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Tue 23 Oct 2007 04:00 AM

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Ask the expert: John Manners-Bell

What significant trends have marked the international container shipping market in 2007?

Question:What significant trends have marked the international container shipping market in 2007?

Expert:John Manners-Bell
Chief executive officer, Transport Intelligence

Container shipping lies at the heart of the contemporary world trading system. The export boom that has under-pinned the Chinese economy for the past decade has been predicated on access to low-cost, high-volume container shipping. In turn this has hurled the shipping sector into growth of remarkable dimensions.

The container shipping market has always been cyclical. A process of increasing demand followed by excessive expansion of capacity has been the dominant characteristic of a market whose participants always feel the pressure to grow market share. As a consequence profits are also highly cyclical. The challenge for any shipping company is to manage this cycle, by keeping margins higher than the competition whilst still growing its share of business.

The effects of this trend have been dramatically demonstrated by the rise and fall of so many shipping companies.

The ‘losers' include some famous names. CP Ships was swallowed by Hapag-Lloyd in 2005 just after P&O Nedlloyd was absorbed by Maersk. Sealand and Safmarine were both bought by Maersk in 1999. Smaller companies are bought-up every year.

The ‘winners' include some idiosyncratic new entrants. One pretender to the throne is Mediterranean Shipping Company (MSC). Since 2003 revenues have grown from US$12.4 billion to $25 billion in 2006. Volumes in 2006 were 8.2 million TEUs. Such furious expansion has vaulted MSC into number two position of container shipping companies. Founded by the Italian Gianluigi Aponte in the early 1970's, the company remains privately owned but backed by Middle Eastern investors. Like CMA-CGA, its growth has been in great part organic, but as it is a private company it is hard to measure its financial performance.

But the biggest noise in the sector is A.P. Moller-Maersk. This $20 billion giant has thrust itself forward with the clear intention of making itself not merely the largest container shipping company but the sector's dominant force. Through a string of acquisitions it has sought to create decisive economies of scale. Its last purchase, Anglo-Dutch line P&O Nedlloyd, was designed to catapult the company into position of unassailable leadership. But it failed. The most recent figures show a painful inability to keep the market share held by P&O Nedlloyd, much of which appeared to migrate to MSC and CMA-CGM.

The clear trend in the sector is towards consolidation. Almost all of the world's big container ships are operated by just twenty companies, a number which is likely to shrink.

The attraction of consolidation is the ability to achieve higher productivity and that's largely about bigger ships.

Less than a decade ago the largest ships were 5000 TEU, limited by the depth of the Panama Canal. Now the biggest ships are twice that size. Maersk's biggest vessel can carry more than 12,000 TEU. In the future ships will be 15,000 TEU.

The use of bigger ships results in dramatically lower costs per TEU, but it also put pressure on the operators to ensure a supply of massive volumes of cargo in order to keep these ships busy. This requires not merely a global presence but also the ability to maintain a huge network of services and infrastructure. Only the largest companies can sustain the capital expenditure required to achieve this.

The immediate future of container shipping looks quite tough. The rebalancing of the world's economy may well be under way, with US consumer spending falling.

This will unravel the macro-economic trend that has powered the growth of shipping over the past ten years. Already Maersk is reporting a 15% fall in volumes on its trans-Pacific routes. Any down-turn is likely to have quite a dramatic impact on the sector.

Shipping companies have been ordering new ships (‘new build') faster than the ship yards can construct them, with volumes up 16% in 2006. So far the terrific volumes from the Far East have supported the flood of new capacity. If those cargo volumes should stop or reverse the overhang of capacity will be sizeable and the effects on container rates painfull. This will accelerate consolidation, but the casualties may not be restricted just to the smaller lines. The giants who have mismanaged during the cycle may also become casualties.

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