Consolidation in the container liner industry to continue

Monday, 22 August 2016 00:01 -     - {{hitsCtrl.values.hits}}

Untitled-1Consolidation in the container liner industry to continue

As referred to by Drewry, container shipping remains remarkably fragmented, with the top five operators accounting for less than half the global market. This presents considerable opportunity for further consolidation. Until recently, the industry had experienced a 10-year lull of M & A activity following a flurry of takeovers in the early 2000s. Yet in the past 12 months four major deals have taken place involving several major shipping lines which have led people to question whether this presages a new trend of further industry consolidation. 

The financial pressure on industry players and in particular on weaker carriers is intensifying daily as rates plumb new depths. Consolidation may be a route to survival for some, allowing lines to combine scale and to realise synergies. As stronger carriers have shown, however it is not the only route to scale. Both Maersk and Hapay-Lloyd have used acquisition as an engine of growth, whereas MSC has relied entirely on organic growth and prior to its acquisition of APL, CMA-CGM had complemented organic growth with a number of small acquisitions. 

The benefit to the industry as a whole is considerably greater if lines pursue growth through acquisition rather than continuing to build new and larger tonnage, which the industry does not need. On the other hand, consolidation as a strategy for individual shipping lines entails considerable risk that the targeted benefits will not be achieved. Much depends on how effectively the task of consolidating the two businesses is managed. Drewry identifies several key learning points for any shipping line considering consolidation with another carrier:

  • Consolidation between two container shipping lines should achieve cost savings, through delivering synergies and longer term strategic advantage.
  • Consolidation yields greater benefit if the geographical footprint of the two companies is complementary, rather than resulting in additional volumes in the same trades.
  • The main cost savings some from economies of scale benefits as well as opportunities for smarter operations with increased volumes – e.g. improved network utilisation and lower container and imbalance costs.
  • While additional volumes can support employment of larger vessels, in many cases scale benefits in ship systems are already being achieved through Alliance membership.
  • A key objective during any consolidation must be to retain the customers of the two lines – loss of volumes or market share can cancel out the cost benefits obtained.
  • The challenge of merging two organisations with potentially different cultures and management styles should not be underestimated.
  • There will be significant one-off costs associated with combining the two businesses.
  • Planning and execution of mergers requires careful project management which can stretch resources – external expertise can alleviate this by providing additional skill sets.
  • People are critical to the transformation process and without a fully committed term there is a risk of customer attrition and project delay. It is essential to motivate both those chosen to remain in the future business together with those who are only needed through the transition phase.
  • Communication with all involved parties, including staff, customers, suppliers and partners, is vital throughout the process.

Asia-Europe rates slide

Despite reports of improved utilisation levels, relatively weak peak season demand has contributed to double-digit weekly declines on Asia-Europe ocean freight spot-rates over the last two weeks, with carriers failing to hold rates above the $ 1,000 per TEU level initially achieved through 1 August general rate increases. According to the latest Shanghai Containerised Freight Index (SCFI) figures, average spot rates on Asia-North Europe trade fell 10.5% to $ 771 per TEU and on Asia-Mediterranean trades dropped 19.2% to $ 699 per TEU, while rates to the US East Coast from Asia fell 6.2% to $ 1,768 per FEU and to the US West Coast by 4.1% to $ 1,225 for each loaded 40ft container. 

Last week, Alphaliner noted how average head-haul capacity utilisation in the third quarter of the year had been hovering in the mid 90% range, with only Asia-Mediterranean routes at below 90%, but the relatively high capacity utilisation levels were due to supply-side adjustments rather than stronger cargo demand, as reported by Lloyds Loading List (LLL).

Maersk Line records second quarter loss

Record low freight rates have driven the world’s largest and normally perennially profitable container carrier Maersk Line to report a second-quarter loss of $ 151 million, despite an internal efficiency drive that reduced its own unit costs by around 15% to an all-time low. While Maersk Line’s own capacity was up 2.2%, year-on-year, in the second quarter to 30 June, it estimated that the global container fleet saw capacity growth of about 6%, while container shipping demand growth was about 2%. 

“Consequently, the market conditions continue to be very challenging,” the line said. Volumes carried by Maersk increased by 6.9% well ahead of the market growth of around 2% but average freight rate decreased by 24%. This resulted in a 19% fall in second quarter revenue to $ 5.06 billion, with the second quarter loss of $ 151 million a deterioration of $ 658 million compared with the Q2 2015 result, when the line reported a $ 507 million profit. Maersk Line said average freight rate continued to fall throughout the second quarter of 2016 due to lower bunker prices, weak demand and overcapacity. 

Compared to Q2 2015, Maersk Line’s average rate declined by 24% to $ 1,716, which is the lowest average freight rate ever reported by Maersk Line. Meanwhile, the carrier’s unit costs reached an all-time low of $ 1,911 per Forty Foot Equivalent (FFE) in the second quarter of 2016, ‘due to a clear cost focus and very tightly managed capacity’. Maersk Line CEO Soren Skou commented ‘Freight rates dropped in the second quarter of 2016 to record low levels and we made a loss as we were unable to reduce costs at the same speed’, reports LLL.

Discipline in container ship order book

The container ship order book is at its lowest level as a percentage of the existing fleet since 1999 and is set to fall to an all-time low by the end of the year as demand for tonnage wanes, according to a shipping industry analyst. Container lines have scaled back new-builds dramatically as they try to get control of a market where structural overcapacity has kept downward pressure on spot rates for the last two years and forced trans-Pacific contract rates to shocking lows. 

The order book-to-fleet ratio has fallen to 17.1% from a peak of 64% recorded at the end of 2007, when a booking container shipping market triggered a buying binge, Alphaliner said. The ratio has been declining steadily since 2008, though Maersk Line’s order for its first Triple-E ships in 2011 sparked “minor” waves of orders by its rivals for vessels of 18,000 twenty-foot equivalent units and over. These mega-ships are most frequently deployed on the busy Asia-Europe trade and their impact on overall capacity is apparent in Asia-Europe spot market pricing trends, which hit an annual high on July 1 ahead of general rate increases, only to retreat in the ensuing weeks, which is by now a well established pattern. 

While the current order book-to-fleet ratio is low in relation to the global fleet, it is heavily imbalanced depending on vessel size, ranging from 56% for ships more than 10,000 TEUs to only 4.5% for vessels below this size. Alphaliner expects the ratio to shrink further as only 202,000 TEUs of new capacity has been ordered in the first seven months of the year compared to the 2.3 million TEUs ordered through 2015.

Maersk Line quits 10 Chinese ports

Maersk Line has decided to stop services to and from 10 ports in China as part of a drive to reduce costs. Maersk Line said it would stop serving ports in Chizhou, Lozhou, Yingkou, Jinzhou, Rizhao, Yueyang, Lijiao, Taiping, Jiaoxin and Nansha old port. The ports are currently served by feeder vessels that move goods to larger ports where mega-vessels with capacity of up to 20,000 20-foot containers take over and transport the goods to ports mostly in Europe and the United States. The Line said in a statement it would focus on ports that offered the best growth prospects and opportunities for its customers. 

The closure of service in these Chinese ports should not be interpreted as a change of strategy but purely pursuing cost reduction through rationalisation of services. Driven by the container shipping downturn and a slump in oil prices, the A.P. Moller-Maersk group’s Chief Executive Nils Smedegaard Andersen was fired in June and Soren Skou, Head of Maersk Line, was named Group Chief Executive, reports Maritime Executive. 

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).)

Recent columns