The FMC chair says if freight rates don’t improve to recoup carriers’ cost of capital, the industry “points toward more consolidations, mergers and acquisitions.”
Continued low freight rates may spur on the container shipping industry to further contract, said a U.S. Federal Maritime Commission official in a speech during the Virginia Maritime Association’s annual banquet Thursday evening.
“While not a prediction, it is fair to say that if the overall rate structure for carriers does not improve to the point that the container carrier industry, as a whole, is earning its cost of capital, then business history across any or all industry sectors points toward more consolidations, mergers and acquisitions,” said FMC Chairman Michael Khouri.
Khouri noted that for the past 10 years the container carriers have been financially hampered, mostly due to their inability to secure and maintain compensatory freight rates from their shippers.
The carriers’ container freight rates have remained flat during the past decade, and when adjusted for inflation, Khouri said those rates overall are down by 29 percent.
Khouri also said the industry continues to be challenged by surplus containership capacity, which shows no sign of abating, particularly with the continued arrival of new and larger vessels. On top of this scenario, the global economy appears to be losing steam, resulting in lower projected cargo volumes in the next several years. “And the alliance structure we see today will be quite different,” he said.
In addition, Khouri pointed out the potential impact of the International Maritime Organization’s Jan. 1 mandate for the ocean carriers to use fuel that contains no more than 0.5 percent sulfur content. This shift to a lower sulfur content in bunker is projected to cost the carrier industry upwards of $15 billion.
“And there may be other changes in the maritime landscape that simply defy predictions,” Khouri said. “Trade disputes, changing trade patterns, nontraditional participants such as new technology and new supply chain and logistics models entering the business — all of these ‘disruptors’ can completely upend traditional ways of doing business.”