1. British Shippers’ Council 03 July 2013, London
Mike Garratt & Edwin Velterop
BoxTradeIntelligence
213038_presentation_8

2. 1. Paper will consider: Trade analysis for the European market
Estimated TEU from the Far East and N America to N Europe & Med by commodity group,
Demand v. Capacity: global market and routes crossing the Suez Canal
Effect of market concentration
Freight rates and costs: interpreting the data (case study for tyre and for the Asian market)
Using data from MDST/Box Trade Intelligence databases

3. 2. Trade analysis: European market
Europe a declining proportion in all market sectors
A consequence of gradual de-industrialization
European share down from 30% to 23% of container trades
A reflection of growth between developing countries
European import share of
global trade
Loss of share
1996
2004
2013
Bulks
Energy
25%
24%
17%
-8%
Non energy
34%
26%
10%
-24%
Foodstuffs
33%
32%
21%
-12%
Chemicals
16%
15%
-2%
Semi bulks
12%
-4%
Containerised
30%
29%
23%
-7%

4. 3. The unit load market The rapid growth from Far East has stalled
volumes in 2011 exceeded pre-recession 2007 levels
but imports stalled in 2012 and are now falling
Deep-sea import substitution also stalling
Alternative sources emerging from Turkey/Eastern Europe etc.
Turkey to Europe grew 22% between 2011Q1 and 2013 Q1 (all modes)
Important implications for freight transport network development across Europe
but not encouraging for deep-sea terminals

5. 4. Unitised imports into Europe by commodity sector, mTEU 2007 – 2013
Imports into Europe from the Far East in decline for all commodity in 2013
Increase in imports of industrial goods into Europe from North America

6. 5. Headhaul capacity (v. demand) by ship class
Underlying demand grew +22% 2008 to 2012
Global capacity grew +18% 2008 to 2012
so until recently a gentle upward pressure on rates

7. 6. Modelling liner service economics: - Suez routes
Oversupply likely to lead to falling rates despite withdrawal of some older ships
Based on modelled experiences of period

8. 7. Impact of falling utilisation on freight rates
7. Impact of falling utilisation on freight rates reduces earnings/ship day (Suez example)
Withdrawing 3-5,000 TEU vessels only cuts capacity by 7%
Inadequate to balance supply and demand
But larger ships can remain profitable at lower rates

9. 8. Effect of market concentration: current
8. Effect of market concentration: current deployed capacity E/W trade lanes

10. 9. Effect of market concentration - deployed capacity shares
Current service capacity of three major East-West trades (‘headhaul’ direction): 46m TEU p.a.
- largest alliance (CKYH Alliance): m TEU
- but in 2014 P3 could offer: m TEU
- of which Far East-Europe: m TEU

11. 10. Effect of market concentration - Asia/Europe Trade Lane

12. 11. Effect of market concentration – P3
Follows other market concentration efforts like the G6
All subject to final agreements and regulatory approvals
Operated through an independent Fleet Operating Company based in London, with subsidiary in Singapore
Employing around 200 people; majority in London
Tremendous challenges to align operational structures
Not new, just the scale is!
Earlier examples are the Tonnage Centres of the 1990’s (TRIO, TSA), where services where jointly operated, including ship planning
Significant regulatory hurdles
even if shippers simply experience 'code-sharing' and price competition remains, supply will be curtailed through ships being returned to owners
terminals and independent ship owners will face a dominant purchaser (P3) of their services that also owns its own ships and terminals
Shipper organisations need to be well informed on liner cost structures

13. 12. Freight rates and costs: interpreting the data
Global deep sea traffic in tyres has been growing
But do freight rate changes reflect falling unit costs?
Those changing unit costs combine
- fuel costs which are independent of the industry
- the reaction to those falling fuel costs by trading off against an emerging surplus of shipping capacity (slow steaming)
- the return on capital from fewer but larger ships
Freight rates (on the other hand) reflect market forces in a market that is inevitably imperfect and tends towards oligopoly
What should be the shipper’s approach?
- to follow the freight rate roller-coaster or
- negotiate on the basis of shipping cost structures

14. 13. Example of the tyre industry
A bulky product for which freight costs are crucial
Largest increase estimated for routes where use of larger ships further reduces costs:
North America to Gulf/ISC
Far East to Africa
Far East to Latin America
Far East to North America and Europe
Trade Lane
‘000s
2006
2012
CAGR
TransPacific-EB
672
948 6%
Asia Europe-WB
425
629 7%
FE/MEGISC-WB
219
422
12%
FE/LAM-SB
152
350
15%
Intra-Asia
230
318
FE/AFR-SB 60
148
16%
FE/ANZ-SB 80
135 9%
NAM/MEGISC-EB 20
112
33%
TransAtlantic-WB 72
107
IET-Intra 9
106 2%
Others
447
665
Grand Total
2,477
3,946 8%

15. 14. Tyres analysis – Global trade, immediate future forecast
Overall trade in tyres increased by 60% between 2006 and 2012 (8% p.a.)
Tyres follow economic cycle
Far East expanding market share
A very large market: 4m TEU out of 125m TEU globally (3%!)
Demand stable in 2013
Inevitable pressure to reduce all production costs, including shipping.
In 2006 we estimate freight rates ex Asia represented 14% of imported values

16. 15. Asian trades modelled (excluding intra services): all commodities
2006
2012
Adjusted for bunkers and inflation
Actual
Change
Demand (outbound) million
30.3
43.1
+42%
Modelled costs ($ billion)
Bunkers
13.3
40.3
21.7
Other costs
43.3
72.0
59.0
Total
56.6
112.3
80.7
saving
39%
Cost (round trip)/TEU
$1868
$1871 0%
Surveyed revenue/TEU
Mean tariff (westbound)
$1416
$1405
-1%
Contribution from backloads
$675
$739
Round trip revenue
$2091
$2144
Profit (per round trip)/TEU
$252
$273 8%
Profit as % costs
12%
15%
Freight rate as % of tyres value
14.0%
11.6%
costs constant
freight rates constant
profit rises
significant input cost

17. 16. Asia-Europe spot rates (SCFI) – Trend in 2013
Same level observed in 2012

18. 17. Lessons for shippers: 2006 to 2012
Shipping costs form a significant proportion of delivered prices and therefore a key element in exporters’ success
Mean shipping tariffs/TEU absolutely stable and associated shipping costs fell by 1% despite bunkers prices more than doubling
Without radical investment and change in practice model suggests shipping costs would instead have been 39% greater
Every reason to suppose that use of even larger ships will lead to further falls in freight rates given a competitive environment
- as smaller ships driven out/cascaded to maintain load factors
So what does benchmarking on rates achieve?
- by definition half will be ‘losers’…and the other half lucky!
Surely better to reduce volatility and uncertainty through long long-term relationships based on transparency
Because costs do reflect medium term rate structures and can be the basis of longer term contractual relationships

19. 18. Using Tools
Although we regularly perform the previous bespoke commodity based calculations, it is also possible to perform these calculations on a regular basis for various Trade Lanes.
Demand, Supply, Shipping Costs and Ocean Freights can simply be compared on a quarterly basis.
To enter into meaningful long term discussions with the Shipping Lines, any reference to weekly and even monthly freight rates are unhelpful and only serve those parties interested in profiting from the (almost self fulfilling) freight rate volatilities.
Our Tools can be used during shipping negotiations, or can even be used to form a baseline for freight rates that can move with the changes over the time of a shipping contract

20. 19. Tools: Asia-Europe example Demand v. Capacity
Table 1:
Demand v. Allocated Capacity Asia Europe
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
TEU Demand
5,190,226
5,177,918
4,953,632
4,810,551
4,882,262
Capacity Supply
8,305,235
8,782,419
8,744,074
8,818,313
9,228,730
Utilisation
67%
64%
61%
59%
Source: Container Business Database,
© BoxTradeIntelligence Ltd 2013, E & O E

21. 20. Tools: Asia-Europe Freight rates v. Costs 2012 Q2 2012 Q3 2012 Q4
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
US$/TEU
Total Costs
1,258
1,275
1,286
1,345
1,342
Freight Rate
1,518
1,434
1,233
1,244
1,152
Profit/Loss
260
159
-52
-101
-191
Source: Container Business Database,
© BoxTradeIntelligence Ltd 2013, E & O E

22. 21. Tools: Asia-Europe cost structure
Table 3:
Cost per TEU (Demand) Asia Europe
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
Costs in
US$/TEU
TimeCharterEquiv Costs
225
241
249
257
258
Bunker Costs
335
317
307
336
329
Port & Canal Costs 99
104
108
113
116
Total Vessel Costs
659
662
663
707
703
Handling Costs
299
300
Container Costs 98
101
107
Total Direct Costs
397
401
404
414
Overheads
202
212
218
224
226
Total Costs
1,258
1,275
1,286
1,345
1,342
Source: Container Business Database,
© BoxTradeIntelligence Ltd 2013, E & O E

23. 22. Summary Container market is continuing to grow
- but the supply side is growing faster
That growth is driven by competitive pressure to deliver lower cost solutions through scale:
- which in a competitive environment can only result in falling rates and cascading of ships to smaller routes
Without consolidation, market forces will therefore further reduce rates
- a scenario likely to be resisted by the lines
- creating uncertainty that cannot encourage trade!
Opportunity available to address that uncertainty by analysis of shipping line cost structures
- regarding shipping as just one more input in the production process.
A more informed approach than hedging
But impact of P3 further adds to uncertainty!
Tools are available to better inform shippers

24. For more information including online data services