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2017 – AN EVENTFUL YEARShipping Industry at a Crossroads

JANUARY 2017

Bill Mongelluzzo, Senior Editor, JOC Group [email protected]

(562) 428-5999

@BillMongelluzzo

2017 – AN EVENTFUL YEAR | JANUARY 2017

The issues • The Unhealthy State of Ocean Shipping

• Global Shipping Alliances in Transition

• Port Performance – Adjusting to Big Ships and Powerful Alliances

• A Good Year for industrial Real Estate

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The Unhealthy State of Ocean Shipping


2016 Was a bad year for ocean carriers

• Carriers in 2016 collectively lost about $10 billion (Alphaliner)

• Supply exceeded demand (again)

• Seven straight years of capacity growth in global liner shipping (Ron Widdows)

• More capacity coming on line in the next few years; 3.1 percent growth in 2017 (Bimco)

• Maersk has 20 vessels of 10,000-25,000 TEU capacity on order

• New entrant into trans-Pacific, Korea Line, to deploy 21 ships in 2017

• Having survived a meltdown in Korea, Hyundai Merchant Marine aims to control 5% of global liner capacity by 2020

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Over-capacity in shipping could last several more years

• Carriers by 2020 will be deploying more than 100 vessels of 18,000-TEU capacity or higher (McKinsey)

• Yet demand projected to increase globally only about 3.2% per year next few years

• By 2020, capacity will still exceed demand by as much as 13% (Boston Consulting Group)

• Maersk predicts balance supply/demand in 2022

• Days of container volumes growing 3X to 4X growth in GDP are over (Seroka)

• After more than a decade of double-digit annual growth rates, carriers, and ports, must get used to a low-growth industry of 2-3 percent per year (Lars Jensen)

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Say good-bye to service for now

• Question: How do carriers grow?

• Answer: By stealing cargo from other lines (Widdows)

• That means service suffers, but shippers don’t seem to mind

• Carriers’ worst fears have been realized: their industry has become a commodity

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For carriers, though, the worst of the bleeding may be over

• For 2017-18 contracting season, carriers are targeting $1,500/FEU to West Coast

• That is much better than 2016 rates that dropped as low as $750 to West Coast

• Carriers just may pull it off

• Carriers emboldened by loss of 7% trans-Pac capacity with Hanjin’s demise

• Shippers want reliable carriers that will be around for awhile and are willing to pay higher contract rates

• 2016 spot rates ended with 20% spike to $1,923/FEU West Coast and $3,100 East Coast

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Global Shipping Alliances in Transition


Global shipping alliances are in transition

• Alliances going from four at present (2M G6, CKYHE, Ocean3)…

• …to three larger, more powerful alliances with more leverage over ports, terminal operators and BCOs (4/1/17)

• 2M – Maersk and MSC with HMM sharing slots (20% of trans-Pac)

• Ocean Alliance – CMA CGM, Cosco, Evergreen, OOCL (40% trans-Pac)

• THE Alliance – Yang Ming, MOL, “K” Line, NYK, Hapag-Lloyd/UAS (40% trans-Pac)

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GRIs Lift Trans-Pacific Rates

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Ocean Alliances to Dominate Trans-Pacific

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Alliances will leverage their control over trade lanes

• Each alliance will have as many as 15 weekly services to North America

• This will create logistical challenges for ports, especially LA-LB

• Containers on same vessel could belong to five or six lines

• Primary purpose of alliances is to reduce operating costs, not improve service

• By controlling 88% of trans-Pac capacity, Big 3 alliances will make it difficult for independent lines

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Trans-Pacific contract rate expectations

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Port Performance –Adjusting to Big Ships and Powerful Alliances


Port Performance: Impact of big ships

• 2016 was a year of recovery for SoCal ports. Laden container volume through largest US port complex up 5.7% through November (port numbers)

• West coast ports suffered greatly during labor disruptions of 2015-16, but short-term loss of market share was minimal

• Longer-term trend, though, has been negative. Loss of cargo share began with 2002 ILWU-PMA contract negotiations

• Since 2013, LA-LB share of US imports declined from 39% to 36.6% (PIERS)

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Message going forward: Improve performance

• Shipping patterns in trans-Pac are set

• Ports that maintain market share in low-growth environment will be ones that most efficiently handle big ships

• This involves staying ahead of curve in infrastructure development and cargo-handling processes

• LA-LB already leaders in infrastructure development: deep harbors, large terminals, on-dock rail

• Spending $6.6 billion in coming decade on terminal modernization and landside access

• On-dock/near-dock rail crucial for LA-LB

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Port Productivity WillRule The Day


It’s all about process improvements from now on

• Mandatory trucker appointment systems, modern gate technology (GeoStamp) and data-sharing throughout supply chain

• Neutral chassis “pool of pools” must be improved

• Redevelop PierPass, which has been successful on many fronts but needs some vital changes to win widespread support from port community

• Must turn big ships in four days, avoid yard congestion and turn trucks in 60 minutes or less

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Port performance must involve all stakeholders

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• Cargo surges, 10,000 container moves per vessel call (highest in world) must be seamlessly handled in LA-LB

• Is terminal automation the answer? Not for every terminal, but for some (Nye)

• Will consolidation hit terminal operators like it did shipping lines? Possibly

• Who will run Pier T in POLB and APL terminal in POLA?

• Will there be consolidation and other fundamental changes in harbor drayage? Possibly

• Reliable, “machine-like” productivity essential at marine terminals


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A Good Year for Industrial Real Estate


It has been a good year for industrial real estate

• Absorption of warehouse and distribution space has been on a bull run for two years now

• It should continue well into 2017 (CBRE/JLL)

• Demand for industrial space continues to exceed new deliveries

• Q3 2016 nationwide, 67.9 million SF absorbed vs 51.3 million new SF delivered

• 49 of the 53 industrial markets tracked by CBRE nationwide registered positive net absorption

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Availability of industrial space near WC precariously low

• LA County: 0.9 percent vacancy; Oakland & East Bay, 2.4%; Kent Valley & Pierce County, Wash., 1.8%

• Developers and tenants responding by moving further inland to locations like Inland Empire and Lehigh Valley. IE’s vacancy rate 4 percent

• Nationwide vacancy rate about 5 percent, or half what it was in depth of economic recession

• So, what is driving the boom market in industrial real estate?

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Diversity is the name of the game in industrial real estate today

• Diversity in types and functions of distribution facilities

• Traditional big-box import facilities, regional distribution, intermediate facilities between import facilities and urban markets

• Traditional distribution for large urban regions is still strong. Class A big-box warehouses (750,000+ SF)

• But also e-commerce fulfilment that can handle shipments at the package level for last-mile delivery

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Market is strong, but not overheated

• Rents for warehouse and distribution facilities went up 5.2% to $6.47/ SF nationwide in 2016

• Similar increases anticipated in 2017

• Due to tightness in market, Class A facilities still most desirable but Class B facility in right location will suffice

• Having struggled through the lengthy economic recession of 2008-09, developers and investors are measured in their development plans

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Conclusions


Conclusions • The next 18 months will be a period of profound change in port and shipping industry

• International trade is maturing. Much of the outsourcing that was to happen has happened

• 2-3% annual growth in container volumes will be the norm

• It’s how the cargo moves that will be the exciting part of the equation

• Carrier mergers and acquisitions will continue (Maersk/Hamburg Sud in 2017; the three Japanese lines will merge by mid-2018)

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Conclusions • Big ships and powerful alliances will place big demands on ports and terminal operators

• Modernization of terminals must continue; super post-Panamax cranes are being purchased as we speak

• Landside infrastructure from terminal gates to warehouses and distribution centers 50 miles away must be improved

• Equally important, cargo-handling processes and information technology must digitize an industry that is still very manual in its operations

• It will be interesting, and hopefully fun!

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THANK YOU!

Bill Mongelluzzo

Senior Editor, JOC Group Inc.

[email protected]

(562) 428-5999

@BillMongelluzzo

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january 2017 2017 – an eventful year old ranch mongelluzzo...2017 – an eventful year | january...

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