After the race to consolidate, the world’s container shipping industry must resist injecting too much new capacity into an already volatile market.
As the majority of consolidation among global ocean carriers and the alliances is nearing an end and the dust is starting to settle, it’s becoming increasingly clear that simply joining forces may not be enough to keep the industry financially fit.
Container carriers by and large returned to profitability last year after a dismal 2016 that triggered an unprecedented wave of mergers and acquisitions and the largest bankruptcy in industry history. The primary culprits for the carnage? Persistent overcapacity and an insatiable appetite for market share that pushed carriers into a race to the bottom on freight rates.
The thinking behind consolidation was that fewer players would be better able to manage supply and less likely to engage in margin- destroying rate wars. But with some carriers once again succumbing to temptation when it comes to injecting new capacity into the market and rates on the decline in early 2018, it’s fair to wonder if the return to profitability seen in 2017 was merely a short-term bump.
Hyundai Merchant Marine, for example, announced in April that it planned to order 12 containerships with capacity for more than 20,000 TEUs each, as well as eight 14,000-TEU ships, as part of a plan to double the size of its fleet by 2022.
But the reality is that container spot rates have been withering away after showing improvements in 2017.
The Shanghai Containerized Freight Index, which is based on estimated freight rates from Shanghai to 13 different regions throughout the world, stood at 776.88 in early May. Although this was better than a reading of 579.60 at the start of May 2016, it was still a significant drop from a year ago, when the index had a reading of 894.43, indicating that the positive effect of consolidation on rates may have been short-lived.
At the start of May, the average composite index of Drewry’s World Container Index, which measures freight rates on eight major routes to/from the United States, Europe and Asia, stood at $1,415 per FEU, 12 percent lower than at this time last year. And at $1,364 per FEU, the average composite WCI through the first portion of the 2018 calendar year is down $86 (5.9 percent) from the five-year average for the index of $1,450 per FEU.
Consolidation in the container shipping industry long predates the most recent financial fiasco in 2016, but the latest wave began in earnest with the 2015 merger of Chinese state-run lines COSCO and CSCL to form China COSCO Shipping Corp. and ended with the commencement of Ocean Network Express (ONE), a joint venture company that combined the container operations of Japan’s “Big 3” carriers — “K” Line, MOL and NYK — on April 1 this year.
Perhaps the biggest single change, however, took place in early April 2017, when the industry went from having four major carrier alliances to just three. In addition to the 2M Alliance of Maersk Line and Mediterranean Shipping Co., this included the OCEAN Alliance of COSCO, CMA CGM and subsidiary line APL, Evergreen Line and OOCL, which itself is in the process of being purchased by COSCO; and THE Alliance of Hapag-Lloyd, Yang Ming, “K” Line, MOL and NYK.
It should be noted that carrier alliances are not permitted to discuss or set rates, but the knock-on effects of consolidation are already emerging and increasingly showing signs that mergers, acquisitions and a reshuffling of alliances was not a viable long-term solution for the carriers to thrive.
Carriers themselves don’t even appear to be that confident that their decision to consolidate would translate into more sustainable rates. THE Alliance, for instance, established a contingency fund that was approved by the U.S. Federal Maritime Commission in September 2017 that can be used to help member carriers manage through, and recover from, the insolvency or financial distress of a participating line.
In addition, Maersk Line parent A.P. Møller-Maersk said its new financial reporting structure that took effect from the first quarter of 2018 “will align the strategic focus on growing the non-ocean part of the business disproportionately to the ocean business to establish a more stable long-term business less dependent on freight rates.”
While 2017 was generally a profitable year for carriers, they are beginning to show mixed results in the early part of 2018, illustrating that consolidation’s immediate benefits may be wearing off.
COSCO Shipping Holdings, for example, posted a 33 percent year-over-year drop in net profit for the first quarter despite a 9 percent boost in revenues and an 11.8 percent increase in container transport volumes.
The recently merged ONE carriers posted a combined loss of $136.6 million for their fiscal year 2017, which ended March 31, 2018, as NYK and “K” Line turned a profit for their last reporting period as separate entities, while MOL sank into the red.
Consolidation among the container carriers and alliances, in theory, should cause these operators to abandon profit-losing practices and foster compensatory rates for their services, but it appears that old habits collectively across the industry die hard.
Ocean Transport: Consolidation knock-ons
