OOCL plans rapid growth to 1M TEU capacity; Maersk slashes guidance

Yesterday during an interim performance presentation, the outgoing Chairman of Hong Kong-based Orient Overseas International Company (parent company of OOCL), C. C. Tung, listed some of the persistent challenges facing the container shipping industry.

“Supply side growth continued at a significant pace, with total capacity levels remaining a risk factor in the future, even if newbuilding deliveries look likely to reduce markedly in the coming two to three years.  Increased costs have also hurt profitability:  the higher price of oil has increased fuel costs, and equipment repositioning costs have been amplified by the increasing imbalance between (1) strong headhaul growth and (2) stable to weakening backhaul growth,” Tung said.

It was a refrain familiar to observers of the maritime shipping industry: container lines embark on aggressive building sprees, ordering ever-larger vessels in pursuit of economies of scale. The subsequent over-capacity in the market crashes rates, forcing over-leveraged lines into bankruptcy or acquisitions, further consolidating the industry but compressing margins. OOCL reported a net loss of $10.32M for the first half of 2018 on top line revenue of $3.1B. 

OOCL’s new owners, the Chinese state-backed China Cosco container line, see things differently. OOCL’s new CEO, Huang Xiaowen, who also serves as executive vice president at Cosco, said that OOCL’s priority moving forward would be to find synergies with Cosco’s fleet and expand its capacity from about 700K TEUs to about 1M TEUs in the medium to long term, “while exploring opportunities in new markets.” The new capacity apparently will not be dumped into one of the world’s busiest and most volatile container lanes, the transpacific, because OOCL said it would cut another service to the North American West Coast. 

How can Tung and Huang’s statements regarding overcapacity and plans for rapid growth be reconciled?

We think there may be a clue in the story of South Korean container shipping over the past few years, especially the bankruptcy and liquidation of Hanjin and Seoul’s massive investment in Hyundai Merchant Marine (HMM). When Hanjin collapsed, so did South Korean export volumes. The government wanted to ensure that never happened again, and put HMM on a plan for rapid expansion to 1M TEU capacity—FreightWaves reported on HMM’s newbuilding spree in June. 

Both South Korea and China are now subsidizing the growth of their state-backed container lines in order to grease the wheels of their export economies, regardless of the implications for freight economics. OOCL and HMM will essentially be loss-leaders, driving down container rates and making it less expensive for foreign consumers to buy Chinese and South Korean goods.

The emergence of this strategy is a profound development for container shipping: one wonders how lines like Maersk, Hapag-Lloyd, and CMA CGM, which do not enjoy generous financing from their respective home countries’ governments, will be able to compete and find profitability. It’s difficult to interpret the news of HMM’s and OOCL’s growth plans as anything but disastrous for private sector container shipping. 

FreightWaves corresponded with a shipping industry insider who thought Maersk’s lowered guidance for 2018 may have been in response to the Asian lines’ building sprees. The source also wrote that everyone is waiting to see what Taiwan’s Yang Ming’s next moves will be, and that Hapag-Lloyd could be a prime target for an acquisition. 

Maersk’s previous guidance for 2018 was $4-5B in EBITDA; the new guidance is $3.5-4.2B in EBITDA.