Container shipping alliances to break up

Monday, 11 January 2016 00:00 -     - {{hitsCtrl.values.hits}}

Container shipping alliances to break up

There is a growing feeling that 2016 will be the year that finally sees significant consolidation taking place in the container liner shipping industry and not before time, many analysts will argue. But while in the longer term such mergers and acquisitions might result in better financial returns and improved levels of stability, initially the upheaval and uncertainty will be huge. The large alliances that have only been in place for a year or so and were supposed to steady the liner ship and given their members better returns, are likely to be torn apart as companies in rival groups are taken over and/or merged. 

It is a now certain that Coscon and China Shipping Container Lines (CSCL), respectively the sixth and seventh largest liner shipping companies in the world, will merge. This will give the combined grouping a fourth place ranking in the league. But which alliance if any, will be the new entity join? Coscon is in CKYHE, while CSCL is in O3. It is ‘Odds on’ that APL will be taken over and that it will retire from G6. If CMA CGM is the successful suitor, then O3 beckons and its tonnage would be welcome, should the new Chinese group opt for the CKYHE alliance or to work alone. Untitled-1

Speculatively it looks as if Hanjin Shipping Co and Hyundai Merchant Marine (HMM), both of which are struggling financially, could come together and that the Japanese three – K Line, Mitsui OSK Lines (MOL) and NYK Line – could become that Japanese two. In both cases, government intervention would probably be involved. Once again, this would shake up the current alliance structures as Hanjin and K Line are in the CKYHE group and HMM, MOL and NYK are in the G6. Only 2M (Maersk and MSC), which arguably is the strongest alliance, would remain unaffected by the events described above. 

Even with the potential consolidation, compared with other shipping sectors, including the conventional reefer, car-carrying and LNG businesses, liner shipping will still remain very fragmented.

Shipping line to make 4,000 staff redundant

Drastic action has resulted from AP Moller-Maersk Group’s disappointing Q3 2015 fiscal results, in warning that Maersk Line’s net profit for the year would be $ 600 million on lower than forecast and the lack of any immediate recovery in the liner shipping market. In a wide ranging cost reduction programme, the group is to make 4,000 staff redundant, cancel its options on ships (six 19,630 TEU ULCV’s, two 3,600 TEU class feeders and eight 14,000 TEU vessels), lay up more tonnage at least one 18,000 Triple-E class was at anchorage at the time of writing and suspend services. 

Moreover, the carrier is to return several charter ships to their owners and its’ own $ 15 billion five year investment plan will be deferred by at least one year. The staff retrenchment programme will take effect by the end of 2017 and will be aided by what Maersk referred to as ‘ongoing automation and digitalisation’. Currently, the line’s workforce numbers approximately 23,000 employees. The company stated that further action may be necessary, as it expects the imbalance between supply and demand to prevail for the foreseeable future and freight rates to remain under pressure. 

This is particularly so on the Asia/Europe trade where spot rates last year have at time sunk as low as $ 200/TEU. Cargo volumes in the head haul direction have also fallen and were down about 5% in the first nine months of 2015 (approximately 11M TEU was moved) compared with the corresponding period of 2014. An official statement issued by Soren Skou, CEO of Maersk Line said, “We will make the organisation leaner and simpler and while these decisions are not taken lightly, they are necessary steps to transform our industry.” AP Moller-Mearsk’s aim is to cut its annual sales, general and administration costs by $ 250 million over the next two years.

Vallarpadam hits 30 moves/hour

Cochin Port’s Vallarpadam International Container Transhipment Terminal (VICTT) has recorded an average of 30 container moves per crane per hour in 2015. After receiving criticism within India for a perceived slow start since it began operations in 2011, the DP World operated facility has also reported an 11% increase in vessel calls over the past 12 months, including 58 calls in October 2015, compared with 43 in October 2014. DP World Subcontinent Managing Director Anil Singh said the productivity milestone was the result of concerted efforts towards establishing VICTT as India’s first ever dedicated transhipment hub. 

“We are constantly investing in our people, processes and technology to enable enhanced efficiency and provide our customers with world class service. Adoption of best technologies and building of superior infrastructure has contributed to our growth,” Singh told World Cargo News. We also have a good team of smart professionals within the organisation who contribute to technological innovation and who are responsible for the efficient use of automation on the ground. With the help of these attributes, VICTT has been forging ahead at a steady pace. 

Singh said that the relaxation of cabotage rules, which has allowed transhipment of Indian cargo at VICTT on foreign flag vessels, has meant carriers can combine these services with Cochin’s gateway cargo. According to Singh, this is an attractive proposition for carriers, as they can avoid the additional cost of feedering the transhipment handling at competing regional hubs. Indeed, he emphasised that their competition is with Jebel Ali, Salalah and particularly Colombo, rather than with other Indian Ports. Today, almost 85% of Colombo’s cargo could have been India’s. 

Currently, many calls with Indian cargo are diverted to Colombo, Jebel Ali and Salalah, when they should be shipped directly from VICTT, rather than incurring additional transhipment handling charges at various other transhipment hubs, said Singh. However local news reports suggest that despite VICTT recording volumes of 368,000 TEU for the fiscal year 2014-2015 (an increase of 7%), only 17,000 TEU was transhipment cargo. Critics claim a delay in changing the cabotage law when the terminal first opened, combined with a lack of coordination between competing government agencies, has meant the terminal has struggled to compete with Colombo on cost. 

VICTT has three main services per week form Far East Asia, including one from Australia. There are also four weekly services to West Asia, two direct services to Europe and one to the US East Coast.

Fines for price-fixing

France’s Competition Authority (FCA) announced fines totalling more than € 672 million to 20 express and parcel delivery operators as well trade body Transport et Logistique de France (TLF) following an investigation into alleged price-fixing between 2004 and 2010. In its judgement, the regulator said there had been ‘repeated consultation between competitors on annual rate increases’, while smaller scale collusive action, concerning 15 of the firms and the TLF had focused on defining a common method of passing on a fuel surcharge. 

The biggest fine, totalling over € 196 million, has been handed to Geodis. Among the other notable names to be sanctioned are French post office units Chronopost (€ 99 m) and DPD France – formerly Exapaq(€ 44.9 m) – DHL Express France (€ 81M), TNT Express (€ 58.8 m), Dachser France (€ 33.4 m), Gefco (€ 30.6 m), Fedex Express France (€ 17 m) and Norbert Dentressangle Distribution (€ 9.7 m). In return for its full co-operation, Kuehne + Nagel’s French unit, Alloin saw its fine reduced by 30% to € 32 m and Schenker France also picked up a € 3 m fine despite parent company Deutsche Bahn being the ‘whistle-blower’ on the price-fixing practices.

Empty containers more profitable than laden

US to Asia ocean spot rates have fallen so low that repositioning empties is now more attractive than shipping laden boxes, according to the Transpacific Stabilisation Agreement (TSA) grouping of lines. The TSA said declining Asian consumer and industrial demand, made worse by a strong dollar, had cut into US export volumes and eroded US-Asia freight rates to the point where some dry cargoes are moving at levels which make them less attractive to carriers than repositioning empty containers. 

As a result, TSA member container lines have agreed ‘across the board’ general rate increases effective at the start of February of $ 100 per 40 foot container FEU for cargo moving via the US West Coast and $ 200 per FEU for cargo moving via the US East and Gulf Coasts. Brian Conrad, TSA Executive Administrator said west bound cargo volumes were likely to post negative growth for 2015, as orders had slowed overall and as sourcing for many goods and raw commodities had shifted to countries with more favourable exchange rates. 

The market slowdown has been unprecedented, due primarily to weakening demand, he added. Lines don’t envision sustained low rates growing the market and see little benefit in growing market share at current rate levels. The challenge now is to generate sufficient revenue to maintain service levels and make a reasonable contribution to the round-trip sailing.

(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).)

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