The container shipping industry is facing another period of upheaval, with consolidation among top carriers threatening to disrupt the mega alliances even as the lines settle into their relatively new vessel tie-ups.
Neptune Orient Lines’, owner of APL, confirmed Saturday in a Singapore Stock Exchange filing that it is in preliminary merger talks with CMA CGM and Maersk Line, just a day after the largely assumed merger of China Container Shipping Lines and Cosco was confirmed by U.S. Federal Maritime Commissioner William Doyle.
For shippers already frustrated with poor reliability, the prospect of more volatility from the mergers themselves and the inevitable restructuring of major shipping alliances that became operational this year is hardly appetizing. Nor, is the long-term prospect of higher rates provided by a smaller pool of players.
Chas Deller, a partner in 10XOceanSolutions Inc., which advises shippers in their carrier relationships, told JOC.com that routing and terminals may change. Performance guarantees provided by one carrier to a shipper could also be questioned.
Timing will be key, with carriers hoping the new marriage or marriages can be leveraged before negotiations of trans-Pacific 2016-17 contracts at the end of April. A merged Maersk and APL, for example, would be the dominant mover of goods from Asia to the United States, with a 6.93 percent market share, according to a PIERS analysis of each carrier’s market share in the first nine months of this year. The merger of CMA CGM and APL would give the combined entity a 6.75 percent share on the trade lane, while a combined CSCL and Cosco would control 6.07 percent of the trade, according to PIERS, a sister product of JOC.com within IHS.
Deller said a typical NOL/APL beneficial cargo owner was a high-end fashion and time-sensitive customer, and if acquired by CMA CGM would help improve the image of the French line. But the changes among alliances would be significant, especially if Cosco-CSCL joined the O3 Alliance, turning it into 05. Deller said it also made sense for Hamburg Sud to join the G6 Alliance.
If consolidation occurs, “we have reached the next level of uncertainty in global ocean shipping,” Deller said.
If the changes were made, the new alliance structure would be: 2M (Maersk, MSC); G6 (OOCL, Hapag-Lloyd, NYK, Hyundai, MOL, Hamburg Sud); KYHE (“K” Line, Yang Ming, Evergreen, Hanjin); and 05 (CMA CGM, CSCL, UASC, APL, Cosco).
Two factors are spurring carriers to scramble for potential partners. Carriers see major consolidation on the horizon and want to make sure they have the size needed to stay competitive at a time when scale increasingly matters. The other driver of consolidation is that there’s no short-term relief of overcapacity that is pushing down freight rates.
Three more years of overcapacity are ahead and it will only get worse next year when 1.3 million twenty-foot-equivalent units of capacity hits the water, Drewry warned last month.
An additional 1.6 million TEUs of new capacity was being added to the fleet this year, equating to a growth rate of 7.7 percent. This has pushed Drewry’s Global Supply/Demand Index — a measure of the relative balance of vessel capacity and cargo demand in the market where 100 equals equilibrium — down to a reading of 91 in 2015, its lowest level since the recession-ravaged year of 2009.
Maersk Line, which has slowly pulled away from the pack in terms of profitability, isn’t immune. Overcapacity, exacerbated by lower volume, pulled profit down 60 percent to $264 million in the third quarter, the Danish carrier reported Friday. Maersk said earlier in the week it would eliminate 4,000 shore-based jobs by 2017 and reduce network capacity. The company also cancelled options for six 19,630-TEU ships and two 3,600-TEU feeder vessels and postponed a decision on whether to exercise an option on eight 14,000-TEU ships
Consolidation has been occurring organically as well as through a slow and very gradual process of industry mergers and acquisitions. The top five carriers in terms of deployed capacity now control 47 percent of total industry capacity versus 41 percent in 2010, according to Alphaliner. This is due to the largest additions to capacity being deployed principally by what were already the largest carriers.