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The container shipping capacity glut; is Maersk Line’s gluttonous Triple-E vessel and the P3 Network the answer?
Maersk Line, the world’s largest container shipping company, has gained notoriety for the development of its Triple-E container ship, taking delivery of the first tranche of in mid-to-late 2013. At almost 400 meters in length, and with a capacity of 18,000 twenty-foot equivalent units (TEU), the vessels have been delivered at a time when excess capacity is hobbling the container shipping industry, proving somewhat controversial. Designed specifically for slow-steaming, to reduce fuel consumption and CO2 emissions, Maersk Line saw its economies of scale benefit, however critics pointed out that current demand cannot absorb the extra capacity the Triple-E’s have brought the container shipping industry.
The Baltic Dry Index (BDI), a measure of charter rates for dry bulk goods, has experienced historic lows during the financial crisis, a combination of reduced demand for commodities, and an increase in capacity as ships ordered during the boom period were delivered during the global recession. This perfect storm of increased capacity and reduced demand for shipping created a crippling capacity glut and saw the BDI’s performance erode to levels not seen since the last comparable recession in 1986.
The HARPEX, an index tracking the charter rates for container shipping, has also seen significant declines during the same period, with container shipping struggling as Maersk and its rivals continue to add capacity in order to take advantage of new technologies and ship designs offering increased fuel efficiency and improved economies of scale. Akin to an arms race, rivals do not want to get left behind when the market does turn, which has led to the continued fuelling of the current capacity glut.
With new vessel orders continuing to be delivered amid the ongoing glut, and demand actually doubling for new ships in 2013, the immediate future is unlikely to enthuse shipping companies. The slowly growing demand for container shipping as the global economy continues its slow recovery is failing to absorb expanding capacity quickly enough for charter rates to recover to pre-crisis levels.
In response to this difficult market, the P3 Network was conceived as an alliance between Maersk Line and its two leading competitors, MSC and CMA CGM. Designed to allow its members to reduce the number of ships across the lines it will operate on, while increasing capacity, it will result in a reduction in operating costs and improved economies of scale. This is essential if all three companies are to maintain their competitive advantage, whilst other competitors struggle with low charter rates the P3 alliance will be able to pool their significant resources and exploit their economies of scale. Once the market recovers, the alliance will be well positioned to consolidate their dominance.
The P3 is of particular importance to Maersk in the wake of its extensive investment in its Triple-E fleet ($3.7 billion for 20 ships), and the company is likely to struggle to recoup its costs if the alliance is nixed by maritime regulators. This could result in the idling of more ships and a loss of market share for Maersk, something the company cannot afford once the market recovery gains pace.
If, as is generally expected, the P3 Network is given the go ahead by regulators, then Maersk is likely to see its position as the world’s leading container shipper consolidated. Its investment in Triple-E vessels will stand it in good stead, and could see the P3 expand. This is not an impossibility, as the Federal Maritime Commission chairman himself stated “it appears the industry is moving towards an alliance model”.
A consolidation of the container shipping industry through alliances could prove detrimental to customers as alliances could see cartel like behavior emerge, although charter rates and capacity would likely stabilize with collusion among alliances. However, this is unlikely in the immediate future, and Maersk and its fellow alliance members will be focusing all their energies on getting the P3 Network cleared by the regulatory authorities with a mind to have it up and running before the end of 2014.
Read more in our case study titled Maersk Line: The Triple-E, the capacity glut and the P3 Network