What is container leasing ?

Container leasing is a process of renting containers to operators by a leasing company, who owns containers , basis the agreements entered into by both the parties. Both the supplier and the customer will also agree to other terms and conditions required by applicable laws, and any other negotiations made between the two entities. The leasing company agrees to deliver a minimum number of containers to the operators for a specified time, basis terms and conditions documented in the lease agreement.

A liner operator assess the demand for containers by forecasting the volume of business expected to take place for a period, both on strong and weak legs, on all locations. The demand also depends the turnaround time ( the time gap required for a container to perform a complete cycle) of the containers in various areas. Having determined the fleet size, the demand could be met either by buying containers from manufacturers or leasing them from the leasing companies, or a combination of both.Liners always require empty containers to be placed at the right place at the right time, to meet customer demand.

Generally the container fleet of liners consists of owned and leased containers, although the proportions vary from operator to operator. The fleet of a relatively new operator will have a high proportion of leased container where as the established operators will have a high proportion of owned containers.

Advantages

1. Outright purchasing of containers requires huge capital financing, which will not be viable for the shipping

    companies, by leasing capital funding could be avoided.

2. It will be easier to adjust the fleet size depends the demand fluctuations.

3. It is possible to enter into lease agreement in such a way that the repair and maintenance expense is on

    lessor’s account . This reduces the overhead expense of the liner.

4. To reduce equipment imbalance cost by leasing containers at the deficit area and returning them at surplus

    area.

5. By lasing special equipments, whose demands fluctuate very often, can avoid dead capital investments on

    buying them.

Types of Leases

Though the operators make ‘tailor made’ agreements with the leasing companies, there are 3 broad type of leases widely in practice

1. Long term leases

In this method the operators commit to lease a fixed number of containers for a fixed period of time, which varies from 1 year to the life span of containers. The longer the period of lease the cheaper the rate is likely to be as the leasing company is guaranteed a fixed income for a long period.

However , from the liner’s point, long term lease reduces the flexibility of resizing the fleet size by redelivering the lased units during slack period. To overcome this, some operators include a clause of redelivery before term period a penalty.

2. Short term or Trip lease.

As the name indicate , this is hiring of containers on an ad-hoc basis , just for a trip without any long term commitment. This leasing method gives operators maximum flexibility on fleet size adjustment depending demand.

For leasing companies, this is not that a good option as the hire charges will be for short period and then will have to find fresh customers for the containers. Also they will have to maintain a good stock of containers readily available for leasing and will have to incur high RnM and on/0ff hire expenses.

Trip lease generally is an expensive affair , often the rate will be more than double of the long term lease. This is due to the risk/ uncertainty involved in this business.

3. Master leases

In this type of leasing , the lessee guarantees to lease a fixed minimum number of containers for a defined term with a provision to on hire additional containers and off hire excess containers at listed locations . However, the total number of containers on hire at any given time should not be below the agreed minimum.

The lessee pays a fixed daily rental for all the containers on hired . The rate generally is on higher side consider to the term lease of equal period. This method helps operator to regulate fleet size according to requirement . Also , with suitable on /off hire clause in the agreement , the operator can avoid unnecessary empty container moves from one point to another.

Container leasing companies

There are many established leasing companies available to cater to the requirements of the operators. Cronos, TAL, Box, Cap etc are few among them. To provide the required services to operators, the leasing company should have a wide network of local depots and offices and large fleet of containers. Many of the medium / small leasing companies identify the requirements of the type of containers in their area of presence and ensure to meet their customer’s requirements.

In short, container leasing is a service as a financial business.

Supply Chain in Container Transportation

What is supply chain management?

Supply chain is the logistics network of suppliers, manufacturers, warehouses, distribution centres and retail outlets. Logistics, which is  an aspect of military science, evolved as a business concept in the 1950s to deal with the complexity of supplying materials and shipping out products in a globalised supply chain management system.

In other words, business logistics is the supply chain process that plans, implements, and controls the efficient, effective flow of goods, services, and related information from the point of origin to the point of use or consumption in order to meet customer requirements.

Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all other logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third‐party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies

Effect of containerisation in Supply chain

Huge waves of changes have been taking place in shipping industry , particularly in the container shipping trade, globally and in India too.Containerisation has brought technological benefits to supply chain such as door-to-door delivery , speedy intermodal transfers, low handling costs, reduced breakage and pilferage , lower insurance cost etc.

Containerisation of goods is a key technology in making multimode transport in supply chain more effective and efficient.


Multimodal transport, which is an integral part of supply chain management,  refers to the transportation of goods using more than one mode of transport in an integrated and seamless manner from the origin to the destination.

Containerisstion–Future opportunities for supply chain management

1. Automobile Industry requirements

 Automakers in India are the key to the supply chain and are responsible for the products and innovation in the industry. As the Indian automotive sector is booming like never before, the relevance of logistics and the supply chain have become all the more important. The automotive industry in India is one of the largest in the world and one of the fastest growing industries globally.

India's passenger car and commercial vehicle manufacturing industry is the sixth largest in the world and the car plants of Maruti Suzuki and Hyundai in India have figured in World’s top 10 list. Several global auto firms like Hyundai, Nissan, Scoda , BMW etc invested in car factories in India.

The supply chain of automotive industry in India is very similar to the supply chain of the automotive industry in Europe and America. 

2. Retail Trade reforms

India’s growing domestic market is one of the major strengths for containerisation. The India Retail Industry is gradually inching its way towards becoming the next boom industry and there is great potential for the organized retail industry to prosper in india. In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores and these market reforms expect to pave the way for retail innovation and competition with global multi-brand retailers as well single brand majors.

3. Increasing Industrialization

India is becoming the most preferred destination for manufacturing outsourcing in the world, offering greater potential for containerisation. The growing industrialisation in India will boost containerisation in the country.Original equipment manufacturers (OEM) such as Samsung and LG Electronics and electronics manufacturing services (EMS)providers such as Solectron, Flextronics and Jabil already have well-established facilities in India

For the past couple of decades, Taiwan and China have been world leaders in the OEM sector, but gradually with the improvement in road infrastructure and better supply chain management, India also begun to gain a foothold in the sector.

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Vizhinjam International Port and Deepwater Container Terminal - Dream project of Kerala

Vizhinjam , a non-major natural port, is located about 17 km south of Thiruvananthapuram, the capital city of the state of Kerala on India’s South West coast. The dream Port is envisaged with a quay length of 2000 meters in three phases. It will be designed to cater primarily for container transhipments besides multi-purpose and break bulk cargo.

Vizhinjam International Seaport Limited (VISL), a fully-owned company of the State Government set up to facilitate the port project, was incorporated under the Companies Act 1956 on 15.12.2004. The main object of the company is to provide external support infrastructure such as road / rail connectivity, water and power supply for the proposed port, besides overseeing the implementation of the port project by the private developer. The company will also be responsible for addressing other development needs like special economic zone, logistic centre, free trade zone & warehousing zone and allied activities.

The first phase of the multi-thousand-crore project is estimated to require an investment of Rs 4,010 crore. The project is proposed to follow Landlord Port Model and the State Government will invest Rs 3,040 crore for dredging, reclamation and basic infrastructure like construction of break-water and quay etc. Port Operation will be on PPP model. Terminal superstructure will be built by private operator who will also operate and maintain it for 30 years. As an initiative , the state finance minister announced a sum of Rs.224 crore for the works related to the Vizhinjam Deep-Water International Container and Transhipment Terminal in the financial budget of 2012 -2013 .

The bid-winning consortium led by Welspun Infratech Limited (India), has requested a grant of Rs.479.54 crore spread over 16 years from the State Government to participate in the project. In other words, the consortium, if the bid is accepted, will have to invest Rs.970 crore on the superstructure of the port, but will receive Rs.479.54 crore as grant from the State government towards operating expenses over 16 years. The port operator can operate the port for 30 years, after which it has to be handed over to the State Government.

Studies conducted at Vizhinjam shows that a natural depth of about 18 to 23 metres within about 3 kms from the shore. A port constructed here could easily accommodate ships with displacements of up to 300,000 tons, with little or no dredging. Basically this means that the Vizhinjam port can handle super tankers and the biggest container mother ships with ease.

Located on the Southern tip of the sub-continent, it is just 10-12 nautical miles from the busy Persian Gulf - Malacca shipping lanes which carry almost a third of the world shipping traffic. Because of the strategic location it could also attract transhipment traffic from Bangladesh in the East, Pakistan in the west and SriLanka in the south to emerge as a mega transhipment terminal in South Asia substantially reducing the importance of Colombo as a hub.

However , Vizhinjam , a non-major port at present – has no cargo traffic at present. Its hinder lands overlaps with that of Tuticorin Port in the South East ( about 200kms) and Cochin on the North West(about 200 kms). Also there is no industrial belt / manufacturing units nearby and there is no such activity is expected to pick up in the near future too. So, Vizhinjam port will have to essentially depend on the transhipment traffic only, which is highly volatile and depends on many factors including the Cabotage / coastal policy etc. Once developed the port will have to gear up for stiff competition from internal ( ICTT,Vallarpadam, ) as well as external established hub ports like Colombo, Portkelang, Tanjung Pelepas , Singapore etc.

There are 9 Chinese container ports among the top 20 container ports and India has none ! Shipping plays an important role in the transport sector of India’s economy. India has an extensive coastline of about 7500km and around 95% of India’s external merchandise trade by volume and 70% by value, is through maritime transport.

The Indian seaborne trade has been growing at a CAGR of 11.38% for the last 10 years, and it was the highest , 12.25%, prior to the global slowdown. Considering this Indian seaborne trade is expected to grow to the level of 2,134 million tonnes by the year 2020, ie, about 3.56 times the current trade.

Despite the existence of Port Kelang, 14th largest port, Malaysian Govt had gone in for a new transhipment port in Tanjun Pelepas, just about 150 kms away , in the year 2000, which is the 17th biggest port now. Chinese port Ningo , 7th largest port, is just about 200km from Shanghai , no.1 port of the world ! Considering all above Vizhinjam Port would be one development which could make a very significant contribution to India's economic progress in the coming years.

Container Maintenance - major concern for the line

Modern container is a rectangular structure of standardised dimensions, designed to carry unit loads, packages or bulk cargo, and which is quickly transferable as a complete module between a number of modes of transportation (IICL, Guide for Container inspection).

Container Inventory is the asset of the shipping company and the storage, maintenance and repair expenses are one of the major cost heads of the line.

A Successful containerized cargo shipment depends on

1. Matching the cargo to the correct type of container

2. Good condition of the container

3. Correct handling of container throughout the voyage

4. Correct method of stuffing / De-stuffing

Container Inspection at the depot

The container should be returned by the customer in an acceptable condition and all containers should be inspected thoroughly at the gate prior accepting to the depot. Accuracy and consistency in container inspection is the key to maintaining containers in safe and serviceable condition. Containers should be inspected for

1. Damages

2. Cleanliness

3. Out-of date labels

Container Damage

Damage is one or more physical defects in a container caused by a single event or series of single events, such as impact, abrasion, contamination, overloading and/or other events beyond the normal exposure to which the original design was intended. (IICL ,Container repair guide)

Common types of container damages are

1. Racking ( Twisting of the structural shell of the container)

2. Toppling

3. Container Collapse

4. Structural failure

5. Holes

6. Interior/Exterior contamination

Container Cleaning

The primary objective of container cleaning is to ensure that the cargo appropriate to those type of containers is not damaged due to the condition of the container. Also , containers provided must be clean enough to carry the type of cargo and must meet the customer requirements.

In general , cleaning is required when

- The material or odor is transferable to cargo

- And the transferred material or odor will damage the type of cargo

- Or prevent the safe operation of the container

- Or the general appearance and cleanliness of the container would not be acceptable to the customer.

Cleaning Methods

The depot must chose most economic and less complicated cleaning method which is effective and of minimal adverse environmental impact. Most recommended container cleaning methods are as under

1. Removal of debris, wire, rope, nails or other waste materials

2. Sweep out – Dust, dirt , and small remnants of cargo should be swept out of the container.

3. Spot Cleaning – This method is applied when only small area needs to be cleaned.

4. Scraping with a flat or shaped tool – This method used for removing labels, tapes or other adhesive material.

5. Power Sanding – This is an alternative spot cleaning method that can be used to remove oil stains or other materials from flooring.

6. Power grinding with an abrasive disk or wire brush /repainting – Heavy layers of dried adhesive and heavy wall scratches may be ground away to bare metal and repainted.

7. Washing – Wash with cold water at standard tap pressure to remove fine dust or other materials remaining on container floors or walls .

8. Cold / Hot high pressure wash – To remove dust/ materials which cannot be removed by ordinary wash. High pressure hot water wash is the most effective way to clean oil stains from container floors.

9. Over painting – Graffiti , wall stains , thin layers of dried adhesives, minor wall scratches etc can be painted over after cleaning the surface properly.

10. Component replacement – It is usually applied to oil soaked floors and/or flooring severely contaminated by odor.

Container Repair

The purpose of any repair is to restore structural integrity to the container, so that it may function safely in worldwide intermodal commerce as an instrument of international transportation. Repaired containers should meet all applicable requirements of ISO standards, the International Convention for safe Containers (CSC), the Customs convention on containers etc.

Kattupalli International Container Terminal - A terminal operated by ICTSI

The Kattupalli Shipyard cum Captive Port Complex is a mega shipyard project at Kattupalli village near Ennore of Chennai being built by L&T Shipbuilding Ltd. LTSB is a joint venture between L&T and Tamil Nadu Industrial Development Corporation (TIDCO), formed to implement the integrated shipyard-cum-port project.

The container terminal will be operated and managed by the Philippines-based port operator, International Container Terminal Services Inc. (ICTSI) for a 28 – year period.. This is their first project in India. Manila-based ICTSI is a port manager involved in operations and development of 23 marine terminals and port projects in 17 countries.

 

 The first development phase is expected to be operational by January 2012 . A CFS is also planned as part of the service package. Access to the terminal on the marine side is via a 3.5 km long channel and port basin offering a draft of 14 m. Kattupalli’s North and South breakwaters (total 3.35 km) ensure a safe harbour and uninterrupted terminal operations. 

The terminal will be well connected by road, upgrading the existing TPP Road expected to complete by the end of this year and the Chennai Bypass road, which connects with NH5 and NH4 (from Bangalore) has also been completed. Also, LTSB is likely to form a joint venture with Ennore port and TIDCO, to build a 25.5km road to connect Ennore and Kattupalli ports.

In terms of cargo generation, the KICT is located in close proximity to the majority of Container Freight Stations in Chennai and is eyeing a potential traffic of 2.5-3 million TEUs  a year . Also the proposed Ennore special economic zone , adjacent to the terminal, is another expected source of business.

 L&T is also planning a shipyard in the facility , which will be competing with Japanese and Korean shipyards in building "specialized ships" such as large-size warships, car carriers, submarines, naval offshore patrol vessels, fast patrol vessels and corvette. After Colombo and Singapore, Kattupalli will be the third major international destinations for ship repairs in the region.

Effect of Cabotage policy on coastal shipping.

 

India is emerging as a modern economy and about 95% of India’s EXIM  cargo trade by volume and 70% by value is transported by sea.  At present India’s foreign trade represents less than 3% of global trade and the National Maritime Agenda  set a target of 5% of global market share by the year 2020.  Coastal shipping has a significant role to play in Indian economy to achieve this ambitious target.

Despite of having a rich and proud  Maritime tradition and a long coastline of about 7517km studded with 13 major and 185 Non-Major (Minor / Intermediate)  ports , the potential of coastal shipping has not yet been fully exploited in India.

Cabotage policy has an important bearing on the coastal shipping of a country. Most of the maritime nations like USA, China , Indonesia etc  practice an absolute Cabotage  and it restricts movement of coastal cargo by their own flag vessels . 

By definition , coastal vessel means a vessel of Indian registry with exclusive Indian crew, engaged in carriage by sea of cargo or passengers, from one Indian port to another port or place in India , and/or any other vessel having specified period license for coastal trade issued by Director General of Shipping.

In India the Cabotage, which is provisioned in section 406 & 407 part XIV of Merchant Shipping Act,1958, is not absolute . According to this law, only Indian flag vessels can carry cargo from one Indian port to  another Indian port , however , permission is granted to foreign flag vessels to ply between Indian ports , incase Indian flag ships are not available.

The Indian National Ship Owners’ Association (INSA) consider the absence of absolute cabotage is the major reason for low investments in coastal shipping and  strongly oppose the move of relaxing the  cabotage law arguing that this will not give a level playing ground for Indian bottoms.

On checking the past records of coastal trade , it is evident that the present cabotage policy did not boost coastal trade to the desired levels. The % of coastal shipping in India is only 7% against 43% in Europe.

Coastal Shipping- Present Status

Economic reforms in India have triggered a high rate of economic growth in the country and this in turn has led to an increase in transport demand.  This demand is being met mainly by the rail and road transport systems.  About 50-55% of the freight traffic is carried by road , 30-35% is by rail and only about 7% by coastal shipping .

Though coastal vessel number and tonnage increased from 244 / .60mgt in 2001 to 682/1.0 mgt in 2010, actual number of cargo carrying fleet is very small. The major percentage of fleet is comprises of passenger – cum – cargo vessels, passenger vessels, dredgers etc. And the average age of the coastal fleet is much higher compared to that of overseas fleet with over 60% of its tonnage already overdue for replacement.

  According to Alphaliner report given below , the world liner fleet has crossed 15 million TEUs now .

 

Whereas only 16 Indian container vessels as listed below  with  about 2200TEUs capacity  only available for coastal run at present. (Source :- (Draft )Report of Sub-Group No.VI on Infrastructure to Support Coastal Shipping, Cruise Shipping and Development of Ship Repair, page.11)

 Sufficient Ro-Ro or Lo-Lo services , which can carry trucks from one port to another to reduce the cost of double handling, are not available in India at present . Introduction of such high tech vessel  will make coastal shipping more attractive. As Indian shipping is not in a position to bring in such new technologies at present due to various reasons, foreign shipping should be permitted to operate.

Coastal Traffic – An overview

The commodities carried by coastal shipping are mainly bulk and break bulk cargo. The passage of cargo to both directions are not equal in coastal shipping and this leads to imbalance. This is because the cargo movement pattern and magnitude is mostly dependent on the production/availability, consumption/demand and the distance separating production centre from points of destination.

The commodity wise split  of costal cargo for 2005-06 and  2009-10 are  as under. Though the POL products has the highest share , it is to be noted that the share of liquid /dry bulk cargo has reduced from 94%(2005-06) to 87 % in 2009-10.  And there has been an increase of 7% in the share of “Others” (food grains, automotive spares, automobiles, steel, cotton yarn, other containerized cargo etc) due to increase in containerized cargo movement.

 

Previous studies and surveys reveal that , foreign shipping is more cost effective and technically advanced compared to coastal shipping. This is another reason why foreign ships  to be permitted to carry Indian coastal cargo, this policy change can do wonders in reducing logistics costs and enhancing efficiencies. Also would boost multimodal transportation trade , a business of huge potential waiting to be tapped  in India.

 Containerization – Driving force for coastal shipping.

 Containerization density in India is lower (18%), compared to the world average, though rising containerization is one of the key trends expected to drive coastal shipping. Positive upward trend in containerization is evident in the below given  chart, an increase of 3.2% from FY04 (14.8%) to FY10(18%).

   

The commissioning and successful implementation of India’s first International Container Transhipment Terminal at Vallarpadam, Cochin and the proposed Vizhinjam International Transhipment Terminal are  expected to catalyze  the growth of coastal shipping further as container volumes are projected to flow to/from  all the ports more rapidly than before.  Presently about 70% of the Indian containerized cargo is getting transshipped at Colombo, Dubai, Singapore and Salalah.  The dependents on foreign transshipment ports make the import and export of a country   expensive and less competitive in the international market.

The cabotage restriction has an adverse effect on the growth of India’s first and only transhipment terminal, ICTT-Vallarpadam, which is in its infancy. This is a classic example of the necessity of relaxing the existing Cabotage restrictions for the promotion of shipping trade in general and coastal shipping in particular.  It is estimated that about 1.2 million Indian cargo, mainly from South Indian ports ,  is getting transshipped at Colombo and If these containers are transshipped at  ICTT there would be substantial savings in the cost as well as transit time . For the success of a  hub port, good connectivity ( sea/river, rail ,road  )is required  to pool cargo from other Indian ports/ overseas and to deliver the cargo to final destinations. From Colombo shipping lines are free to feeder in/out container to any Indian ports without any difficulty and this increases the acceptance of Colombo as a preferred hub port.  

The cargo carrying capacity of ships,   is several times greater than that of rail wagons or  trucks  and therefore, coastal shipping offers the benefit of low transport / operating & logistics costs to the trade and industry.  

The Department-Related Parliamentary Standing Committee on Transport, Tourism & Culture in their 170th Report on Modernization of Major Ports presented to the Rajya Sabha on 11.8.2011 says this on cabotage: “346. In view of the critical implication of this regulation in the successful implementation of the ICTT project and in the larger interest of economic self-reliance of the Indian EXIM trade, it is imperative that the Cabotage Law is relaxed to enable transshipment of containers through foreign flag vessels from ICTT, Cochin. The Committee, therefore, recommends that the Government should immediately undertake a review of the Cabotage law and take appropriate decision in consultation with all the stakeholders involved”.

Also ,The Director General, Shipping himself recommend in the draft of the Coastal Shipping Policy, “a nuanced approach towards transshipment cargo would require opening it up foreign flag so as to boost containerization and the requisite infrastructure and practices”.

According to INSA this move will adversely affect the growth of Indian coastal shipping. They also argue that the foreign liners have only short term interest and the Indian shipping companies are equipped enough to cater to the expected increase in demand for more feeders . .   However , it is difficult to foresee the acquisition of sufficient container ships by Indian companies . Though it is argued that the relaxation would hurt the growth of Indian tonnage, in long run ,by creating demand for the coastal shipping, it would be beneficial.  

Key Advantages of coastal shipping.

It is estimated that the nation would save Rs. 15-20 billion through diversion of 5% of cargo from road apart from a reduction in pollutants by 6%  and savings in fuel . India’s transportation sector relies heavily on petroleum as its chief energy source, thereby dominating the country’s oil consumption. 

Indian marine  highways are a vital national resource currently not being used and India should develop a  vibrant system of sea highways connecting a network of  major/minor ports and the Inland water Transport system which would complement the land bound network .A well developed coastal shipping will substantially help to reduce road accidents, fuel conception and will prove to be an environmental friendly mode of transport.  

Also, various studies in India and abroad prove that Coastal shipping can reduce green house gas emission considerably. This makes all the more important that India should look closely at the potential of the coastal shipping transport systems to ease the pressure on surface transport modes and arrest the continuous damage caused to environment.  

India should reduce the stress on road and rail and also on environment by diverting a sizable  percentage of  cargo moved by rail and road to coastal shipping. A relatively modest investment in coastal sea routes with appropriate policy changes, would bring substantial benefits by  reducing burden on present transportation system, traffic congestion and pollution