Danish-Norwegian Containership Company Keeps it Simple and Profits

The Containership Company eyes first profits. For the year ending April 2011 the Scandinavian liner start-up said it expects to report earnings in the region of $6.5 million to $7.5 million.

Chief executive Jakob Tolstrup-Møller also said that the company is now generating sufficient cash-flow from its Great Dragon Service to cover operating expenses.
Speaking at the company’s first AGM he revealed that The Containership Company (TCC) spent about $10.5 million of working capital to launch the Great Dragon Service. Of this about $9.5 million has been invested in containers which Jakob Tolstrup-Møller says are now being sold or re-financed through sale-lease-back transactions or simple bank financing.

He also said that the company is looking at a paper profit on one of the chartered-in containerships on which TCC has a purchase option. Ship brokers estimate the market value of the 2,500-teu Taicang Dragon (ex-Ripon, built 2008) to be in excess of $35 million against the purchase option price of $29 million, he said.

TCC is reported to have fixed the ship from UK-based shipping financier Marine Capital at rates of around $8,500 per day for 12 months.
Jakob Tolstrup-Moller added that TCC was “continuously evaluating” the opportunity for launch of a second service later this year.
The “no frills” carrier has the financial backing of Norway’s Anders Wilhelmsen group as well as primarily Norwegian institutional and US-based investors.

Press release from The Containership Company

Keeping it simple does it really pay off?
In recent years industry insiders and analysts alike believed that consolidation would be the way of the future in the container shipping sector.
The figures certainly support this contention. In 1980 there were a total of 300 shipping lines in the world. Today, there are just 50.
But has the downturn changed this trend? Has the accessibility to cheaper assets lowered the entry barrier?
The arrival of a new player in the market earlier this year, The Containership Company (TCC), may be an indication that more will follow. But while the barriers to entry may not be as high as they once were, is there room for new players in the market?

Today in The Container Shipping Manager we will take a look at how the self-described ‘back to basics’ carrier is surviving as a newcomer in a very competitive marketplace…
TCC is strictly a transpacific carrier at this stage, offering a shuttle service between the Chinese port of Taicang (which is roughly 40 miles northwest of Shanghai), and the Port of Long Beach in California.

The shuttle service, which is known as the Great Dragon service, commenced on April 17 this year, deploying five 2,500 TEU-2,700 TEU vessels.
For all intents and purposes, it is a ‘no frills’ business. While some carriers in the market are looking at ways to outshine the competition with value-added services, including transhipment and hinterland connection options, rather than just a port-to-port service, TCC has opted for the latter.
Just two months after the carrier launched its inaugural service, it has recently announced it will be upgrading its vessels to 3,000 TEU in a bid to increase its capacity offering. Is that a sign that the back to basics approach is working?
Let’s look a little more closely to see.

In our example today, we will assume the vessels are 2,500 TEU, as this was the size used for the past two months. The actual loadable capacity of these ships is 1,850 TEU, based on an average weight of 14 tons per container.
According to one analyst we worked with on this study, the distance between Taicang and Long Beach is 11,516 nautical miles.
Average service speed for these vessels is 22 knots, which burns approximately 88 tons of fuel per day.
Extreme Slow Steaming is 16 knots, and burns 50 tons of bunker fuel per day.
Despite TCC’s recent decision to suspend slow steaming, the company has been sailing at roughly 15-16 knots on the service for the past two months, according to our sources.
If we take into account the slower speed of the service, this gives the company a sea time of 30 days for one round voyage from Taicang to Long Beach and back, plus a further five days if we include time spent at port.
Based on the price of 380 CST bunker fuel, which is around US$470 per ton, this will carry a cost of $705,000 based on a 50-ton per day rate of consumption.

Now we add the time charter cost for the Great Dragon service, which for the 2,500 TEU vessels now stands at around $11,000 per day. Of course, TCC negotiated the deals for its vessels at a time when prices were much lower, but for today’s study we will instead use the current time charter rates as our guide, for a more conservative profit estimate.
Based on the 35-day total service time, the carrier incurs a total cost of $385,000 in time charter expenses per vessel. This makes for a combined total cost of $1.09 million.

On a per TEU basis, which enables us to see the cost the carrier must cover with its freight rates, the cost amounts to $590 per TEU, based on the effective capacity of the vessel. If we also consider that carriers must factor in port charges, let’s say the total cost is around $600 per TEU.
According to the latest figures released by the Shanghai Container Freight Index (SCFI), spot rates from China to the US west coast are now around $2,700 per FEU and $1,350 per TEU.
Simply put, with a cost of just over $600 per TEU, even without taking into consideration the potential earnings on backhaul cargo, the ‘back to basics’ strategy is paying off.

One advantage of the ‘no frills’ approach is the fewer number of port calls, as well as bunker costs, which would only increase the average cost per TEU, while at the same time the revenue earned is still roughly the same as any other service offered from Asia to the US west coast.
However, the analyst did add that “although TCC’s approach looks very workable, it does not mean that other business models used by the larger consortiums does not work. Different carriers have different strengths, and hence each carrier must find how best to exploit these with their own models.”

In other words, there is no one size fits all in container shipping. Service differentiation is highly important for the industry. Without service differentiation, we run into the trap where shipping is treated as purely a commodity business with little attention paid to servicing the customer’s individual needs.
TCC, at this point in time, has decided not to challenge its competitors in the areas of transhipment or inland connections, but as the company grows a new approach may be necessary.
Additionally, if the company continues to make its foray into the world of container shipping a success, then it will be interesting to see if more new companies will spring up in the near future.

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