After a promising start, 2015 is ending in disarray for the container shipping industry, with no sign that 2016 will bring any relief.
In fact, the coming year threatens to be the most challenging 12 months faced by global carriers since 2009 when the banking crisis hit world trade and sent cargo volumes tumbling.
Severe ship supply and demand imbalances in most trade lanes, coupled with the prospect of another round of consolidation that will reverberate throughout the industry, are likely to be the main features of 2016. And if past experience is anything to go by, that means continued downwards pressure on freight and charter rates, service withdrawals, more ships put into lay-up or sent to the breakers, and further cost-cutting including job losses, as top management struggles to balance the books.
The final weeks of 2015 culminated in the sale of Neptune Orient Lines’ container shipping and terminals activities to France’s CMA CGM. The $2.4bn deal will, assuming it passes regulatory hurdles, consolidate CMA CGM’s position as the number three container line; the combined fleet of the new entity will have an 11.5% share of global container capacity and the deal will strengthen the French line’s position in both the intra-Asia and transpacific trade lanes.
Moreover, the likely merger of China Shipping Container Lines and Cosco Container Lines will create a new heavyweight in the industry that could potentially threaten the dominance of European 2M partners Maersk Line and Mediterranean Shipping Co, as well as the expanded CMA CGM, which saw off Maersk in the race to acquire NOL.
The Danish line had been sending out some mixed signals, insisting that it preferred organic growth despite emerging as one of the parties in preliminary takeover discussions with NOL.
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Had Maersk Line bought APL, that would have pushed it well clear of MSC as the world’s largest containership operator. But if Maersk continues on its path of organic growth, then it could well be overtaken by MSC at the top of the league table, and eventually be challenged by CMA CGM.
Having ordered 11 second-generation Triple-E ships earlier in the year, Maersk decided in November to cancel options on another six. MSC still has a large orderbook for 19,000 teu-class ships although there are no plans to extend its newbuilding programme in the current climate, according to chief executive Diego Aponte.
One of the features of 2015 has been the rush to catch up with the handful of lines that already had ships of 18,000 teu or more in service or under construction, with both Cosco and China Shipping placing new orders, and attention focused on the G6 alliance, where two of the six members have vessels of this capacity in the pipeline.
Hapag-Lloyd had said when it announced its initial public offering in September that some of the expected $500m proceeds would be put towards six 20,000 teu ships.
At that stage, the German line was feeling upbeat about prospects after the successful amalgamation of CSAV, which had produced greater financial synergies than initially anticipated. Yet within a few weeks, the mood in Ballindamm was very different. With no sign of the usual peak season in the Asia-Europe trades and spot rates consequently sliding to near record lows, investors shied away from buying into a company caught up in such a hard-pressed industry. The offer period was extended, the IPO restructured and shares priced at the bottom of the offer range, resulting in net proceeds closer to $300m.
Nevertheless, word on the street suggests that Hapag-Lloyd still plans to go ahead with its order, even as talk spreads of other lines possibly trying to defer deliveries of ultra large containerships already contracted.
That also begs the question of whether ship capacities have now peaked.
A year ago, most experts assumed containership sizes would continue to increase up to around 24,000 teu as carriers sought to obtain even better economies of scale.
Certainly, in terms of container slots there are no technical barriers for ships even larger than the current biggest, MSC’s 19,224 teu Oscar class.
OOCL and China Shipping both have 21,000 teu ships on order, but that could turn out to be the peak for the foreseeable future, given the disruption these behemoths have already caused.
The impact has been felt globally, as the ULCs that have been phased into the Asia-Europe trades coincided with an actual decline in westbound volumes this year compared with last.
The year-on-year contraction of about 5% had not been expected by lines in late 2014 when they were putting their networks together for 2015. Most had assumed modest growth, and had to hurriedly pull capacity as the year wore on without any sign of any upturn.
As unwanted ships were cascaded from the Asia-Europe market to other trades, so the crisis spread. Making matters worse was the fact that very few areas of the world have been showing much economic uptick. One of the few exceptions to the malaise was the US, but even there, some shipowners were noticing the first signs of a cooling off towards the end of 2015 in the form of a slowdown in imports of project cargo. That is a good measure of future industrial activity, followed by consumer spending and hence container traffic.
Maersk Line chief executive Søren Skou summed up the situation succinctly when discussing the line’s third-quarter results.
“If demand remains weak, then the balance between supply and demand is not going to improve, and in fact may worsen slightly next year,” he said shortly after the line had published a sharp reduction in earnings, issued a full-year profit warning, and announced plans to cut the workforce by 4,000 over the coming couple of years.
One of the biggest problems faced by container lines is their lack of control over prices. The industry has become commoditised, with freight rates driven by supply and demand, and swinging wildly from one week to the next as the Shanghai Containerised Freight Index shows.
Shippers may claim they are willing to pay more for better service, but the evidence suggests that is not the case. Maersk, for example, had to abandon its Daily Maersk product, with guaranteed delivery times between certain ports in Asia and Europe, for lack of support, despite plenty of enthusiasm from customers when the premium service was first launched.
Hedging through freight derivatives still appears to have no appeal to the lines, partly because of the lack of liquidity and also because of perceived counterparty risks.
What may change in the coming year is the way freight rates are communicated to customers.
A lengthy antitrust probe by the European Commission is thought to be drawing to a close, with Brussels expected to reach agreement with carriers on greater transparency. Rather than just announce planned rate adjustments, the commission also wants lines to publish actual prices.
That, though, is not likely to bring greater price stability to the main trade lanes. Since carriers are unable to control prices unless their ships are running at full capacity, there is every chance that the rate volatility of recent years will continue throughout 2016. With fleet growth continuing at a brisk pace, and volumes at disappointing levels, the supply and demand imbalance shows no sign of going away anytime soon.
So top management has no choice but to remain focused on costs, given pressure on revenues and profit margins.
As if this were not enough, an even more troubling situation is looming.
With NOL being sold and the two Chinese lines possibly amalgamated, at least three of the big four global alliances will have to be restructured. NOL’s container division APL is a member of the G6 alliance, alongside Hapag-Lloyd, MOL, OOCL, NYK Line and Hyundai Merchant Marine. China Shipping belongs to the Ocean Three group that includes CMA CGM and United Arab Shipping Co. Cosco partners K Line, Yang Ming, Hanjin Shipping and Evergreen in the CKYHE alliance. Another potential disruption is the possibility that north-south specialist Hamburg Süd may expand its presence in the east-west trades and join the Ocean Three alliance, given that it already has co-operative arrangements with members.
At this stage, only the 2M alliance of Maersk Line and MSC looks immune from the shake-up.
A membership reshuffle is never straightforward at the best of times. And it is not just a matter of receiving regulatory approval, redesigning networks, moving ships into different services, renegotiating berth windows with terminals, and notifying customers and vendors. On past experience, there will be a tremendous fight to maintain key accounts and protect market shares, and that almost always means a price descent as lines undercut each other rather than lose business.
Global alliances are also falling out of favour as the downside of these huge vessel-sharing agreements starts to outweigh the perceived benefits of allowing smaller players to still offer their customers worldwide coverage. Shippers are nevertheless grumbling about deterioration in customer service and lack of differentiation between one line and another.
At the same time, the stronger lines are complaining privately that alliances are keeping weaker carriers in business when they would be better off either withdrawing from shipping or just focusing on trades in which they have a commercial advantage. That policy appears to be working for Israeli line Zim, which has pulled out of the Asia-Europe trades, for example, and is developing its US operations.
So 2016 has the makings of a grim year for container shipping, even though consolidation should bring longer-term benefits for the industry. Fewer operators in the big deepsea trades would probably rein in excessive newbuilding activity, stabilise prices, and enable the survivors to focus their attention on customer service and product differentiation.
But reaching that position will not be easy, especially given state control and other vested interests that enable many lines to stay in business despite poor financial returns, which has destroyed shareholder value over the years.
Whether there will be a fundamental shakeout of the container shipping industry remains to be seen, but 2016 looks certain see some changes in the global rankings. Another round of consolidation has already started, albeit in a modest way, with CMA CGM’s acquisition of OPDR, Hapag-Lloyd’s tie-up with CSAV, and Hamburg Süd’s acquisition of Chilena de Navegación Interoceánica.
But the next moves could be far more radical if, as seems probable, APL is swallowed up and the two big Chinese lines merge, providing a genuine Asian challenge to the top-four European carriers.