MSC gets serious about Asia-ECSA

Mediterranean Shipping Company (MSC) clearly has no intention of being left behind in the race to acquire greater economies of scale between Asia and East Coast South America. By launching its own ‘Ipanema’ service, it has thrown down the gauntlet to other carriers, many of whom also have expansion in mind despite poor trading prospects. MSC’s announcement at the beginning of April of a new stand-alone ‘Ipanema’ service between Asia and the East Coast South America has rocked the industry not so much because of its declared scale, but because it is clearly just the tip of the iceberg.
Much greater things must be in the making as it is hard to imagine that the world’s second largest carrier, which very much believes in economies of scale, would be content to replace its current slot charter arrangement on CSAV/CMA CGM/CSCL’s SEAS 1 / ASAX 1 service that uses 6,350 teu ships with owned vessels offering just 2,000 teu nominal capacity (see table of services at bottom of page for more details).
The implication is that its new Ipanema schedule is a trial of a much bigger service to come. Hamburg Süd’s new series of 10 x 7,100 teu wide-beam reefer friendly ships, some of which are now deployed between Asia and ECSA, have set the benchmark in the tradelane, and MSC will not want to be left behind for long.
The Geneva-based carrier has a series of at least 6 x 8,800 teu similar wide-beam ships due for delivery this year, and can easily charter other 8,000 teu ships to take the place of the existing fleet. Should these not be available, a vessel sharing arrangement is always possible.
In the interim, there are already indications that the planned 2,000 teu vessels are to be quickly replaced by chartered vessels of around 4,500 teu. MSC is not known for giving away much in advance. Even though the first sailing, the 3,016 teu MSC Jenny, was scheduled to depart from Shanghai on 18 April, the names of all the other vessels have yet to be confirmed, with the Portugal (4,545 teu) and the MSC Esthi (9,200 teu) only vaguely being mentioned on the website.
As shown in the chart below, the charter market is in its favour, with the daily hire cost of a 4,250 teu vessel being less than half of what is was two years ago. Rates as low as $6,000 per day are now even being offered. This was in fact the 12-month rate negotiated by MSC for the Portugal  in May.
As shown in the table of services, MSC’s new Ipanema schedule will be much shorter than CSAV/CMA CGM/CSCL’s remaining service, with Rio de Janeiro, Rio Grande, Montevideo and Paranagua omitted.
How this fits in with transshipment services to ports no longer serviced directly, or ports still not served directly, is not yet entirely clear, although Rio Grande is now advertised as being offered via MSC’s Lion service from Asia to North Europe, with transhipment taking place at Sines in Portugal. Shanghai to Montevideo and Rio are not yet advertised, but are offered from Hong Kong via the Tiger service from Asia to the Eastern Mediterranean, with transshipment occurring at the Greek port Piraeus.
What seems clear is that less cargo will require transshipment between the Mediterranean and ECSA, leaving MSC with a challenging hole to fill in its Asia/Europe vessels.
MSC is giving little away on its intentions, which is unsurprising, given that the Asia-ECSA tradelane does not appear ready for more capacity. As shown in the following charts, recent trade growth in each direction lacks conviction, so the deployment of additional capacity will result in a significant reduction of average vessel utilisation, taking freight rates with it, unless rationalisation of other services is envisaged.
According to data from Container Trades Statistics, headhaul cargo from Asia to ECSA declined by 2% last year, and the prospects for this year remain weak when compared to Brazil’s stellar growth over the previous five years. Brazil has to control inflation urgently, so its currency has lost over a quarter of its value compared to the US dollar over the past two years. Argentina also still has trade protectionist measures in place.
The inference is that some sort of service rationalisation will take place with unwanted post-Panamax tonnage, possibly involving Hamburg Süd. The two already share some services between North Europe and ECSA. Hamburg Süd also has 10 x 9,700 teu wide-beam reefer friendly vessels due for delivery between now and the end of 2014, which could enter the equation.
With the high season approaching, particularly for reefer exports from Brazil, Argentina and South Africa, it is the time of year for change. Evergreen, Coscon and Zim are in the process of upgrading the 3,500-4,500 teu vessels deployed in their ESA service to between 8,000-9,000 teu.
Meanwhile, the SSA 1/AESL/NHX 1 schedule is about to be separated back into a weekly loop run only by PIL, K Line, NYK and HMM.
Our View
Ocean carriers will deploy far more post-Panamax vessels between Asia and ECSA in future, if only to get rid of further unwanted capacity operating between Asia and Europe, and between ECSA and Europe.
Laying up does not appear to be an option. This will force them to rationalise services on a much bigger scale than at present, including more transshipment to/from shallow draught ports in Argentina and Brazil.
Source: Drewry Maritime Research