The ocean carrier industry has seen unprecedented changes in the past year or so, but will rapid consolidation and a reshuffling of alliances actually allow carriers to raise rates and begin the long climb back to profitability?
They say change is the only constant. Then again, they also say the more things change, the more they stay the same.
When it comes to the container shipping industry, a lot has changed in the past year or so, at least on the surface. Several carriers have merged, been acquired, or in the case of Hanjin Shipping, completely collapsed under the weight of severe overcapacity, which along with tepid global trade growth caused freight rates to plummet to below operating expenses on most major east-west trade lanes.
Now, things are about to change again, or at least that’s what “they” tell me.
On April 1, three major carrier vessel sharing agreements—G6, CKYHE and Ocean3 alliances—were officially disbanded, and two new VSAs went into force in their place—THE Alliance and the OCEAN Alliance. Even the 2M Alliance of Maersk and MSC was altered slightly, as Hyundai Merchant Marine and Hamburg Süd were added as a slot purchasers.
Without a doubt, these changes will have an effect on carrier operations, negotiations with shippers, port terminal efficiency, and so on, but will they actually allow carriers to raise rates and begin the long climb back to profitability? I’m not so sure.
Since the financial crisis of 2008-09, the global container fleet has grown faster than cargo volumes, in part because carriers had placed orders for additional vessels prior to the recession that were still being delivered.
Then in 2011, the carriers decided to renew and further enlarge their fleets in the hopes that global trade growth would one day return to the double-digit rates seen prior to the economic recession, placing orders for larger, more efficient containerships that would provide greater economies of scale and significantly lower per-TEU transport costs. As the vessels began to be delivered, the need to fill these behemoths accelerated the emerging trend toward cooperation among carriers in large-scale vessel-sharing agreements.
Unfortunately for the carriers, however, global trade has yet to return to its pre-recession glory days, and a precipitous drop in the price of crude oil significantly lessened the value of fuel efficiency gains from newer vessels in terms of overall costs. These factors, along with the delivery of additional capacity into a market in which supply already outweighed demand, caused a race to the bottom in freight rates.
Carriers took turns lowering rates in an effort to gain (or at least retain) market share, likely figuring that over a long enough timeline, the stronger operations would prevail and the weaker ones would disappear via mergers and acquisitions and bankruptcy. All this came to a head during a dismal 2016 that saw the industry take several billion in combined losses.
Consolidation among carriers may help to weed out some of the inefficient firms, but as we’ve said here before, if the industry is ever going to become profitable again, it must address the fundamental imbalance that exists between available capacity and cargo demand.
According to a January report from maritime analyst Alphaliner, even if carriers break last year’s record for containership scrapping, new deliveries will still outpace demolition 2-to-1 in 2017, meaning that the carriers are chasing an ever-receding horizon when it comes to supply-demand equilibrium.
Take the eastbound transpacific trade lane—the largest by volume in the world and the one on which U.S. consumers rely for the vast majority of their household and apparel purchases—for example.
The adjacent chart, built using data from BlueWater Reporting’s Carrier Trade Route Deployment application, compares overall weekly deployed capacity on direct region- to-region liner services in the transpacific over the past several years. Because container shipping is still subject to seasonal demand fluctuations, ramping up in mid-summer to the peak pre-holiday season, it’s necessary to compare present deployment with roughly the same period in previous years, as opposed to the previous quarter, for example. As of the first week of April, following the reconfiguration of the alliance service networks, carriers are deploying a combined 395,728 TEUs per week between Asia and North America. That’s a nearly 40 percent increase from 282,769 TEUs at the end of the first quarter of 2010, just prior to the first swath of orders for the latest generation of ultra-large containerships. What’s more, it’s a 5.5 percent bump from the same 2016 period, only slightly higher than the 5.1 percent average growth rate over the past seven years.
All this begs the question: has anything really changed with respect to the fundamental imbalance between supply and demand that caused rates to drop to sub-opex levels in the first place? Only time will tell if the new alliance structure helps carriers get back in the black, but for now it seems that if they continue to increase available capacity, volumes will never be able to catch up, and it will have been a lot of sound and fury ultimately signifying nothing.
Ben Meyer is Managing Editor of American Shipper and Research Analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.