What will happen to the VLCS of today now that the first ultra-large jumbos are coming to take their places?

Having slowed down almost to a standstill, the ship rolls gently in the long ocean swell. Two of the port’s powerful tugs are already standing by, ready to take over the giant container vessel’s bow and stern lines. Barely half an hour later, the 335-metre leviathan is safely moored alongside the quay and the terminal’s giant container gantries have already started to lift the first containers off the vessel. Another jumbo vessel handled, another routine job done. Nothing extraordinary about it, except that we’re not in Shanghai, Hamburg or Long Beach: the port’s name is Ngqura.

The South African port of Ngqura, however, is just a placeholder. We could just as well be at Doraleh, Vizhinjam or Navegantes: ports that might see their first scheduled VLCS calls before many of us even learn how to spell their names.

The recent deliveries of the first ultra-large box ships to follow the pioneering Maersk E-class series and the ships’ maiden calls in the Far East, Middle East and Europe have stolen many a headline in the past few months. Two dozen vessels of 10,000 teu or larger are already in service and another 179 units of this size range are still in the pipeline according to AXS-Alphaliner’s data base. Obviously, this armada of jumbos will change the face of most mainline container trades. It is pretty safe to assume that the new breed of vessels will successively replace today’s 8,000 to 10,000 teu mainliners on the Asia to Europe and Asia to North America routes, with occasional stops in the Middle East. But then, what is going to happen to the VLCS of today?

Including both existing vessels and orders, there are presently 300 units in the size range from 8,000 to 10,000 teu. AXS-Alphaliner shows that their added intake is about 2.59 Mteu. As for ships of +10,000 teu, again looking at existing tonnage and orders, there are 211 units of 2.65 Mteu. Even if one assumes a moderate market growth over the next couple of years, it becomes obvious that many – if not most – of today’s mainline ships will have to venture into new areas of trade to find employment. Inevitably, there will be a cascade of vessel sizes in which ultra-large ships will replace VLCS, which will then be relegated to smaller loops where they in turn free-up standard post-Panamax tonnage, and so on.

This brings us to the abovementioned ports such as Ngqura, Doraleh or Vizhinjam and the question of if – and if yes which – emerging route corridors will have the potential to absorb these ships.

In some respects, one might be tempted to say that the second level of services, the emerging trades run with mid-sized tonnage until very recently, is where the change will really be happening: with slight exceptions here and there, most of the world’s main ports are already prepared for ULCS. For a large port that regularly handles VLCS, the step up to ships of 12,000 teu or more is relatively small. Most main ports already offer berths, fairways and gantries ready to serve the coming generation of mainline ships, though the high draft of fully-laden jumbos is still an issue – even in some major ports.

However, the move away from Panamaxes and the occasional call of post-Panamax vessels approaching +8,000 teu?? are much more challenging: Indian terminals are frequently congested and port development work has made slow progress over the past few years, the South American east coast ports still have draft restrictions, hinterland connections are extremely overstrained in much of Africa and many ports in the emerging trades do not provide sufficiently large cranes and gantries for the smooth handling of VLCS. In other words: not every trade that is technically fit to handle very large ships has the potential to fill them and not every trade that might have the potential to fill such ships is technically ready to handle them.

The last cascade of vessels that were freed up on the world’s maritime highways and subsequently relegated to lower-volume slings consisted of vessels that were large but still small enough to find a sufficient number of adequate terminals outside the Far Eastern, European and North American port ranges. Usually these ships were not directly sent to entirely new areas of trade. Typically, a mainline ship initially employed on its operator’s flagship route would first switch to a secondary loop within the same area of trade or another mainline corridor. Ships sailing between the Far East and Europe, for example, were often passed on to the Transpacific trade or to another – smaller – Far East to Europe loop when replaced by a newbuild. Only the second or even third wave of the fleet cascade would eventually send large post-Panamax tonnage to entirely ‘new’ areas of trade.

One of the carriers at the forefront of venturing into emerging trades with large tonnage is the Mediterranean Shipping Company (MSC). Late in 2008 for example, the company introduced ships of 6,700 teu on its service between Northern Europe and South Africa. The carrier thus more than doubled the size of vessels employed within only five years. Furthermore, MSC literally upped the ante and doubled the size of the vessels in its Europe-India service, the IPAK, to 6,700 teu. In this case, the Swiss carrier followed the French CMA CGM, which introduced such vessels on its competing EPIC loop but recently decided to cut weekly capacity back to Panamax vessels of around 4,200 teu. CMA CGM’s decision comes as no surprise: against all hopes, volumes in Indian ports have crumbled since even the word’s emerging boom nations such as India and Brazil are not immune to the negative effects of an ailing world economy. This raises the question of what is going to happen when the engine that drives the fleet cascade – cargo volume growth – stalls.

Without at least moderate volume growth in all sectors, the fleet cascading game no longer works as smoothly, and the question is which type of container vessel will be worst hit by the shortfall in demand. While bigger ships are still being introduced at the top of the fleet pyramid, volume growth is no longer the driving force behind this. Today it is much more a matter of service consolidation: instead of just upgrading slings, individual services are being merged or re-arranged in order to fill the big ships. Two Far-East to Europe loops run using ships of 11,000 teu might, for instance, replace a pattern of three existing 8,500 teu slings – a move that not only results in a capacity reduction of about 14 per cent but also replaces a fleet of 27 ships with only 18 units – or possibly 20 if the new pattern uses an extended port rotation to cover more ports with fewer services. Either way, a service consolidation like the above would not only require twenty ships to be relegated to the next, smaller loop, it would also leave seven or even nine surplus ships. That is, unless a ‘creative’ solution can be found to accommodate these units.

In a recent edition of the DNV Container Ship Update, AXS-Alphaliner illustrated that – even if we see a relatively rapid recovery of seaborne world trade – it will probably take several years for vessel supply and demand to reach equilibrium again. It is no secret that years of damaging overcapacity lie ahead. Container ships have already been mothballed by the dozen in anchorages around the globe. Assuming that all yard-new ULCS will enter active trade on mainline services which are relatively easy to consolidate, the question of which type of ship will fall victim to the oversupply situation is not an easy one to answer.

Provided that most port upgrading and dredging schemes in countries like Brazil or India go ahead as planned, then larger vessels may be the weapon of choice on secondary routes outside the main corridors. However, this would create additional pressure on Panamax-sized units, many of which might no longer be needed.

On top of that, shipping lines might favour a consolidated route network with larger vessels and feeders over a network of direct links with smaller vessels for one very simple reason: in times of overcapacity, bigger ships are more difficult to get rid of.

Since the container as such is still a relatively young phenomenon, there is – obviously – a noticeable correlation between vessel size and vessel age. The vast majority of big vessels are still rather young and, typically, large mainline ships are either owned by the shipping line itself or on long-term charters. Mothballing such vessels will only save on overheads, whereas fixed costs or charter rates have to be paid anyway. For smaller ships, the situation is different. The initial charters of many Panamaxes and standard post-Panamaxes have expired or will expire over the next few years. These ships will then have to prove their worth on the spot market.

Funnily enough, this does not necessarily mean that all of these units will be returned to and subsequently laid up by their owners. Some shipping lines are using the slow market to supply themselves with young second-hand charter tonnage at rock bottom prices and rejuvenate their fleet at the expense of smaller, older ships sent to the breakers.

Given all the above, we return to the original question: what will happen to the VLCS of today now that the first ultra-large jumbos are coming to take their places?

Despite the still low trade volumes, it is not unlikely that the first +8,000 teu units will venture into new markets in 2010 or possibly even before the end of this year. In this context India, South Africa and the South American east coast will be the most likely port ranges to see VLCS calls. Though maybe not entirely justified by cargo volumes, some lines will certainly try to establish VLCS in these trades – partially due to the lack of employment alternatives for these vessels and partially to establish a massive presence with large vessels that were selectively picked up when charter rates were at their lowest.

MSC, for example, recently announced the launch of a new Europe to India service in cooperation with SCI. The new service, which will use a fleet of 4,300 teu ships, adds to another India-related MSC loop with a weekly capacity of 6,200 teu. Should volumes between Europe and India remain below expectation, replacing the two slings with one – extended to cover all ports – 8,000 teu service, would result in a capacity reduction of about 24 per cent. Replacing the 6,700 teu ships with 8,000 teu units, on the other hand, would boost capacity by 17 per cent. Depending on the performance of the trade, either option might be reasonably realistic – especially since MSC will gradually take delivery of a massive number of jumbo vessels which will free-up numerous VLCS. Similar scenarios could be drawn for any emerging trade which is already served by more than one comparatively large loop, like Europe-ECSA or the trades between Europe and South Africa or the Far East and Brazil (via the Cape).

Since the ULCS-club will remain a very exclusive one throughout 2009 and most of 2010 – only Maersk Line MSC and CMA CGM will employ such ships – it is these lines that are also expected to be the forefront of pushing larger ships into new markets. Unless volumes pick up significantly in these trades, competition might become even fiercer than today as the big ships head for Pipavav, Navegantes or Ngqura.

Author: Jan Tiedemann/AXS-Alphaliner, Paris

Date: 2009-06-23