2017 AN EVENTFUL YEAR Shipping Industry at a Crossroads Bill - PowerPoint PPT Presentation

JANUARY 2017 2017 – AN EVENTFUL YEAR Shipping Industry at a Crossroads Bill Mongelluzzo, Senior Editor, JOC Group Inc. bmongelluzzo@joc.com (562) 428-5999 @BillMongelluzzo

2017 – AN EVENTFUL YEAR | JANUARY 2017 • The Unhealthy State of Ocean The issues Shipping • Global Shipping Alliances in Transition • Port Performance – Adjusting to Big Ships and Powerful Alliances • A Good Year for industrial Real Estate 2

2016 – AN EVENTFUL YEAR | JANUARY 2016 The Unhealthy State of Ocean Shipping 3

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Carriers in 2016 collectively lost about $10 2016 Was a bad billion (Alphaliner) year for ocean • Supply exceeded demand (again) carriers • 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 4

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Carriers by 2020 will be deploying more than Over-capacity in 100 vessels of 18,000-TEU capacity or shipping could higher (McKinsey) last several more • Yet demand projected to increase globally years 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) 5

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Question: How do carriers grow? Say good-bye to service for now • 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 6

2017 – AN EVENTFUL YEAR | JANUARY 2017 • For 2017-18 contracting season, carriers For carriers, are targeting $1,500/FEU to West Coast though, the worst of the bleeding • That is much better than 2016 rates that dropped as low as $750 to West Coast may be over • 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 7

2016 – AN EVENTFUL YEAR | JANUARY 2016 Global Shipping Alliances in Transition 8

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Alliances going from four at present (2M Global shipping G6, CKYHE, Ocean3)… alliances are in transition • …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) 9

2017 – AN EVENTFUL YEAR | JANUARY 2017 GRIs Lift Trans-Pacific Rates 10

2017 – AN EVENTFUL YEAR | JANUARY 2017 Ocean Alliances to Dominate Trans-Pacific 11

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Each alliance will have as many as 15 Alliances will weekly services to North America leverage their control over trade • This will create logistical challenges lanes 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 12

2017 – AN EVENTFUL YEAR | JANUARY 2017 Trans-Pacific contract rate expectations 13

2016 – AN EVENTFUL YEAR | JANUARY 2016 Port Performance – Adjusting to Big Ships and Powerful Alliances 14

2017 – AN EVENTFUL YEAR | JANUARY 2017 • 2016 was a year of recovery for SoCal Port Performance: ports. Laden container volume through Impact of big largest US port complex up 5.7% ships 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) 15

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Shipping patterns in trans-Pac are set Message going forward: Improve • Ports that maintain market share in low- performance 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 16

2016 – AN EVENTFUL YEAR | JANUARY 2016 Port Productivity Will Rule The Day 17

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Mandatory trucker appointment systems, It’s all about modern gate technology (GeoStamp) and process data-sharing throughout supply chain improvements from now on • 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 18

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Cargo surges, 10,000 container moves Port performance per vessel call (highest in world) must be must involve all seamlessly handled in LA-LB stakeholders • 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 19

2016 – AN EVENTFUL YEAR | JANUARY 2016 A Good Year for Industrial Real Estate 20

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Absorption of warehouse and distribution It has been a good space has been on a bull run for two year for industrial years now real estate • 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 21

2017 – AN EVENTFUL YEAR | JANUARY 2017 • LA County: 0.9 percent vacancy; Availability of Oakland & East Bay, 2.4%; Kent Valley industrial space & Pierce County, Wash., 1.8% near WC precariously low • 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? 22

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Diversity in types and functions of Diversity is the distribution facilities name of the game in industrial real • Traditional big-box import facilities, estate today 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 23

2017 – AN EVENTFUL YEAR | JANUARY 2017 • Rents for warehouse and distribution Market is strong, facilities went up 5.2% to $6.47/ SF but not nationwide in 2016 overheated • 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 24

2016 – AN EVENTFUL YEAR | JANUARY 2016 Conclusions 25

2017 – AN EVENTFUL YEAR | JANUARY 2017 • The next 18 months will be a period of Conclusions 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) 26