With consolidation changing the face of the industry, the rankings of the top 20 carriers are set to change dramatically
The events of the last year have been so tumultuous that it is likely to go down in the history of the industry as one of its major turning points. The list of the top 20 carriers looks unlike any before it – and this time next year the rankings are likely to look more different still.
Taken in chronological order, 2016 saw China Ocean Shipping (Group) Co (COSCO) and China Shipping Group complete their merger in the first quarter of the year. CMA CGM completed its acquisition of Singapore’s Neptune Orient Lines in July, Hanjin Shipping Co went into administration in September, and the three Japanese lines Mitsui OSK Lines (MOL), Kawasaki Kisen Kaisha (K Line) and Nippon Yusen Kaisha (NYK Line) announced they would merge their box businesses in October. In December Maersk Line and Hamburg Süd came to a sale and purchase agreement that will see Germany’s second carrier sold to the Danish giant.
In the background has been the ongoing merger of Hapag-Lloyd and United Arab Shipping Co (UASC), which has taken far longer than expected to complete but should be finalised by the middle of this year.
The process of consolidation that began with CMA CGM’s offer to buy Neptune Orient Lines has escalated rapidly, and means that the select group that leads the market will become much bigger than the mid-sized and smaller carriers. The gap between the top and the bottom is set to widen considerably.
That might not be a bad thing, according to many who have argued for consolidation during the extreme rate volatility that has been a central feature of the global container shipping market since the financial crisis broke in 2009.
“Consolidation is a sure sign of an industry that is not healthy and cannot continue unless there are some fundamental changes on the part of the shareholders,” says David Arsenault, former president of Hyundai Merchant Marine America.
Jim Blaeser, senior partner at consultancy firm AlixPartners, adds: “We have long argued for consolidation amongst carriers if the industry is to recover, and we think there could be a lot more than is currently on the table.
“Consolidation is certainly the first step on the road to recovery, but there will continue to be some hard decisions for some liner executives to make. Mergers and acquisitions activity does not make the excess ships go away. The market is going to remain out of balance because all that capacity is still there.
“While there may be a market correction to a degree, there will continue to be impediments. There is still a vast amount of debt and there has been a huge erosion of balance sheets.”
This is not down to low freight rates alone. It is also due to the declining value of container vessels, leaving bankers and other investors such as state-owned investment funds with the rising risk of widespread defaults.
Maersk will control 3.86 million teu of capacity across its fleet after it completes the Hamburg Süd acquisition, which took another step forward following a recent green light from the European Commission’s competition regulators in early April. However, it still has to clear Brazil’s competition regulators and Maersk has offered to sell its Brazilian cabotage operation Mercosul Line, which operates four 2,500 teu Mercosul class vessels. That loss will, however, barely dent its global fleet capacity numbers.
After the UASC merger, Hapag-Lloyd will have a total capacity of 1.52 million teu. And once the three Japanese carriers have merged their container businesses the combined capacity will be 1.45 million teu.
But the consolidated companies will not simply leapfrog their competitors in the global rankings, because two of the largest carriers, China Cosco Shipping and Evergreen Line, also have very large orderbooks. The Taiwanese carrier will grow its fleet capacity by 310,000 teu, representing a 30 per cent increase, as it seeks to keep pace with the industry leaders in terms of scale. Its fleet expansion programme will largely come about through the delivery of 11 vessels of 18,000 teu for which it has paid US$140 million each and five 14,000 teu vessels that are costing it US$100 million, as well as another 20 vessels of 2,800 teu that are destined to operate the intra-Asia trades.
Without a suitable acquisition target, fleet growth was the only way for Evergreen to maintain similar economies of scale as its larger competitors and alliance parties. However, with the units due to be delivered over the course of 2018 and 2019, they bring with them the risk of renewed overcapacity, especially to the Asia–Europe trade where the bulk of the larger vessels are expected to be deployed.
And it is dwarfed by the plans of its Ocean Alliance partner China Cosco Shipping. This, too, is set to increase its fleet by around 30 per cent – but in its case this will amount to 540,000 teu across just 33 ships. This means that the vast majority of them will be ultra large container vessels (ULCVs). The new additions will take its entire fleet up to 2.25 million teu capacity.
In fact, every deepsea carrier will be operating ULCVs by next year, as the remaining medium-sized carriers take delivery of their first mega units which have effectively become the price for being a member of one of the three main deepsea alliances. MOL recently took delivery of MOL Triumph, a 20,170 teu vessel which is technically the largest box ship in the world and the first in a series of six.
Orient Overseas Container Line (OOCL) will take delivery of six 20,000 teu vessels over the next couple of years, which cost it just shy of US$1 billion.
Even Hyundai Merchant Marine, which veered perilously close to bankruptcy last year, plans to place an order for a series of ULCVs. Indeed, its ability to do so was one of the core drivers of its financial restructuring.
At the other end of the scale, the gap created by consolidation means that a number of regional carriers and feeder operators now find themselves in the top 20 rankings. The X-Press Feeders group has evolved over the years to become the largest feeder operator in the world, effectively replicating the global networks of its deepsea carrier customers as these have gradually exited from serving second and third tier ports. Its feeder services now cover most of the main markets and it claims to annually carry 5.3 million teu.
Agility and flexibility are the key weapons of the feeder operator and as a result X-Press Feeders has a very high proportion of chartered-in tonnage – 75 per cent of its fleet– which in recent times has enabled it to take advantage of some very cheap daily hire charter rates.
The other two lines which have joined the top 20 – South Korea’s Korea Marine Transport Co (KMTC) and Chinese carrier SITC – are both intra-Asia regional carriers, reflecting the strength of a trade which is now similar in size to the Asia–Europe and transpacific deepsea trades.
However, this trade also has its idiosyncrasies. Traditionally rates have been far more stable, as have volumes which have increased steadily. This has previously allowed the growth of Taiwanese line Wan Hai Lines and Singapore’s Pacific International Lines to grow their core business on the trade before expanding to others.
There are also restrictions at numerous intra-Asia ports that limit the vessel sizes that can be deployed, so insulating the trade from the sort of upsizing that has lowered rates on many deepsea trades. While many Panamax ships may technically be able to call at a certain number of second-tier Asian ports, the sailing distances between destinations as well as the need to maintain weekly rotations have largely meant that the ideal intra-Asia vessel has remained at around 2,500 teu.
And once UASC, Hamburg Süd, and two of NYK Line, MOL and K line disappear as separate names, the next four lines to enter the top 20 – Iran’s national shipping line IRISL Group, Turkish regional operator Arkas Container Transport (Arkas Line), UAE-based feeder operator Simatech Shipping and Chinese cabotage line Quanzhou An Sheng Shipping Co – will make the top 20 even more diverse.
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