Financial burdens from the IMO’s 2020 sulfur cap, a projected slowdown in trade growth and the looming threat of overcapacity could bump out some carriers.
The container shipping industry has continued to present shippers with fewer choices in terms of the number of carriers and services they have to choose from, and this trend is not expected to let up anytime soon.
The dwindling choices are primarily a result of container carriers aggressively consolidating operations over the last several years in order to stay afloat and not end up like Hanjin, South Korea’s largest carrier when it filed for bankruptcy in 2016.
Rampant vessel delivery in 2019 and 2020, an expected slowdown in global trade, exacerbated by the trade war between the United States and China, and the International Maritime Organization’s (IMO) 2020 sulfur cap placing huge financial burdens on carriers could cause the number of carriers to further dwindle as a result of mergers and acquisitions or, in an extreme case, bankruptcy.
However, factors that could somewhat hinder this trend include carriers becoming better at managing capacity in recent months by being more aggressive in blanking sailings and showing less interest in ordering record-breaking size containerships and instead focusing more energy on advancing technology and branching out from their core container liner operations, such as CMA CGM acquiring CEVA Logistics.
Consolidation trends. Shippers saw options quickly dwindle in April 2017, in particular, when the number of container shipping alliances participating on major east-west trades declined from four alliances —the 2M Alliance, Ocean Three Alliance, CKYHE Alliance and G6 Alliance — to the current three alliances: the 2M Alliance, Ocean Alliance and THE Alliance.
In terms of the four alliances:
• The 2M Alliance consisted of — and still consists of — Maersk Line and MSC;
• The Ocean Three Alliance consisted of CMA CGM, UASC and CSCL;
• The G6 Alliance consisted of APL, Hapag-Lloyd, HMM, MOL, NYK and OOCL;
• And the CKYHE Alliance consisted of COSCO, “K” Line, Yang Ming, Hanjin and Evergreen Line.
In terms of the current three alliances:
• The 2M Alliance continues to consist of just Maersk Line and MSC;
• The Ocean Alliance is made up of CMA CGM and its APL subsidiary, Evergreen Line, COSCO and OOCL;
• And THE Alliance is Hapag-Lloyd, Yang Ming and the Ocean Network Express (ONE), a container shipping joint venture that consists of NYK, “K” Line and MOL.
In addition to Hanjin filing for insolvency in the third quarter of 2016 and officially being declared bankrupt in February 2017, COSCO and CSCL officially merged in February 2016 and Hapag-Lloyd officially acquired UASC in May 2017. Additionally, ONE began its container operations in April 2018.
The chart below, which was built using data from BlueWater Reporting’s Carrier/Trade Route Deployment Report, illustrates that the number of containership operators on trades around the globe has generally decreased between the end of May 2014 and the end of May 2019. In particular, the Asia-North Europe, Asia-Mediterranean, Asia-Oceania, Asia-East Coast South America and North Europe-North America lanes saw sharp declines in the number of containership operators over this time period.
The number of container services on many of the world’s most prominent global trades also took a sharp downturn over this time period, as illustrated in the chart below, which was built using BlueWater Reporting’s Capacity Report. The Asia-North Europe and Asia-Mediterranean lanes saw the largest declines in the number of container services over this time period.
Looking at how consolidation has impacted the key Asia-to-North Europe and Asia-to-North America trades, currently on the Asia-to-North Europe trade currently, where 10 carriers collectively deploy 264,746 TEUs a week, the top three carriers on the trade — Maersk Line, COSCO and Hapag-Lloyd — deploy 52.2% of this capacity each week at 138,169 TEUs, as illustrated in the chart below, which was built using BlueWater Reporting’s Carrier/Trade Route Deployment Report.
Currently on the Asia-to-North America trade, where 17 carriers collectively deploy 431,801 TEUs per week, the top five carriers on the trade — Maersk Line, ONE, COSCO, Evergreen Line and CMA CGM — deploy 60.3% of this capacity each week at 260,310 TEUs, as illustrated in the chart below, which also was built using BlueWater Reporting’s Carrier/Trade Route Deployment Report.
Looking deeper into how actual alliances hold an extensive amount of power on these two trades, from Asia to North Europe, alliance-operated services collectively deploy 97.5% of the overall weekly deployed capacity on the Asia-to-North Europe trade. The chart below, built using data from BlueWater Reporting’s Capacity Report, shows that the Ocean Alliance deploys the most capacity each week on the trade, followed by the 2M Alliance and THE Alliance.
The Ocean Alliance and the 2M Alliance each operate six services on the Asia-to-North Europe trade, while THE Alliance operates five. No other carriers provide vessels on these abovementioned services. Additionally, there are two loops on the trade not operated by an ocean carrier alliance.br>
On the Asia-to-North America trade, the Ocean Alliance deploys the most capacity each week on the trade by far, as illustrated in the chart below, which also was built using BlueWater Reporting’s Capacity Report. The Ocean Alliance is the only vessel provider for 18 services on the Asia-to-North America trade; THE Alliance is the only vessel provider for 14 services on the trade; and the 2M Alliance is the only vessel provider for eight services on the trade. Sixteen services for this chart below have been classified as “non-alliance services;” however, this includes two services in which the 2M Alliance and ZIM are both vessel providers, as well as one service in which the Ocean Alliance, PIL and Wan Hai are vessel providers.br>
Fueling a decline. Potential overcapacity in the container shipping industry could cause the number of container carriers to decline.
The orderbook for the container fleet stands at 380 vessels, with the lion’s share of deliveries expected in 2019 and 2020, according to data from Affinity Research, S&P Global Platts said in its May report, “Into the storm: How will shipping cope with fuel bills from IMO 2020?”
“Despite fairly high demolition numbers in the last few years, the fleet’s capacity keeps growing as the orderbook is dominated by large vessels, especially in the 14,000-18,000 TEU+ range,” the report said.
Between this large orderbook, coupled with the forecast slowdown in the economy and global trade, carriers could be in troubled waters in the very near future.
The WTO said in April that it expects world merchandise trade volumes will grow 2.6% in 2019, down from growth of 3% in 2018 and 4.6% in 2017.
Additionally, the Organization for Economic Cooperating and Development (OECD) said in its economic outlook released in May that it expects real global GDP growth will total 3.2% in 2019, down from a growth rate of 3.5% in 2018.
“The global economy is expected to achieve moderate but fragile growth over the coming two years,” the OECD said. “Vulnerabilities stem from trade tensions, high policy uncertainty, risks in financial markets and a slowdown in China, all of which could further curb strong and sustainable medium-term growth worldwide.”
Adding fuel to the fire, financial burdens are being placed on carriers from the IMO’s 2020 sulfur cap, and it’s still not clear just how much success carriers will have in passing these added costs on to their customers. If carriers can keep capacity tight and trade volume growth does not decline as much as it is expected, carriers may have more leverage in recovering these added costs.
The IMO’s 2020 sulfur cap will require carriers to use low fuel oil (LSFO) with a sulfur content of 0.5% or less (compared to the current limit in which they can use fuel oil with a sulfur content of 3.5% or less), install scrubbers or use liquefied natural gas (LNG) as a fuel.
In the four designated emission control areas (ECAs) across the globe, the limit for sulfur in fuel oil used on board ships will remain at 0.1%. These four designated areas, according to the IMO, are the Baltic Sea area; the North Sea area; the North America area, covering designated coast areas off the U.S. and Canada; and the U.S. Caribbean Sea area, around Puerto Rico and the U.S. Virgin Islands.
There is no cheap and easy option for carriers when it comes to complying with the IMO’s 2020 sulfur cap, whether they choose to use LSFO, LNG or scrubbers.
The container shipping industry is expected to primarily rely on LSFO to comply with the regulation, or at least initially, with plans to pass on these higher costs to their customers through bunker adjustment factors (BAFs), which in theory allow carriers to recoup the fuel expenses they incur when transporting containers.
LSFO will be more expensive than IFO380, the most commonly used fuel utilized by container carriers today. Additionally, little is still known about these new LSFO blends, as well as how they could impact vessel engines when mixed.
Jack Jordan, editorial lead for bunkers at S&P Global Platts, said in the firm’s report that a lot of LSFO products are expected to be on offer.
“Products could range from a largely unaltered low-sulfur straight-run fuel oil to a primarily distillate-based product or use other refinery streams, including VGO and hydrocracker bottoms,” he said. “The trouble will come when the products are mixed and some blends prove incompatible with one another: When a more aromatic 0.5% product comes into contact with a more paraffinic blend, the products are likely to separate and form sludge, blocking filters.
“The risk of a spate of engine failures across the world in 2020 is currently keeping marine engineers awake at night,” Jordan said.
S&P Global Platts said in the report that although there are a “surprising number of shipping industry participants who believe that getting customers to pay for increased bunker costs will be smooth sailing,” it believes the reality is it may prove to be more complicated.
“The extra costs for shipowners will depend on the adoption of various compliance options and spreads between fuel type prices and are certainly hard to predict,” the report said. “However, even moderate projections indicate hefty bills, running to tens of billions of dollars extra a year for the sector.
“Customers may not have to pick up the full bill if they have the negotiating power to pay less,” the report added. “Bunker cost recovery mechanisms are imperfect and tend to fail in times of volatility.”
Although carriers plan to recoup the higher fuel expenses through BAFs, which appear straightforward and have been employed by the industry for a number of years, the report said the largest problem with BAFs (which carriers have different names for), especially with the upcoming sulfur cap, is “almost a complete lack of standardization and transparency in the underlying formulas. The fuels used as a reference, the ports chosen, the length of review period for bunker prices, capacity utilization and other elements may vary significantly.”
Jason Silber, global head of ocean intelligence at S&P Global Platts, said in the report, “Container carriers are barely breaking even — and that’s before the fuel price spike.”
Silber added, “Expect additional mergers and pray for no Hanjins.”
In terms of scrubbers, the cost to retrofit a 12,000-TEU-to-14,000-TEU containership with scrubber technology falls between $6 million and $7 million, Clarksons Research said in September 2017. The firm added that installing scrubber technology on a newbuild containership between 12,000 TEUs and 14,999 TEUs would cost $5 million to $6 million.
However, SEA\LNG in January commissioned an independent study, “LNG as a marine fuel – the investment opportunity” by simulation and analytics firm Opsiana, which said that scrubbers are significantly more expensive than widely reported. “In this study, an industry accepted scrubber capex figure of $8.6 million for a newbuild 47,000kW containership of 14,000-TEU capacity is used together with additional consideration for Tier III NOx abatement SCR equipment,” the study said.
In terms of relying on LNG fuel to comply with the IMO 2020 sulfur cap, LNG bunkering infrastructure is still limited. Jerome Leprince-Ringuet, managing director at Total Marine Fuels Global Solutions, told S&P Global Platts in May the market for LNG globally as a marine fuel will remain quite limited in 2020, but it’s expected to ramp up quickly after 2020 due to various developments, such as the IMO 2020 rule, IMO’s greenhouse gas emissions target cuts, concerns over particulate matter, favorable pricing economics and development of infrastructure. He said that LNG’s share as a marine fuel will reach around 5% by 2025.
Peter Sand, BIMCO’s chief shipping analyst, said in an emailed statement in May that BIMCO believes that “a failure to recover the extra fuel costs from the IMO 2020 sulfur cap in full may result in bankruptcies.” Additionally, he said a failure to recover these costs is also likely to spur consolidation to some extent as well, adding that many of the liner companies are already working with slim margins, with no room for higher costs.
Drewry said in its March 31 Container Insight Weekly newsletter that “financially vulnerable carriers could be pushed into M&A by the extra costs associated with the new low-sulfur fuel law.”
Additionally, ONE CEO Jeremy Nixon said in April at the second annual Capital Link Singapore Maritime Forum that the IMO 2020 sulfur cap is creating a “very high hurdle to jump over” for the industry. “Companies that do not handle that well or recover those additional costs will put themselves under more financial strain, which could create further consolidation down the line,” he said.
However, Darron Wadey, senior shipping analyst and consultant at Dynamar, said in an emailed statement in May that although he believes the number of container carriers will continue to shrink, he does not believe the IMO’s 2020 sulfur cap will be a contributing factor.
“I am not aware of any carrier trading principally within the pre-existing and more stringent emission control areas in North America and North Europe going under as a result of these measures,” he pointed out. “Of those small carriers in the Baltic trades who have left, namely Team Lines and Hacklin, no mention was made of extra regulatory pressures and costs arising from the sulfur cap as being the cause, rather, market conditions (which in the Baltic makes sense).”
Who is next? In terms of future mergers and acquisitions, it’s likely safe to assume larger carriers will not be merging with other large, global carriers due to the likelihood of a deal of this scale getting blocked by competition authorities.
In June 2013, Maersk, MSC and CMA CGM announced their plans to form a container shipping alliance known as the P3 Network, although the deal was subject to relevant regulatory authorities. In June 2014, the deal was rejected by the Ministry of Commerce of the People’s Republic of China (MOFCOM) due to competition concerns in the Asia-Europe market. As of Jan. 1, 2014, Maersk, MSC and CMA CGM collectively held a capacity share of 46.7% on the Asia-Europe route, with Maersk holding a 20.6% share, MSC holding a 15.2% share and CMA CGM holding a 10.9% share, making them the top three carriers on the route, according to MOFCOM.
Drewry even said in its March 31 Container Insight Weekly newsletter, “The possibility of any takeovers among the top seven lines is remote in our opinion, primarily due to the likelihood of such deals being shot down by competition regulators.”
ONE’s Nixon had said in April that mergers and acquisitions are getting more challenging due to regulatory hurdles, as well as there being less players to absorb. However, he said there is probably more room for consolidation involving some of the niche carriers in regional markets.
BIMCO’s Sand said in the May emailed statement that BIMCO believes consolidation among the larger carriers may not be approved by competition authorities due to being close to the market share limits set by relevant authorities.
“Consolidation amongst the smaller carriers will only come around if one nation/government decides to merge a few carriers into one larger ‘national carrier,’” he said. “Most likely, we will see larger carriers acquire smaller ones — again, pending on approval from relevant authorities.”
© 2019 BlueWater Reporting (www.BlueWaterReporting.com) Used with permission