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November 25 2019

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November 25 2019 | The Journal of Commerce 27 Commentary Lars Jensen THE GLOBAL ORDERBOOK for container vessels is continuing to decline in relative terms. Underlying the drop is a seeming shift in philos- ophy and strategy among a number of key players that is about to change the competitive scene in the main deep-sea trades. Orders for new vessels have fallen below 11 percent of the total fleet size — a sharp reduction from more than 35 percent back in 2010, which itself was a decline from a peak of 60 percent in 2008. Of course, the mag- nitude of the orderbook back then was driven by two key factors: the rel- atively easy access to financing in the run-up to the financial crisis, and the continued implicit assumption of 8 to 10 percent annual demand growth rates that had been the norm for more than two decades at the time. But one aspect remained a con- stant throughout these changes: all carriers were active participants in this arms race of capacity injection — until the last couple of years, that is. In a market growing by double-digit per- centages every year, strong and active participation in such an arms race was the very recipe for success. But in a low-growth market such as the current 2 to 4 percent annual growth environment, the dynamics change. Strategic shi In the period from 2004 to 2016, only three of those years saw one of the top-10 carriers not having an active orderbook — or, for that matter, even an orderbook below 2 percent of their active fleet. This means that all were very actively engaged in fleet enlargement. But for 2017 and 2018, this went back up to one carrier with no orderbook, or at least one of less than 2 percent of the fleet. And in 2019, this has jumped to five out of the top 10 carriers with such a lack of new construction orders. For half of the top 10 carriers suddenly to be without an order- book is indeed unprecedented in recent history. Given the fact that orders tend to be placed up to two years in advance, this drastic shift implies that a range of large carriers made a conscious choice in changing their approach to fleet renewal as early as 2017. Looking at the historical order- books for the top 30 carriers in the same 15-year period, the same trend is evident among mid-sized operators. From an average of about five carriers without an orderbook before the financial crisis, this has been increasing to the point there are now at least 10 lines without an active orderbook. Of course, some cyclical ups and downs in the ordering pattern are only natural, and a carrier that has just received a large number of new vessels might need a little time to fill them before going on a new ordering spree. But this ignores the unprec- edented shift in magnitude. In other words, the container shipping industry is facing a new strategic competitive situation unlike any it has seen for many years. The escalation in the number of carriers with no — or almost no — orderbook signals a strategic shift whereby three aspects have been considered. First, the market is unlikely to revert to the high-growth rates of the past, and hence more time is needed to absorb the capacity a carrier already has. Second, that the path to sustainable profitability is now to be found not solely through ever-larger vessels driving operational costs down, but instead through yield management, whereby some loss of market share is acceptable when it is traded off against filling vessels with more profitable cargo. The third element might also be a hesitation in relation to the choice of vessels for the future. There are two large problems facing the carriers: What is the right size vessel for the future workhorses? Do they proceed down the path of the ultra-large vessels or revert back to the 14,000- to 15,000-TEU vessels, which are much more versatile in that they can be deployed in multi- ple different trade lanes? The other fundamental unknown is the future propulsion technologies stemming from the 2050 carbon reduction targets set forth by the International Maritime Organization. For the competitive dynamics in the short to mid-term, this implies a bifurcation in the market. One group of carriers will continue to pursue growth and market share; they have to in order to fill all the capacity coming onstream. The other group of carriers will increasingly refine their value proposition to improve per container unit revenue on their existing vessels. Of course, both groups will continue to seek operational cost reductions — that part is business as usual — but the split in focus on the value proposi- tion will have implications in terms of both price and service. For shippers, this will imply that while they see their operational choices more limited — larger ves- sels inevitably reduces the number of weekly sailings — they might see an increase in the choice of service offerings surrounding the physical freight itself. JOC email: Lars.Jensen@SeaIntelligence- Game changer For half of the top-10 carriers suddenly to be without an orderbook is unprecedented in recent history.

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