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CONTAINER SHIPPING

India - the impact of shipping lines’ consolidation and the cabotage rule change

India has the world’s fastest growing economy and its trade has been growing at twice the global average.   This article considers India’s prospects for trade growth and the implications for its ports of the emergence of the major container shipping alliances and the Government’s relaxation of the cabotage rules.

Global trade has been growing at a moderate rate for the last five years and it is expected to remain weak for the foreseeable future. Based on the most up-to-date trade data available at the time of this analysis, we estimate that global trade grew by approximately 1% last year and is projected to grow by less than 2% in 2016. In contrast to this gloomy performance, India, the fastest growing economy according to the International Monetary Fund (IMF), remains one of the few bright spots. During the first half of 2016 global containerised trade experienced an annual growth of less than 1% while India has been growing by 2%. Even more impressive is the contrast between 2010 and 2015: during this period, India experienced a CAGR of 8.4% while global trade grew at a CAGR of some 4%. For the near future, we forecast that India could experience a CAGR of some 5% between 2015 and 2020 while global trade is forecast to grow at a CAGR of 3.7% during the same period.

Indian performance is expected to endure thanks to the Sagarmala Project, an initiative indorsed by the Indian government to boost India’s role in global trade. Unitised traffic, estimated to have accounted for 67% of total Indian trade in 2015, could undoubtedly grow if the government’s plan to remove the current major constraints limiting the maritime sector[1] succeeds.

The results of our trade analysis are shown in the following figure.

Figure 1: Indian trade vs Global trade, Index 2000=100

 Source: MDS Transmodal, Wold Cargo Database 28.09.2016

The drivers supporting the positive results experienced by India, however, are not only ‘endogenous’. The recent improvements experienced by the European economies, India’s principal trading partners, are positively impacting the Indian market. Indian exports to North Europe & Mediterranean have grown by some 8% between 2015H1 and 2016H1, with cargo to the EU up by more than 5%.

The following tables show India’s exports by world region in 2016H1 compared to the same period last year and the top 10 fasting growing commodities exported to North Europe & Mediterranean during the same period.

Table 1: India’s exports by destination world region (‘000s Estimated Loaded TEU)

Destination Region

2015H1

2016H1 (e)

Growth

Volume

%

Australasia & Oceania

26

27

1.1

4.3%

Europe & Med

670

721

51.1

7.6%

of which EU(28)

426

449

22.7

5.3%

Far East

721

669

-52.7

-7.3%

Gulf & ISC

570

629

59.6

10.5%

Latin America

148

129

-18.4

-12.4%

North America

424

412

-12.6

-3.0%

Sub Saharan Africa

281

284

3.3

1.2%

Grand Total

2,840

2,871

31.6

1.1%

Source: MDS Transmodal, Wold Cargo Database 28.09.2016 (e)=estimates

 Table 2: Indian top 10 fasting growing SITC2D to N Europe & Mediterranean (Estimated Loaded TEU)

SITC 2-digit level

2015H1

2016H1 (e)

Growth

Volume

%

Plastics in primary forms

6,729

11,501

4,772

70.9%

Textile fibres 

24,489

34,624

10,135

41.4%

Electrical machinery 

59,745

74,122

14,377

24.1%

Crude fertilisers & minerals

12,680

15,002

2,322

18.3%

Tea/coffee/cocoa/spices 

24,554

27,602

3,048

12.4%

Vegetables & fruit, nuts

22,717

25,484

2,766

12.2%

Mineral manufactures 

34,673

37,929

3,256

9.4%

Rubber manufactures 

36,769

39,676

2,906

7.9%

Miscellaneous manufactures 

17,777

18,856

1,079

6.1%

Textiles & made-up articles

90,553

95,228

4,675

5.2%

Top 10 SITC2D

330,687

380,023

49,336

14.9%

Other commodities

339,006

340,780

1,774

0.5%

Grand Total

669,693

720,803

51,110

7.6%

Source: MDS Transmodal, Wold Cargo Database 28.09.2016 (e)=estimates

Maritime services[2]

Analysing the maritime services calling at Indian ports and the shipping lines operating on these routes, we estimate that between 2012 and 2016 the total number of services to India has remained substantially the same (73 in 2012 up to 74 in 2016) with deployed capacity having increased by some 37%, up from 11m TEU in 2012 to approximately 15m TEU in 2016. The maximum ship size deployed on the services passing through India has increased from 6,800 TEU to 11,600 TEU. Considering the deepsea component only (i.e. excluding services calling only at Gulf & Indian Subcontinent ports), we estimate a higher increase of 45% in deployed capacity, up from 6.3m TEU in 2012 to 9.2m TEU in 2016.

All of this does not come as a surprise given increases in ship size and the consolidation amongst shipping lines. However, what is interesting is the impact of the consolidation in terms of market share. In 2012 the top 3 carriers had a combined market share (based on deployed capacity) of 30% whereas they now have a combined share of 38% as shown in the following table.

Table 3: Capacity deployed on all services passing through Indian ports by operator 2012 vs 2016

Top 15 operators (ranked on 2016 data)

2016

2012

Deployed capacity ('000s TEU)

Market share

Cumulative market share

Deployed capacity ('000s TEU)

Market share

Cumulative market share

Maersk

2,508

17%

17%

1,813

17%

17%

MSC

2,261

15%

32%

723

7%

23%

CMA-CGM

950

6%

38%

688

6%

30%

UASC

615

4%

43%

364

3%

33%

Hapag-Lloyd

581

4%

46%

416

4%

37%

OOCL

574

4%

50%

425

4%

41%

X-Press Feeders

525

4%

54%

472

4%

45%

Wan Hai

511

3%

57%

443

4%

49%

Bengal Tiger

399

3%

60%

379

4%

53%

ZIM

399

3%

63%

190

2%

55%

OEL

380

3%

65%

54

0%

55%

Hyundai

378

3%

68%

295

3%

58%

NYK

377

3%

70%

313

3%

61%

COSCO

359

2%

73%

90

1%

62%

PIL

356

2%

75%

254

2%

64%

All others

3,699

25%

100%

3,904

36%

100%

Total

14,871

100%

 

10,822

100%

 

Source: MDS Transmodal, Containership Databank

The four dominant alliances (2M, Ocean Three, CKYHE and G6) that have emerged in the last few years could become three (2M, Ocean Alliance and THE Alliance) from April 2017. Although the composition of these proposed Alliances is far from certain (in the light of Hanjin’s collapse, their compatriot Hyundai (HMM) may possibly team up with the 2M Alliance and there are rumours over Maersk Line acquiring K-Line), we expect these Alliances to compete with each other on the quality of services provided. Rather than abandoning slow steaming, and thereby incurring higher bunker costs, we expect the emergent three Alliances will focus on faster transit times and reliability through network efficiency and cutting port calls.

Another factor that affects the shipping industry is the scrapping process, which seems to have intensified in the last few quarters. The completion of the Panama Canal expansion (inaugurated on 26th June 2016), allows ships up to 14,000 TEU to transit the Canal, making ships of 5,000TEU more or less redundant when they cannot be repositioned on other routes (i.e. intra-regional markets). On 20th September 2016 a 10-year old vessel of 4,600TEU operated by CMA-CGM and previously deployed on the Panama routes become the youngest container vessel ever sold for scrap. The likelihood that more, relatively young, vessels will be sold for scrap in the coming quarters seems fairly high.

If on the one hand these factors bring stability to the market, with the improvements in services welcomed by shippers, on the other, they could lead to increases in freight rates. Shippers could also soon need to redefine their supply chains as a consequence of changed and or reduced port calls.

Ports will not be immune from these imminent changes; they will face stronger competition and will need to adjust their quayside and shoreside handling operation due to vessels becoming significantly larger and visits becoming less frequent.

Another factor affecting Indian maritime services is the relaxation of the Indian cabotage rule to allow foreign shipping lines to operate on coastal routes in order to promote transhipment hubs. With the easing of the cabotage law in March 2016, the Indian government aims to attract Indian containers to Indian ports instead of being transhipped via neighbouring ports. However, the Indian Private Ports and Terminals Association (IPPTA) suggested that “the cabotage relaxation, to be meaningful, should be applied unconditionally at all the container handling ports at least for five years,” and it is seeking a review of the new rules. The main criticism is related to the requisite volume of transhipment that the port handles. An existing container port, once the cabotage relaxation is approved, will need to tranship at least 50% of the total containers handled during the first year, while a new port, will have to achieve this threshold in the second year. In the event of this threshold not being achieved, the relaxation granted would be withdrawn and the port would then not be eligible for cabotage relaxation for the following three years.

With the relaxation of the cabotage rules having been introduced for only a few months, trying to assess its benefits seems premature. However, we have analysed the context in which the new legislation has been put in place and the changes that have occurred in the last few years in the services calling at Indian ports and their major competitor port for transhipment, Colombo. Comparing the deepsea services passing through India and Sri Lanka in 2012 with 2016, it seems that Colombo is strengthening its overall position, but not at the expense of India. The number of services calling at Indian ports passing via Colombo has increased from 16 in 2012 to 19 in 2016 with the capacity deployed on these services up by 72%. The capacity we estimated is deployed on the deepsea services dedicated to India and Sri Lanka now accounts for 57% of the total deepsea services passing through India, up from the 48% we estimated in 2012. Comparing the shipping services calling only at Indian ports and Colombo, we estimate that between 2012 and 2016 the number of services has declined from ten to seven with the total capacity deployed on these services down by 30%. This analysis suggests that, although Colombo still plays an important role in the Gulf & ISC routes, Indian ports are now more competitive and succeeding in attracting more direct shipping lines.

The following two figures illustrate which Indian ports are gaining the most.

Figure 2: Number of services calling only at Colombo and Indian ports

Source: MDS Transmodal, Containership Databank

 

Figure 3: Capacity deployed on services calling only at Colombo and Indian ports (mTEU) Source: MDS Transmodal, Containership Databank

Indian ports are undoubtedly on the right track. However, for the relaxation of the cabotage rule to achieve its targets, it will need to be supported by collateral interventions; competitive port charges and improvement in existing infrastructure being the major ones. These interventions could be key to encourage a modal switch from overland to coastal shipping.



[1] The current major constraints limiting the maritime sector have been identified by the Indian Ministry of Shipping as: lack of integrated institutional arrangements, weak infrastructure at ports and beyond and limited economic benefit to the region and to the community.

[2] For this analysis we have considered only services with average ship size of at least 1,000TEU.