In the choppy wake of the liner alliance reshuffle,
industry consolidation and the (long awaited) boost from expanded
Panama Canal traffic, a glimmer of hope appears.
The situation for the liner carriers has clearly improved since
the doldrums of 2016. Consultants Drewry were estimating that
container carriers could book profits of $5 billion in 2017 -
coming on the heels of half a decade of losses. In early 2017,
improvements were seen in the market compared to the previous two
years; Soren Skou, the CEO of conglomerate AP Moller Maersk,
describing 2017 Q1, told investors: "Both spot freight rates and
contract rates have increased during the quarter, lately also on
the North-South trades." Earlier, he was estimating that the 2017
results for its eponymous liner company, Maersk Line, would be
better, by $1 billion, compared to 2016 (when the line saw a
deficit of nearly $400 million).
In 2017, demand growth may finally eclipse increased supply
(reflected by TEU capacity). Maersk presentations to investors
were forecasting that, for 2017: "Global demand for seaborne
container transportation is still expected to increase 2-4
percent." Supply growth, year on year, was estimated to be less
than 1 percent. Rebounding freight rates have been the result.
Port Volumes, Fundamentals & Consolidation,
Ports in the U.S. also saw a rosy start to 2017. Logistics data
provider Descartes noted in their online blog, "So far in 2017,
import volume at the Port of Los Angeles has grown 5.2 percent
compared with the same period in 2016. The Port of Savannah has
seen continuous month-over-month growth vs. January-April 2016,
with imports up 10.3 percent over the first four months of 2017.
Notably, 18 of the top 20 U.S. ports increased in TEU import
volume this April vs. April of last year."
The improved fortunes of carriers are fueled by improved
fundamentals, but also by consolidation, which has been fast and
furious lately. Liner shipping, like other sectors of maritime
marketplace, suffers from the near-permanent bouts of oversupply
that are endemic to the industry. But, in contrast to drybulk and
tanker sectors mired in doldrums, the liners (defined as
container carrying vessels on regular runs) have fought back
through "consolidation," which can take the form of commercial
alliances (typically taking the form of VSAs - "Vessel Sharing
Agreements") or outright mergers between companies.
Lately, the mergers have been receiving all the headlines. In
early July, the ongoing rumors of a deal between Cosco Shipping
Lines and the listed company Orient Overseas International (OOIL,
controlled by the C.Y. Tung family) quickly morphed into a deal
announcement. Cosco, joined by Shanghai International Ports, is
now on a path to purchasing OOIL (which controls Orient Overseas
Container Line- OOCL) in a deal valued at US$6.3 billion. If the
deal moves to fruition, the entity would control a fleet with
capacity of 2.4 million TEU- ranked number 3 on the world
leaderboard (with approximately 11.6 percent of world TEU
Olaf Merk, a European based observer of maritime economics who
publishes the highly regarded "Shipping Today" blog, noted via
his Twitter feed that: "Market share of top 4 carriers after
COSCO takeover of OOCL: 53.8 percent. The container shipping
industry has 'officially' become an oligopoly."
A little more than a year earlier, Cosco had seen its size
bolstered following an early 2016 hookup with China Shipping
Container Lines. In the weeks prior to the Cosco / OOIL news, the
trio of major Japanese container carriers, Nippon Yusen Kaisha
(NYK), Mitsui O.S.K. Lines (MOL) and Kawasaki Kisen Kaisha (K
Line) finalized their plans to merge their businesses into Ocean
Network Express, or "ONE"- effective in Spring, 2018. The merged
entity's capacity would be roughly 1.4 million TEU, putting it at
number 6 on the carrier roster (with a share around 7 percent).
Other mergers in recent years include Hapag Lloyd's acquisition
of United Arab Shipping Company, in the works for two years and
finally completed in the Spring of 2017. Hapag Lloyd, which
controls 1.53 million TEUs, had previously bought CSAV in 2014
(in an unusual share exchange), and, in earlier round of company
combinations, bought CP Ships, in 2004. Another major deal saw
Singapore's Neptune Orient Lines (NOL), which had been largely
owned by the governmentally linked Temasek Fund prior to being
swallowed up in late 2015 by CMA CGM in a US$2.4 billion deal.
CMA CGM, controlled by the French businessman Jacques Saadé,
ranks third (but will be usurped by Cosco- OOIL), controlling 2.3
million TEU (around 11 percent of the market).
More narrative surrounded yet another 2017 deal; Maersk's
acquisition of the German company Hamburg- Süd, for the
equivalent of around US$4 billion. In explaining the rationale,
CEO Skou, said that the transaction: "… represents a unique
opportunity to combine two complementary businesses and realize
sizable operational synergies as well as commercial
opportunities. Combined, the two companies will be able to
realize operational synergies in the region of USD 350-400
million annually over the first couple of years…" He continued,
adding, "The cost synergies will primarily be derived from
integrating and optimizing the networks as well as standardized
procurement. In addition, APM Terminals' global portfolio will
benefit from increased volumes." Of particular importance in this
merger was the terminal business's recent growth in South
America, where Hamburg- Süd remains very active.
In late August, APM took an important step towards sharpening its
shipping / logistics focus with the announcement of a $7.5
Billion deal to sell its oil production unit, Maersk Oil, to the
French oil company Total.
A Long Strange Trip
The voyage to market dominance is not without its freak waves.
One arrangement that would not move forward, blowing up in mid
2014, was a VSA dubbed "P3", which would have brought a combined
set of services from top seed Maersk (controlling 16 percent of
mid 2017 capacity with 3.35 million TEU), the number 2 player
Mediterranean Shipping Company (presently controlling 3.06
million TEUs, or just under 15 percent of capacity), and CMA-CGM.
The consolidation trend also brings ripple effects to other
aspects of the business. In another wrinkle on such deals,
landside terminals tied to affected carriers may change hands -
for a combination of financial, tactical and strategic reasons.
In a deal that finally closed in July 2017, NOL's not so new
parent, CMA CGM, recouped more than $800 million (used to pay
down company debt) from the sale of a 90 percent stake in the
Global Gateway South Terminal, in Los Angeles that had been held
by NOL. The buyers were a pair of infrastructure funds and such
investors seek assets with long term deals. For fund packagers,
carrier business combinations with a short time fuse may fly in
the face of arrangements with terminals typically predicated on
decade-long commitments to cargo throughputs.
With the announcement of the OOIL acquisition by Cosco, concerns
have been raised about Chinese ownership of OOIL's terminal
business, which includes a commitment through the year 2051 to
move cargo through its newly constructed Long Beach Container
Terminal (owned through other companies in the Tung Group) in
Long Beach, California.
With the U.S. political mood and the Trump administration's
attitudes towards China's state-owned companies more
unpredictable than freight rates, the situation in Long Beach
bears watching. There is some history here; observers may
remember the 2006 flap when DP World (controlled in the Emirates)
took over the venerable P&O Ports. Following intense
objections regarding foreign control, the U.S. terminals were
sold into a company that evolved into Ports America (originally
part of AIG, but now held by an entity linked to shipping
investor Oaktree Capital).
On a mainly economic front (tinged with a heavy dose of
sentimentality for the days of U.S. leadership in the sector),
long time shipping watchers will note that it was NOL that
acquired American President Lines (APL) in 1997. A small carrier
with the US Lines nameplate (evoking the famous brand that
suffered a failed re-invention in the 1980s), was acquired by CMA
CGM in 2007.
Just Over the Horizon
What's in store for the industry? Its economics may remain
unchanged. Mr. Hua Joo Tan, Executive consultant at Alphaliner,
offered that, "Consolidation in itself does not necessarily lead
to pricing power or improved financial health. The container
shipping market is fundamentally driven by demand and supply
factors and until the capacity overhang comes under control, it
is highly likely that price competition will continue to
Consultants who provide strategies for shipping companies of all
stripes are always advising their clients to gain 'pricing power'
by moving away from 'commoditization,' where one slot is
indistinguishable from another. Interestingly, CMA CGM announced
that commencing in Q4, it would be teaming up, in a VSA, with
refrigerated cargo specialists Seatrade and Marfret, to offer a
weekly service to shippers of cargo such as fruits and meats.
According to CMA CGM, "13 modern geared ships with a nominal
capacity of between 2,200 and 2,500 TEUs will be deployed on this
new line." Each will have minimum 600 Reefers on board necessary
to transport refrigerated goods…" on north-south trades.
Nevertheless, established smaller carriers could be vulnerable to
acquisitive tendencies of consolidators; in July, Alphaliner was
pointing to Pacific International Lines (PIL), an independent
based in Singapore, as the next acquisition target. PIL is a
niche play - with Alphaliner emphasizing the carrier's
positioning in the burgeoning Africa trades.
The present firming of the market may not be indicative of a
long-term structural change. Citing the industry's natural
economic tendencies, Alphliner's Tan told MLPro, "The market
moves in cycles so it would be foolish to suggest that pricing
power can ever be a permanent. There is bound to be overly
enthusiastic ordering when the market recovers."
In contrast to the centuries-old rules of economics and the
tendency towards over-ordering, geopolitics is dynamic, with a
steadily changing seascape. Liner shipping is strategic; where
state-owned Cosco is concerned. In a recent blog by Olaf Merk, he
opines that "Cosco will not stop until it is the biggest." In his
discussion, he adds that: "As a state-owned company, Cosco has a
logic that is not only commercial, but also geopolitical, maybe
even predominantly so. China wants to secure its supply chains
and strengthen its naval presence: dominating in container
shipping can help achieve this." At the highest level, some
political analysts are considering Cosco to be an instrumentality
of China's "Belt and Road" initiative.
For those keeping score of which carrier is dancing with another,
political factors may trump the economic rationale for
combinations, with Mr. Merk noting that "P3 would have forged an
alliance of the three largest global container carriers: Maersk,
MSC and CMA CGM - all European - in a way that would have
transformed the classical vessel sharing agreement into a more
strategic form of cooperation." Stressing the reason that P3 was
never finalized, he says, "… the Chinese authorities did not give
regulatory approval, officially because it would distort
competition and quite likely also for geopolitical reasons:
namely to avoid the emergence of a European champion. European
regulators were prepared to bless this alliance."
The political motivation also drove Mr. Merk, in his blog, to
offer a hypothetical, albeit tantalizing possibility, an alliance
between CMA CGM and Hapag Lloyd. Though infusing less hegemony
than P3 might have, such cooperation, although unlikely, might
bring a powerful "European" brand into the marketplace.