TOC EUROPE 2011 ANTWERP 8 JUNE 2011

CONTAINER SUPPLY CHAIN THE FUTURE OF GLOBAL SUPPLY CHAINS

GUSTAAF DE MONIE

G. De Monie Policy Research Corporation

THE REASONS FOR THE MAJOR COLLAPSE OF THE WORLD ECONOMY IN 2008 AND 2009
The surge of trade imbalances, the huge balance of payments deficit of the U.S. and the resulting weakness of the U.S. dollar The sub-prime crisis resulting in a full-fledged financial disaster for major banks around the world Overstocking induced by cheap credit, generous rebates and the expectation that inflation would sharply rise following massive increases in oil prices Recession delay tactics strongly promoted by the U.S. therein followed by most other traditional industrialized countries Creation of excess capacities in many countries and industry sectors, following the artificially sustained boom, thereby helped by low interest rates available to borrowers

SHIPPINGS PART IN THE ABOVE-LISTED CAUSES

Shipping was not directly co-responsible for any of the above-listed causes, but shipping lines and vessel operators did try to benefit from the circumstances created by the recession delay tactics of governments, that did not recognize the overheating of some of the major economies In particular the almost unlimited availability of easy and cheap credit lines incited ship owners to order a massive indeed an unprecedented - number of new vessels Before the crisis broke in mid 2008, almost all vessel types had been ordered in large numbers (large in terms of the then existing fleet for each type of vessel) and for most vessel types what was especially serious, was the fact that especially the largest ships were ordered The shipping sector failed to recognise the artificial boom conditions prevailing in the 2005 2007 period and their longer term sustainabaility

SHIPPING IN 2011
2010 was for most shipping companies, particularly in the container trades, an excellent year, with a sudden rebound of profits (a 17 billion dollar profit in 2010 for the container operators against a loss of 19 billion dollars in 2009) thanks to a combination of cost-cutting measures and a significant improvement in earnings. Container vessel ordering has in since late 2010 and the first half of 2011, however, reached new heights, with massive orderings from Evergreen (30 vessels), Hapag Lloyd (10), OOCL (10) and Maersk (20). This is additional to some 70 vessels still to be delivered in 2011 and 2012. Not surprisingly, the freight rates in the Far East Europe trades and the Far EastNorth America trade have once more declined thus, marking the shortest business cycle in liner shipping (low in 2009, high in 2010, back to low in 2011). The scope that still more vessels could be put in slow steaming mode, is no longer there and the containership operators prepare for another scramble for market share.

MEASURES TAKEN BY PORTS AND TERMINALS IN DEALING WITH THE CRISIS OF 2008- 2009 (1)
Slowing down of new major development projects (e.g. London Gateway project; Maasvlakte 2 developments, JadeWeser terminal) or even cancelling or delays to new terminals in for example the Westerschelde Container Terminal in Vlissingen Delayed acquisition of additional handling equipment Reduction in manpower levels Cost cutting measures (revised maintenance schedules, sub-contracting of operational activities to reduce fixed costs) Rebates offered to main carriers on port dues (Port Authority of Rotterdam, Port Authority of Antwerp, Port of Bremerhaven, etc.) Adaptation of the service contracts between the carriers and the terminal operators, with substantial lower tariffs up to 50% rebates on the rates set for 2008, stricter conditions for priority berthing and much more flexibility demanded by the carriers)

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MEASURES TAKEN BY PORTS AND TERMINALS IN DEALING WITH THE CRISIS OF 2008- 2009 (2)
Investments in improved intermodal facilities, extended gateways, upgraded intermodal links, creation of additional CFSs , ICDs and distribution centres Requests from terminal operators to port authorities to: reduce lease rents; apply different scale/revised variable amount for the calculation of royalties a lowering of the throughput commitment waiving penalty clauses Request to governments to increase the subsidies for port infrastructure works (entrance channels, locks, berth construction and inland transport accesses)

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EFFECTIVENESS OF THE MEASURES

MEASURES TO BETTER CONTROL MEASURES TO BETTER CONTROL CAPACITY CAPACITY Effects are both short and long-term Effects are both short and long-term Short-term measures may negatively Short-term measures may negatively affect terminals service and performance affect aaterminals service and performance level level Long-term measures aim at reducing the Long-term measures aim at reducing the imbalance between supply and demand in imbalance between supply and demand in port range their effectiveness depends aaport range their effectiveness depends still on the future evolution of the traffic still on the future evolution of the traffic and particularly, the required throughput and particularly, the required throughput volumes in each range volumes in each range MEASURES TO INCREASE REVENUE MEASURES TO INCREASE REVENUE AND DECREASE COSTS AND DECREASE COSTS The measures to increase revenue contain The measures to increase revenue contain often conflicting ingredients (rebates on often conflicting ingredients (rebates on port dues; lowering of handling tariffs, port dues; lowering of handling tariffs, increased discounts) their success increased discounts) their success depends on the effectiveness to attract depends on the effectiveness to attract sufficient cargo from competing ports sufficient cargo from competing ports or terminals or terminals The cost decreasing measures are by The cost decreasing measures are by nature short-term and unpopular nature short-term and unpopular -their main purpose is to allow their main purpose is to allow ports and terminals to get over the existing ports and terminals to get over the existing slump with the core of their personnel slump with the core of their personnel intact and maintaining high quality staff intact and maintaining high quality staff

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THE INFLUENCE OF THE MAIN LOGISTIC OPERATORS AND CONSUMER-FACING COMPANIES IN CONTAINERISATION
Also in future, the main logistics operators such as DHL, Schenker, Khne + Nagel, Nippon Express, Hellman Worldwide Logistics or Panalpina and the consumer-facing companies such as Walmart, Unilever, Toyota, Nestl, Michelin, Karstadt and others, are mainly interested in price, security and speed. But also wider performance factors such as: working conditions vessel efficiency emissions environment labour rights become priorities. Companies such as Walmart are demanding that their suppliers perform against a sustainable scorecard. This practice is bound to lead to a rapid proliferation of standards for shipping with raised expectations from ports, financiers, insurers and other interested groups.
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FIVE KEY FINDINGS AND POSSIBLE SOLUTIONS OF THE SUPPLY CHAIN

Cost Containment
Rapid, constant change

Instrumented
Machine-generated from sensors,RFID tags, meters, GPS inventory will count itself

Visibility
Flooded with infomation the executives struggle to see and act on the right information

Risk
Risk management ranks high, but executives are divided on approach

Interconnected
The entire chain will be connected: customers, suppliers, IT systems, parts and products

Customer Intimacy
Companies are better connected to their suppliers than their customers

Intelligent
The supply chain will be much smarter Advanced analytics and modelling will help to evaluate alternatives

Globalization
Globalization has proven to be more about revenue growth than cost savings Source: IBM
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SELECTED MEASURES TO REDUCE NEGATIVE ENVIRONMENTAL EFFETS

PROPOSED MEASURES Proportion of containers to be moved in or out of the terminal by barge or railway instead of by road Creation of facilities for the handling of barges coming from the mainline vessels on the major container terminal or going there Reliance on wind turbines or solar power for terminal operations Greater use of electric handling equipment for the operation of a terminal (e.g. all electric RTG fleet) Use of cold ironing POSSIBLE ADVANTAGE Savings in carbon dioxide emissions because of preferential use of barges and rail Required to allow terminal operators to achieve the imposed modal split for barge operations Saving of 45 % in carbon dioxide emissions Savings of up to 50% in carbon dioxide emissions less maintenance than on diesel powered equipment Use of on-shore electric power supply to reduce Nox, toxic particulate matter and greenhouse gases Decreases fuel consumption Electric truck used for short interterminal distances
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DIRECT BENEFICIARIES Port authority as concessioning authority Port authority barge operators cargo owner interests

Terminal operators Terminal operators

Shipping lines port authorities

Vehicle truck refits Vehicles drayage trucking

Port authority terminal operators Port terminals drayage operators

RECOMMENDATIONS FOR STAYING ON TOP OF THE PRESENT COMPETITION (1)

Recommendations: Be cautious when using GDP-based forecasts. The link between GDP and throughput has over the years seriously weakened because of: strong differences in GDP growth and trade growth strong imbalances on most key routes and this is still continuing increased use of specialized containers growing but unpredictable influence of transhipment Bottom-up market research should be used, in the short to medium term, to test the validity and robustness of the top down forecasts. The recorded cargo flows through bottom-up research should preferably also be monitored not only by number of anonymous boxes but by genuine tonnages and volumes.

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RECOMMENDATIONS FOR STAYING ON TOP OF THE PRESENT COMPETITION (2)

Recommendations: Many ports and terminal operators have diversified their activities (inland ports, rail operations, barge operations, extended gateways). How many of these services have added real value to ports and terminals. Have these been effectively measured? In how far have they not distracted the operators from their true calling Dont ports and terminals not stray away from the ports or terminals core business when circumstances demand it correctly redefine what is the core business .
G. De Monie Policy Research Corporation

RECOMMENDATIONS FOR STAYING ON TOP OF THE PRESENT COMPETITION (3)

Some more practical recommendations: Stop price cutting to attract illusory traffic away from the competitors
Build-in capacity flexibility in the design phase and rely on modular designs

to expand facilities in due time Optimize equipment allocation dont add handling equipment if it doesnt help to effectively improve productivity in a sustainable way Remain realistic when setting production and financial targets: ports and terminals can be a robust business, but in the long-term it is not a business that will expand much faster than economic growth in the region allows

G. De Monie Policy Research Corporation

2011 2025 THE FUTURE (1)

In 1996, when the biggest container vessel was the Regina Maersk of 6000 TEU, I introduced the idea that vessels of 15000 TEU, would be an acceptable maximum upper limit by 2015. This statement was very much criticized at the time. But since then, it has been proven quite correct with the Maersk line Emma Class vessels. The only weakness in my argumentation was that the first of these vessels was already put in service in the second half of 2006 and not sometime around the middle of the second decade.

2011 2025 THE FUTURE (2)

Now that Maersk have confirmed an order for 10 ships of 18000 TEUs and have also confirmed the ordering of another series of 10 ships of 18000 TEUs, they seem to have moved well beyond the initial limitation of 15000 TEUs. This has, however, more to do with the advances that shipyard engineers have been able to achieve in putting more containers in a vessel, that previously only could take 15000 TEUs. My firm belief is therefore that the maximum vessel size has now been reached, with a length overall of some 400 meters and a beam overall of 59 meters. These vessels have the possibility to load from 14000 to 18000 TEUs depending on the internal arrangements of the container stacks under deck and on deck and the positioning of the ships engines away from the navigation bridge. But as always, they need still to be filled with adequately paying cargoes.

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2011 2025 THE FUTURE (3)

Future very large containership designs will incorporate energy saving devices with two rather then one engine to give speeds of 18 to 20 knots, with 35% or more fuel cost savings, strongly reduced CO2 levels per TEU carried and waste heat recovery systems. Also environmentally, the ships will become much more friendly, with what has been described as a cradle to cradle passport for used materials at the end of the vessels life, either as they go back into nature or become recycled into new vessel types. Container shipping lines are becoming ever more an oligopolistic system. Today, the top 20 container lines have 80% of the total carrying capacity of all containerships, but the time comes closer that the top 10 container lines will hold that 80% of the available capacity. Most of the remaining lines will then concentrate on feeder vessels and direct call vessels that ply between secondary ports .

2011 2025 THE FUTURE (4)

Ever more, the emphasis on container terminal systems will be on connectivity, communications and automation From a logistical point of view, the security of the complete chain will be pursued, with increasing controls in all its individual elements. This, however, is bound to contribute to significant extra costs which in the final analysis has to be borne by the ultimate users, the ultimate consumers. Increased automation of the processes can be applied to check, in an integrated effort, ships, cargoes, containers, trucks, rail and barges. This may help to lower somewhat the envisaged extra additional costs.

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2011 2025 THE FUTURE (5)

New development and expansion plans for large container terminals will increasingly opt for fully automated systems and will move towards integrated container systems with the emphasis on still faster speeds of operation, shorter dwell times for all container statuses and fast delivery or receipt of incoming or outgoing boxes. It will include an automated grounding strategy, advanced container port optimisation techniques and green port technologies (for example battery driven AGVs, diesel electric straddle carriers, hybrid e-RTGs and automated stacking cranes). On the ship-to-shore operation, new types of quay gantry cranes are likely to be introduced to allow a much greater number of cranes to be allocated per vessel and to boost the number of moves per crane per hour to over 50 and per vessel per hour to an average of over 300. The requirement to move 5000 to 6000 containers per 24 hours then becomes a real possibility.
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2011 2025 THE FUTURE (6)

Inland transport means will have to be organised in a totally different way, in order to assist in the reduction of carbon dioxide and noxious gas emissions. In particular, container terminal operators will be forced, by special clauses in their concession contracts, to increase the share of rail and barge transport as is already the case in the development of Maasvlakte II. This can be possibly be achieved through, for example, longer and possibly double stack block trains (at least on certain routes) and the development of transferia for barge traffic. These latter additional transfers will, however, also carry major cost increases in the transport of containers to and from the hinterland. In the case of road transport, whatever system of taxation will be applied, the cost will inevitably rise much faster than for rail and barge traffic. But also rail traffic cannot avoid significant extra costs. The gap between the container vessels scale economies and the reduced gains in road an rail transport will become ever greater.
G. De Monie Policy Research Corporation

TOC EUROPE 2011 ANTWERP 8 JUNE 2011

CONTAINER SUPPLY CHAIN THE FUTURE OF GLOBAL SUPPLY CHAINS

GUSTAAF DE MONIE

G. De Monie Policy Research Corporation