Special coverage: Will liner shipping see further consolidation?
A sense of what the container shipping industry may look like a year from now has started to emerge as ocean carriers seek to avoid a financial wreck from overcapacity and low freight rates.A sense of what the container shipping industry may look like a year from now has begun to emerge as an industry reeling from overcapacity and low freight rates has taken its first steps in what could be a new phase of consolidation:
• In December of last year, the third largest container carrier, CMA CGM, announced plans to acquire NOL and its APL container-shipping subsidiary. In April, the plan was approved by the European Commission. As of May, the companies were awaiting approval from Chinese authorities.
• In February, COSCO and China Shipping were formally merged after months of discussion. The newly merged COSCO Container Lines continues to operate ships in vessel-sharing agreements (VSAs) with both CKYHE and the so-called Ocean3 alliance using the COSCO and China Shipping brands.
• In April, Hapag-Lloyd announced it was engaged in discussions with United Arab Shipping Co. about forms of cooperation, including a potential combination of their container-shipping businesses whereby UASC would own 28 percent of the combined company.
• There has been continuing speculation about a possible combination of the two major South Korean container carriers, Hanjin Shipping and Hyundai Merchant Marine, both of which have struggled with financial problems.
In addition, carriers are once again looking at reconfiguring the vessel-sharing agreements they maintain on the major east-west trade routes.
On April 20, CMA CGM, the newly merged COSCO Container Lines, Evergreen Line and OOCL said next April they plan to form a new alliance to be called the OCEAN Alliance.
Since this includes both the merged China Shipping and COSCO, as well as the combined CMA CGM and APL, the new alliance will pull together what had been six large carriers from three of the four existing major container alliances that are scheduled to remain in operation until next April. They are:
• CMA CGM and China Shipping from Ocean3.
• COSCO and Evergreen from the CKYHE alliance.
• APL and OOCL from the G6 (The European Commission made removing APL from the G6 by next April a condition of its approval of the CMA CGM-APL deal, explaining membership in two consortia would have resulted in anti-competitive effects. However, that provision didn’t really break any new ground—CMA CGM had already announced a plan to pull APL out of the G6 upon merging. The European Commission did not review the China Shipping/COSCO deal).
The formation of the OCEAN Alliance left eight carriers as “orphans” from those three alliances with a need to figure out their future. They were:
• UASC from the Ocean3.
• “K” Line, Yang Ming, and Hanjin from the CKYHE.
• Hapag-Lloyd, MOL, NYK and Hyundai from the G6.
On May 13, six of the carriers—Hapag-Lloyd, Hanjin, Yang Ming, and the three Japanese carriers—NYK, MOL, and “K” Line—all announced they would form a new agreement called THE Alliance. Collectively, they have 3.5 million TEUs of capacity.
Furthermore, they noted “Ongoing discussions between Hapag-Lloyd and UASC are progressing according to plan, although an agreement on [a] business combination has not yet been reached and will in any event be subject to regulatory approvals. It is anticipated that UASC will become part of THE Alliance, which will increase the overall alliance capacity to more than 4 million TEUs.”
Lars Jensen, chief executive officer and partner of SeaIntelligence Consulting in Copenhagen, said even if a Hapag-Lloyd/UASC merger does not take place, the heavy investment in mega-ships by UASC would still make it highly attractive to THE Alliance.
Meanwhile, Hyundai Merchant Marine (HMM) issued a separate statement that indicated it might also become part of THE Alliance.
(In addition to similar names, both the OCEAN Alliance and THE Alliance have decided to use unusual capitalization).
HMM said its “entrance into THE Alliance is only being postponed as there have been several media reports since the beginning of this year about the possibility that HMM might be under court receivership. The current members of THE Alliance is going to determine HMM’s participation once HMM’s business is normalized. HMM is currently discussing its entrance into THE Alliance in early June, by which [time] the company’s business normalization is scheduled to be completed.”
If HMM does not become a member of an alliance, it would have to make vessel-sharing arrangements with other carriers on an ad-hoc basis.
Jensen said he thought it “extremely critical” for HMM now to get funding and normalize its finances.
“If they do not get that funding in order, and thereby do not make it into the alliance, then they will be one of the ones that will have a very tough future. You cannot be a major east-west carrier and not be a member of an alliance,” he said.
Regardless of whether HMM becomes a member or a Hapag-Lloyd/UASC merger takes place, Jensen said THE Alliance is “a viable alliance. It makes sense.”
Maersk and Mediterranean Shipping Co., the two largest container carriers, have their own alliance, the 2M Network.
“The new landscape of the three alliances that we were expecting to emerge (2M, OCEAN Alliance and THE Alliance) is now putting in a solid foundation for quite a number of years ahead,” Jensen said.
Both the OCEAN Alliance and THE Alliance are scheduled to begin operation next April and are five-year agreements, he noted, and 2M has another eight years to run.
“This is basically the foundation being put in place for the competitive landscape of global container shipping for the next five years,” Jensen said. “This offers a glimmer of hope for an industry that is right now… in turmoil, in chaos. This provides a very good foundation for them to start building up from, provided everything gets regulatory approval.”
However, with at least six members, and maybe more, making THE Alliance work will not be without challenges.
VSAs have been around for many years, but Jensen said “the more members you have in an alliance, the less efficient the network is because there are compromises to be made when you have multiple carriers.”
He believes that Hapag-Lloyd, the largest member of THE Alliance, will set the tone for the VSA, and said if the group is “more focused on getting an efficient network and less focused on the special interests of every single member, then this alliance is just as capable as being a competitive force as the two other alliances.”
Before THE Alliance was announced, Drewry had questioned whether all eight of the orphan carriers could work together because of their varied interests and because of HMM’s financial problems. In particular, it noted, “There has always been reluctance for all three Japanese lines to work together and if they do somehow find themselves in the same club it would add further pressure on them to merge their respective liner divisions (but not their bulk businesses).”
But Drewry said “Were all eight of the orphan lines to join together into a third alliance they would be a match for 2M and OCEAN in both Asia-North Europe and [the] transpacific.”
However, Dirk Visser, senior shipping consultant at Dynamar in the Netherlands and managing editor of its DynaLiners newsletter, noted that having all three of the major Japanese container carriers might not be such a stretch as for years MOL and NYK have cooperated in the G6.
And if Hapag-Lloyd and UASC merge their operations and the South Korean government forces a marriage between Hanjin and Hyundai, THE Alliance looks even more doable.
Rolf Habben Jansen, chief executive officer of Hapag-Lloyd, said during a conference call with securities analysts that “the key difference between THE Alliance and the other alliances is… to optimize whatever we can and are allowed within the joint operations.
“That means that the philosophy can be very similar to the G6 philosophy, which is don’t only look port-to-port but also look beyond that as illustrated by the service center which the G6 used to have in Singapore. We will have a similar setup also with THE Alliance going forward,” he explained.
He said the group will “try to find every possible angle to work together… port-to-port and wherever we can for stronger operational coordination.”
That kind of cooperation has been suggested by a number consultants, including Ron Widdows, former CEO of APL and chairman of the World Shipping Council, who said in a 2015 speech there was untapped potential for carriers to achieve savings through deeper collaboration, for example, by running a group of terminals as a single entity or managing intermodal business jointly.
“From an operating standpoint, combining activities gets you to a scale to be able to drive a more competitive cost structure,” Widdows said.
Operations like that of the G6 is not a new idea. In the late 1980s, Sea-Land, Nedlloyd, and Trans Freight Lines had a tonnage control center in New York for their services between the United States, North Europe and the Mediterranean.
However such operations centers have not been without controversy.
Before Maersk and MSC formed the 2M, an earlier proposal to form a three-way alliance with CMA CGM, called the “P3,” was shot down by China’s Ministry of Commerce (MOFCOM) in 2014.
One of MOFCOM’s concerns was a proposed “network center,” to be located in London that would integrate the capacity of the three carriers on east-west routes.
At the time, Xia Yu, an associate at the Beijing office of Management, Markets and Legal Consulting Group, said “MOFCOM believed that the transaction would form a close association since the proposed network center integrates the full capacity of the global east-west route of the counterparties, is responsible for daily management of all ships in the cooperative routes of the counterparties and operations in accordance with pre-agreed procedures, unifies billing costs and shares the ship operation costs, uniformly coordinates and handles those unused containers and directly determine the issues of stopping shipping. By contrast, the traditional existing shipping alliances are looser in cooperation.”
“The antitrust regulations are very important and we take them very seriously,” Habben Jansen said. “There have been a number of discussions already with the various authorities and also because the whole thing builds on the G6 model we have had in the past, we do not anticipate any issues.”
The largest carrier that has not announced any plan to join an alliance is Hamburg Süd, even though its involvement in the east-west trades has been growing through a VSA with UASC.
Part of the Oetker Group, Hamburg Süd is headquartered in Hamburg, Germany, as is Hapag-Lloyd, and the two companies have discussed combining operations in the past, most recently in 2013 before those talks fell apart. After those discussions, both companies acquired Chilean carriers that specialize in the South American trade. Hapag-Lloyd acquired the container operations of CSAV, and Hamburg Süd took over CCNI.
The seventh largest container carrier globally, Hamburg Süd has had a strategy in the past of working with various carriers on different trades, and Jensen thinks they are probably already looking ahead and negotiating new deals for after the new alliances start operations next April.
In addition to UASC, Hyundai and Hamburg Süd, other carriers that do not, at least yet, have a spot in the major alliances are ZIM, Pacific International Line (PIL), Wan Hai Lines, and X-Press Feeders Group.
Many of these companies have a strong regional presence.
“They are definitely becoming large, but they are not becoming players on the large east-west trades… Being a niche carrier is perfectly fine and nothing has really changed from their perspective,” Jensen said. “They will have to go out and get new slot charter deals” from the carriers in the reshuffled alliances.
The alliance reshuffling will not change the overcapacity situation overnight, but he said it will help create more stability come next April. Over the past couple of years as carriers have sought to staunch their losses, there has been a big increase in the use of blank sailings, and a decline in schedule reliability, which Jensen noted is “massively disruptive to supply chains.”
Higher rates are needed because “you cannot long term have a critical industry like container shipping where all carriers are perpetually losing money,” he said.
As the OCEAN Alliance and THE Alliance design their new networks from scratch, Jensen sees an opportunity for them to improve stability and reliability to the benefit of shippers.
“I see the alliances as precursors to consolidation,” said Jim Blaeser, vice president of AlixPartners. Mergers in liner shipping are nothing new--Japan's three carriers were once six, and Maersk absorbed Sea-Land in 1999 and P&O Nedlloyd in 2005, the same year as Hapag-Lloyd swallowed CP Ships, itself a roll-up of more than a dozen lines.
Now merger activity may be picking up again. Blaeser says investor, even government, patience may be wearing thin after years of losses in the liner industry. For example, while both NOL, the parent of APL, China Shipping, and COSCO all had some public float, they were controlled by Temasek, Singapore’s sovereign wealth fund and the Chinese government, respectively.
A Hapag-Lloyd/UASC hookup may also depend on what the governments that own UASC seek to accomplish.
UASC is owned by six countries in the Middle East. Qatar owns 51.27 percent, with smaller stakes owned by Kuwait, Saudi Arabia, the United Arab Emirates, Iraq and Bahrain. It’s not clear how motivated those countries are to reach a deal with Hapag-Lloyd.
On one hand, Jensen said national pride could weigh against an outright sale, since the owners have been “pursuing a vision for the last few years that they wanted to be a large global carrier.”
One of the means UASC has used to reach that goal has been to build large ships: Eight ships with 13,500-TEU capacities were delivered in 2011-2012 and six 18,800-TEU ships were delivered in 2015-2016. In addition, between November 2014 and mid-May, UASC has received seven 15,000-TEU ships. The final four of that series of 15,000-TEU ships are scheduled for delivery by the end of this year. (See the Container Analytics column in this month’s issue on page 34 to learn more about the possible Hapag-Lloyd/UASC deal).
To fill those ships, UASC joined the Ocean3 alliance, but next April that agreement is to be dissolved and replaced with the OCEAN Alliance to which UASC does not belong.
If it does not become a member of THE Alliance, UASC would be between a “rock and a hard place,” Jensen said, because it does not have the market share to fill such large ships on its own. “Their choice is to find new partners and all the big guys are gone, except for Hapag-Lloyd.”
On one hand, Jensen said, UASC’s government owners might view a deal with Hapag-Lloyd as an extremely attractive proposition, because they would go from “full Arab ownership of a medium-sized container line to being 28 percent owners of one of the world’s largest carriers.”
For Hapag-Lloyd, the deal would give it access to much larger ships. The largest vessels in its fleet currently are its nine 13,169-TEU Hamburg Express-class ships.
CMA CGM has indicated that it will preserve the APL brand and has big ambitions to grow its business in and out of the United States, which it said was up 30 percent in 2015 to 2.3 million TEUs.
Rodolphe Saadé, vice chairman of the French carrier, said the company expects to become the largest carrier on trades out of the United States after the APL acquisition.
While China Shipping and COSCO completed their merger in February, the process of integrating the two companies in the U.S. trades, at least, is not expected to be fully completed until at least next year as the G6 and Ocean3 have indicated those alliances will stay intact until next April. The process of integrating the two companies in China, where much of the cargo they move originates, seems to be moving at a faster pace, a source said.
For the moment, the two companies have separate offices for the two brands. COSCO has its U.S. headquarters in Secaucus, N.J., while about 20 miles north China Shipping has its U.S. headquarters in Montvale, N.J.; COSCO has a national service center in Houston, China Shipping’s is in Atlanta; COSCO has its ISRIS 2 computer system, China Shipping its CS1 system; and on the West Coast COSCO is a partner in Pacific Maritime Services and has its office at the Port in Long Beach, while China Shipping has an office in Long Beach and is a partner in the West Basin Container Terminal in the Port of Los Angeles.
During contract negotiations this year, some shippers negotiated deals with each brand separately, some jointly.
Alliances give carriers the ability to reach more customers, and offer their services on more routes between more port pairs. It also allows carriers to pool assets and manage them more effectively as a group, Blaeser said.
But alliances have also frustrated some shippers.
Peter Friedmann, a Washington-based attorney who represents a number of shipper groups including the Agriculture Transportation Coalition and Coalition of New England Companies for Trade, said the trend toward alliances has reduced the ability of carriers to differentiate themselves. While they may have separate marketing and customer service efforts, if all the carriers load their cargo on the same ship, they end up having similar policies.
If consolidation among carriers continues, there may be less need for alliances and the industry may end up with just a handful of truly global carriers, Blaeser said.
In its annual survey of the container industry, AlixPartners said its “continuing financial woes accelerated because nearly all key financial indicators declined from 2014. At the heart of the industry’s problems, a persistent global supply-and-demand imbalance is to blame. All signs point to a continuation of that theme into 2016 and beyond. The most recent forecasts expect global container fleet capacity to grow by 4.6 percent in 2016, and another 4.7 percent in 2017, though spot prices for major routes have dropped 21-44 percent from a year ago because of plunging demand, now about half the current growth forecast.”
Maersk, which is generally seen as one of the strongest carriers, said when it reported its first quarter results that its average rate decreased by 25.5 percent from the first quarter of 2015 to what it described as a record low of $1,857 per 40-foot container in the first quarter of 2016.
Those prices reflect what Maersk called a “continuation of the global rate war in container shipping, driven by weak demand and significant supply growth. Global container-shipping demand growth stood at about 1 percent, a small fraction of the global container fleet capacity growth of more than 7 percent.”
“Since the Great Recession of 2007–09, carriers have struggled to find feasible solutions to this systemic problem,” AlixPartners said. “Most chose to act independently, embracing such initiatives as slow steaming, vessel idling, organizational cost-cutting, and information technology (IT) modernization. Although those initiatives have provided some tangible benefits, the carrier community may finally be coming to grips with the need for significant industry consolidation.”
Mergers of more carriers would “tend to reduce the need for competitive pricing,” said Foster Finley, a managing director at AlixPartners.
Carriers have been “focusing on attaining economies of scale by trading up to large ships, which not only lower operating costs but also provide access to the biggest trading lanes,” noted KPMG in an article last year.
Expect that to continue this year after the expanded locks in the Panama Canal open later this month, allowing carriers to nearly triple the size of the containerships using the waterway.
KPMG noted some carriers were struggling to finance big ships because “Banks, the largest source of financing to the shipping sector, have been gradually reducing their exposure to shipping assets post-recession. Due to lack of capital, several companies would prefer a merger option if it provides them access to finances.”
However, in an interview with Bloomberg in early May, Nils Andersen, chief executive officer of the Maersk Group, said negative interest rates are delaying badly needed industry consolidation, “because it’s easy for banks to keep weak shipping companies above water.”
Finley said he does not believe carriers are likely to immediately regain pricing power despite the moves toward consolidation. Pricing wise for carriers, “I think it will get a little bit worse before it gets better. The shippers will enjoy watching this consolidation take place and I suspect there will be a little bit of a lag before [the carriers] are able to exert that muscle to sustainably drive those prices back up,” he said.
“The cautionary tale is 2010,” Blaeser added.
Following a dismal 2009, carriers laid up a significant number of vessels. Many retailers and other importers had either under-ordered or reduced their inventories for the holiday season. “They got caught in a pinch where everybody was restocking, and the carriers that had laid up all these vessels were in the driver’s seat and pushed through massive increases,” Blaeser recounted.
Some shippers took a major hit to their profits.
“I think there’s a real danger of the whipsaw coming back around,” he said.