many factors beyond the scope of forecasts, with no better example than the Japanese tsunami. The disaster caused serious damage to local production and export, especially between March and May, although shipping lines agree with Ernst Russ that the recovery has also been quicker than predicted. “The recovery speed was, surprisingly, faster than we initially expected and in July 2011 production figures were almost back to the same level as last year,” says MOL’s Luttmann.
K-Line’s Menzel agrees, pointing out that while some ships have been idled as a result of the quake, by early June the last of those had been reactivated. “While there has been some disruption to services out of Japan into Europe and the US, which in turn has meant less tonnage available out of those markets, we have been able to fulfil most of our export commitments,” says Menzel. Japanese carmakers also agree that ro-ro shipping capacity has not been a significant issue following the disaster. A spokesperson for Toyota Motor Corporation in Japan explains: “We are not having trouble getting our vehicles out of Japan. Rather, our main issue over the past few months–which is now largely resolved–has been producing the vehicles, not securing ships.
“Most of our vehicles bound overseas are shipped from areas other than those hit by the tsunami and thus, the ports from which such vehicles embark were not directly affected.” Menzel is now expecting a strong rise from an admittedly depressed market, to the extent that there could well be a shortage of capacity in the second half of 2011. MOL has a similar view, although it acknowledges that the strength of the Japanese yen could dampen exports.
Wang is also optimistic. “Volumes are not quite back to where they were, but if you could disregard the effect of the tsunami, the underlying growth is positive, as indeed it was before the tsunami.” Wang believes that this year will see strong growth from Japan as sales recover and the production pipeline is restocked. Despite economic uncertainties he is hopeful that there will be a 4-5% growth in the market, much of it out of Japan.
Tough market for European short-sea
Meanwhile, the short-sea market in Europe has shown a limited recovery, says the head of car sales at intra-European operator UECC, Bjorn Svenningsen. UECC is putting its last two laid-up vessels back into service, although scrapping and the return of chartered vessels mean that the fleet is only 22 vessels compared with a pre-crisis peak of 32. But as a joint subsidiary of NYK and Wallenius, UECC has the option of chartering tonnage from its parent companies.
Freight rates are currently “rather depressed” although Russia and Turkey have been positive, while there is promise seen in North Africa, including Morocco, where Renault is building a new factory for export.
At Naples-based Grimaldi group, external relations manager Paul Kyprianou says there is optimism, but admits there is concern over the Eurozone crisis, including Italy and southern Europe. But Kyprianou points out that the line has long since diversified into other markets including the transatlantic (through ACL) and the Baltic (through Finnlines). Grimaldi scrapped a number of vessels in the midst of the crisis in 2009 but since then has kept its fleet around the same size. Around ten vessels ordered before the downturn–four for Finnlines and the rest for other European and Mediterranean services– are due to be delivered and will slightly increase total capacity. Beyond that, there are no firm plans for new ships, although the group is studying replacement of the five container/ro-ro ships operating on the ACL service.
Meanwhile MOL and Höegh have decided that, at least for European short sea, it will be better to team up rather than go it alone, particularly in the face of tough competition within the sector as well as from land transport. The two have set up a 50-50 European joint venture, Euro Marine Logistics (EML), which combines both their European short-sea operations as well as those of EMC, a previous joint venture between MOL, Höegh and Nissan Motor Car Carriers. EML will operate 13 vessels in European waters from the third quarter of 2011, with capacities ranging from 750 to over 3,000 cars. “Setting up this joint venture company must be seen as an exercise of consolidation and rationalisation to cope with the challenges,” says Luttman.
Could emission regulation benefit road transport?
Among the chief concerns expressed by many shipping operators today is environmental regulation, most notably the Emission Control Area (ECA) proposed for much of Northern European waters and the North American east coast, which would require a 0.1% sulphur limit to fuel burned by 2015. The European Commission has adopted the proposals, with sulphur content in the rest of European waters to be lowered to 0.5% by 2020.
Wang says that for the industry as a whole, meeting the standards will be “a huge burden and costs will also go up”. Shifting older ships to places with less stringent emission rules will at best be only a short-term solution and the measures will ultimately require investment in new ships or expensive modifications. However, the industry is still trying to quantify exactly what the costs will be.
Like other operators, Wilhelmsen has been making more use of slow steaming or, as Wang prefers to call it, ‘economical steaming’. While this could be viewed as a ‘hidden’ capacity reduction, if it is used intelligently with good information from ports and local agents it need not mean a massive lengthening of transit times. “There is no point in rushing headlong for a port that is not in a position to handle the ship, for instance,” says Wang. According to Stojicevic, Höegh’s view is that the ECA is a positive development to push all carriers operating in these waters to take environmental measures. However, for the legislation to have the intended effect on the environment, strict environmental measures must also be imposed on intra-European road transport, otherwise, it will result only in more short-sea European transport shifting to road instead of sea. UECC’s Svenningsen says that if the EC presses ahead with its plans the cost impact would be enormous. Ships would either have to be retrofitted with expensive scrubbing technology or burn scarce and expensive lowsulphur fuel. “We need a dialogue with the regulators,” says Svenningsen.
“Otherwise, we would have to pass on the extra costs to end-users and in certain areas this would make land transport more competitive.” MOL believes that there could be alternatives to regulations on sulphur emissions and that the industry should look at the wider shipping process. It recently released plans to build a hybrid car carrier concept that would have zero emissions in port. But this technology does not address the sulphur content and Luttmann acknowledges that the change will increase costs. “We believe that it is also in our customers’ interest to improve sustainability. But this does not come free of charge and in addition to the current fuel costs there will be a significant price premium for low sulphur fuel in the current market.”