Exponential -- June 14, 2015

• The trade gap narrowed by 19.2% to a seasonally
adjusted $41bn in April 2015.
• Maersk Line, a unit of the Danish shipping and oil
giant, is the world’s largest container operator,
controlling 15.3% of all capacity.
Exponential the Skillbridge Magazine
Deeper Dives
Trading spaces:
challenges of shipping
industry incumbents
America closes its trade gap
The US trade deficit fell sharply in April as the effects of a West Coast port slowdown in
early 2015 faded. According to the Commerce Department, the trade gap narrowed by
19% to a seasonally adjusted $41bn in April, the sharpest drop in over six years.
Trade figures have swung wildly in recent months, in large part because of the labor
dispute at West Coast ports that created backlog of goods early in the year and a
surge in imports after the matter was resolved in March. Tepid overseas demand and
a strong dollar are both obstacles for exporters. From July 2014 through mid-March,
the dollar appreciated more than 23% against a basket of major currencies according
to Federal Reserve data. That has made American products more expensive overseas
and foreign goods cheaper at home.
Through the first four months of 2015, US exports were down 2.3% while imports were
down 1.8% from the same period in 2014. Last month, American exports of services
were the highest on record. Other categories were mixed, with sales of industrial
supplies, capital goods and autos rising, but consumer goods and food falling. One
major factor helping the trade gap the sharp narrowing in the petroleum deficit linked
to a surge in domestic oil production. The trade deficit for petroleum products was
$6.8bn in April, the lowest since March 2002.
Maersk orders more megaships
Private equity takes on shipping
Opportunities in shipping technology
Technology is playing an increasing role
in shipping logistics. In one prominent
example, the UK firm ExactEarth has
developed high-end technology for
tracking ships – using eight satellites to
track 120,000 ships and producing
seven million daily reports. ExactEarth
was started six years ago with three
employees. It now has 59 employees
and expects 2015 revenues to be about
$25 million.
Other innovations are coming out of
Finland. Norsepower has introduced
Rotor Sail — a new wind propulsion
technology for ships that brings fuel
savings of 2.6% for each small Sail. The
technology pays for itself within 4 years.
Into the 21 st century
The world’s biggest container-shipping
companies are set to dominate
maritime trade over the next few years,
leaving little space for small and
midsize operators to compete, said
Maersk CEO Nils Andersen. Maersk
Line, a unit of the Danish shipping and
oil giant, is the world’s largest container
operator, controlling 15% of all capacity,
according to shipping data provider
Alphaliner. Last week, Maersk
confirmed a $1.8bn order for 11 new
megaships that will be able to carry
19,630 containers each. The new ships
will be deployed in the Asia-to-Europe
trade loop.
“I can’t speak for other companies, but
small and midsize carriers-controlling a
3% to 5% market share--with very few
exceptions--have been unprofitable for
the last seven years,” Andersen told The
WSJ. “After such a long period of not
being profitable, it defies logic to
continue to invest in the business.”
Key Sources:
• WSJ: U.S. Trade Gap Shrinks by 19%,
• Reuters: Shipping industry faces shake up
as private equity unwinds bets
• McKinsey: The hidden opportunity in
container shipping
While global shipping grapples with its
worst downturn in 30 years, private
equity firms are unwinding massive bets
made on the sector in a move that will
accelerate a restructuring of the
shipping industry. Private equity firms
invested tens of billions in global
shipping after the 2008 financial crisis,
but weaker Chinese demand and an
oversupply of ships has driven down
freight rates. Additionally, firms have
been forced to idle vessels and, in some
cases, to file for bankruptcy. Mergers
and acquisitions are likely to drive more
consolidation in one of the world's most
fragmented industries. According to
shipping services firm Clarkson, 70% of
the sector's thousands of firms own
fewer than 51 vessels.
According to maritime fund
management firm Tufton Oceanic,
private equity firms invested $32bn in
shipping from January 2012 to January
2014. This is equivalent to 22% of the
total value of the world merchant fleet,
including ships on order. The value of a
new tanker or dry cargo vessel is 13%
lower than 10 years ago, said Ralph
Leszczynski, head of research at ship
broker Banchero Costa.
McKinsey Insights reports that the
container-shipping industry has been
highly unprofitable over the past five
years. But, during this time, earnings
have been “exceptionally volatile.”
McKinsey believes several factors are
responsible, notably “trade’s spotty
recovery from the global financial crisis,
and redoubled efforts by corporate
customers to control costs.” However,
some of pain is self-inflicted. As in past
cycles, the industry “extrapolated the
good times” and foresaw an
unsustainable rise in demand. It is now
building additional capacity that may not
be needed.
Shipping companies cannot afford to
throw up their hands and accept their
fates. Hidden beneath these issues is
another set of challenges that shipping
lines can readily take on. Across the
industry, in commercial, operations, and
network activities, shipping lines have
opportunities to improve performance.
In operations, many lines treat fuel as
just another cost of doing business and
have been slow to adopt new
technology. A new attitude to
technological change is required if small
existing firms are going to survive.
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