New alliances but the same challenges remain

 

‘This trend will continue’

If the first half of 2017 was dominated by the forging new alliances and the move towards even more consolidation, shipping industry watchers will be hoping the second half will be dominated by headlines about stability and growth.

And there are signs that this could well be the position, helped in part by the increased pricing power that mergers and acquisitions inevitably bring with them. On top of that global shipping demand is on the rise, with a modest expansion of the economy in the US also playing its part.

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Meanwhile, the $6.3bn cash deal to sell OOCL, the globe’s seventh-biggest container line, to Chinese state-owned Cosco Shipping has become the latest chapter in the growing consolidation story. When that deal goes through it means that three alliances will collectively hold 90 per cent of the shipping market - and it may well be that we haven’t seen the end of the trend yet. 

In a recent interview with the Financial Times, Mariko Semetko, analyst at the debt agency Moody’s, summed up the situation, commenting: “The competitive environment, persistent oversupply and resulting pressures on freight rates have driven industry consolidation. We expect that this trend will continue.”

Economies of scale

If so, what is this all going to mean for shippers and ports? For one thing, the drive from the alliances will be to realise greater efficiencies. It’s what consolidation is built to deliver.

It is a situation highlighted in this statement from Mærsk which was reported in the trade media: “Alliances enable container shipping lines to optimize networks and benefit from economies of scale.”

There is one school of thought which says that as a result we could see larger vessels reducing their number of port calls, and carriers demanding wholesale increases in lift capacity to shorten those port stays.

The challenge for port operators is meeting those demands to cut the price per call, amid the fear that if they don’t they will lose those ships and their revenue totally. Delicate balancing acts may be required to meet this challenge - but we may see the big alliances calling at fewer ports as a result.

Impact on shippers

This drive for more efficiency is also likely to have its impact on shippers. If the number of ports the carriers’ vessels call at is reduced in the new landscape that is emerging, that in turn will affect pricing structures as well as transit times. Capacity shortages may also become an issue in the future.

All that added cost will have to be borne by the shipper, not least an escalation of freight rates as a result of fewer services on key trade routes.

The growth of alliances also makes it much harder for shippers to look to drive better deals by making individual liners compete against each other. Then there is the issue of increasing use of digital technologies in the logistics sector, again driven in part by this desire to harness more efficiency.

Superior IT and fleet management systems are the order of the day as these new container line alliances look to better analyse demand and the commodities being shipped, giving them more of a handle on the prices they can charge.

That pricing structure that is developed as a result may also be tilted towards long-term customers, valued for the higher profits they can deliver the carriers. However, it is not all bad news with analysts noting that the improved overall outlook for the industry that we are now seeing means it is unlikely there will be a return to the pricing wars witnessed early last year.

The industry alliances are also likely to use their scale to fund the building of even bigger ships, though this may do nothing to address the issue of overcapacity that has blighted the sector in recent times. This in turn could mean more mergers and the creation of even bigger global operators as the merry-go-round continues. Consolidation isn’t going to come to a halt any time soon.

With mergers and acquisitions having impact within the industry there has been extensive press coverage and opinion below are links to further industry insight into the current situation.

http://splash247.com/cosco-takes-oocl-eyes-cma-cgm/

https://theloadstar.co.uk/container-lines-banking-5bn-profits-year-says-dreary/

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