The Evolution of the PCTC Cascade

Shipping as an industry is used to upsizing as shipowners and charterers forever strive to maximise economies of scale. In the bulk carrier market, for example, contracting of traditional Handymax vessels drifted from being 40-50 k Dwt in size during the 1990s to becoming 50 k+ Dwt Supramaxes in the 2000s, and are now being displaced by 60 k+ Dwt Ultramaxes, and there are countless examples of upsizing across most commercial shipping sectors.

What has set the PCTC sector apart, until now, has been the very clear size limitations defi ned by the width of the Panama Canal (which sees approximately 800 PCTC transits per year) and the length restrictions in some key Japanese ports (where Japanese exports still account for 28% of global light vehicle deepsea shipments). As a result, the current industry benchmark vessel (6-7 k CEU with 2-4 hoistable decks and 100-150 tonne quarter-ramps) has persevered since it first began to be built in the early 1990s, with limited scope for upsizing. Of course, some owners have opted to build longer ships or lengthen existing ones in order
to increase cargo capacity, but these vessels have typically been deployed on non-Japan trades or called at unrestricted ports.

New Dawn for PCTCs
However, the widening of the Panama Canal heralds a new dawn of sorts for the PCTC sector as the shackles of past design constraints are thrown off. Originally scheduled for completion in 2014, the widening of the canal will now be completed in 2016, and owners and shipyards have been quick to seize the opportunity to develop new vessel designs intended to maximise
cargo carrying capacity. The fi rst generation of new wide-beam post-Panamax PCTCs already hit the water in 2013 with Hyundai Glovis leading the way, and their emergence throws up some interesting conundrums for the PCTC sector moving forward, particularly as
post-Panamax vessels begin to be deployed on the mainlane trades, thereby displacing smaller vessels.

Of course, the capacity cascade is by no means a new phenomenon. The overwhelming preference amongst owners and operators to build and deploy 6-7 k CEU vessels on mainlane trades has had consequences for smaller vessels, particularly as the market collapsed in late 2008. Chart 1 shows the evolution of deployed capacity on the Asia-Europe trade since 2000. The burden of capacity reduction since 2008 has almost exclusively been borne by the 4-6 k CEU segment, although it should be noted that this segment has also seen a net reduction of 34 vessels since 2008 as a result of intensive scrapping during 2009-10.

A similar squeeze on mid-size PCTCs can also be seen on the Asia to North America, transatlantic and Europe to Oceania trades, as 6 k+ CEU vessels have come to dominate deployment on these trades. So where did the rest of the mid-size PCTC fl eet disappear to? The answer can partly be found in the fast growing nonmainlane trades, such as those to the Middle East, Africa and South America, but even on these trades we see 6 k+ CEU vessels staking a claim.

Scaling Up on Intra-regional Trades
Interestingly, mid-size PCTCs are also increasingly finding employment in intra-regional trades. As Chart 2 shows, mid-size vessels have gained a significant share of deployment in intra-Asian trade, with the 3-6 k CEU vessels accounting for more than 50% of deployed capacity in Q1 2014, compared to less than 20% six years ago. This is perhaps not so surprising when you consider the cargo development. Intra-Asian light vehicle shipments have increased by 158% since 2000, whilst the corresponding growth for intra-Asian High & Heavy1 cargo volumes is 174%.

While there will inevitably be limits to how far the cascade can evolve, as port constraints and cargo parcel sizes limit the physical and economic viability of bigger ships on some routes, the PCTC cascade still has some way to go, particularly as the post-Panamax vessels become a more significant factor in the fleet.

Learning from the Container Market
MSI has worked extensively on forecasting the evolution of the containership cascade in recent years. Given that PCTC and containership sectors have much in common in broad commercial and operational terms, there is some value in considering the impact of the containership cascade. As in the PCTC sector, containership cascading is not new and has been taking place since the birth of containerisation. However, the current phase is most aggressive since it is taking place in a distressed market, and as such perhaps offers the clearest lessons. Firstly, it has always been container lines who have led the way in terms of ordering a new generation of vessel. Indeed, it was 16 years after the Sovereign Maersk (the world’s fi rst containership over 8 k TEU) that any independent owners actually placed orders for vessels of that size class on a speculative basis.

Secondly, the process of creating a liquid market of larger ships runs slower than might be expected. Since the early 2000s, the Panamax class of containership was the largest liquid asset on the charter market, and this remains broadly the case today, with liquidity still
limited for larger assets. Similarly, lines have been slower to shed their second-tier vessels as they become replaced by larger ones than might be expected, and it is only recently that a trickle of 8 k TEU vessels have been making their way onto the S&P market as they are superseded by vessels of 13-14 k TEU. Lastly, the process of cascading inevitably creates
bottlenecks, with middle segments of the fl eet squeezed and earnings crimped as they struggle to displace smaller vessels on niche trades. With containerships, Panamaxes have borne the brunt of this, whilst the question for the PCTC fleet is whether the cascade will proceed sufficiently slowly to avoid a pinch point, and if not where this pinch point will fall.

250+ Ships to be Ordered?
The post-Panamax revolution in the PCTC sector won’t happen overnight. It took over ten years for the 6-7 k CEU vessels to usurp the 5-6 k CEU segment as the largest size segment of the fleet in terms of both total capacity and number of vessels, and the rise of the post-Panamax fleet will almost certainly take longer. If post-Panamax ships are to take over the mantle as the largest segment of the PCTC fleet, more than 250 ships would have to be ordered, in addition to the 50 or so post-Panamax vessels already on the water or in the orderbook.

This is a heady number, particularly given the reluctance of some players to commit to the post-Panamax concept, but it is just a matter of time before that is broken. Although cargo capacity gains vary between designs, a 15-20% increase in cargo capacity should make the unit cost savings on offer to operators compelling enough to ensure post-Panamax vessels
evolve to become the new industry benchmark despite higher build costs, particularly when the improved economies of scale are considered together with more fuel efficient new vessel designs. Witness the reluctance of Evergreen to commit to ultra-large containerships (ULC) a few years ago as its competitors ramped up their ULC orderbooks, before finally caving in earlier this year.

Fortunately, time is on the side of investors. Recent market expectations of a prolonged shipping asset price recovery cycle have been misplaced, and like many other shipping sectors the PCTC market finds itself in a position of stasis, with fleet utilisation, charter earnings and asset values expected to remain static in the near term. This gives shipping
lines and their tonnage providers some breathing space to further develop their newbuilding investment strategies. Whether or not it leads to the emergence of new lines is questionable, given the concentrated nature of commercial control in the PCTC sector. As such, the pool of willing buyers and willing sellers is signifi cantly smaller than that for containerships, but MSI nevertheless expects increased liquidity in the market over the next fi ve years, both in terms of asset transactions and charter market liquidity, as owners seek to build or add chartered post-Panamax newbuildings to their fl eets, as well as divesting older and smaller tonnage. This will open up opportunities for investors seeking to take or expand a position in
the market.
Source: Maritime Strategies International