Liner consolidation on the horizon for regional, niche carriers

Lars Jensen, chief executive officer of Seaintelligence Consulting, said that although consolidation among the largest carriers is likely coming to an end, smaller, niche carriers are just getting started.    The container shipping industry is “near the end game for consolidation among major carriers,” but perhaps as many as 30 percent of the 100 largest regional or niche carriers may disappear over the next five years as a result of mergers and acquisitions in the coming years, according to Lars Jensen, the chief executive officer of Seaintelligence Consulting.
   The Copenhagen-based consultant offered his view of the future of the industry in a presentation at the JOC TPM 2018 conference in Long Beach this week.
   He is also predicting that while there may be an upturn in freight rates this year and in 2019 as a result of tightening capacity, a downturn in the industry in 2020 seems likely as additional capacity enters the world fleet.
   Container shipping is now dominated by seven global “super-carriers,” he said, which include Maersk Line, Mediterranean Shipping Co. (MSC), CMA CGM, COSCO, Hapag-Lloyd, the Ocean Network Express (ONE), and Evergreen Line.
   ONE is the new joint venture company between Japan’s “big three” carriers – Kawasaki Kisen Kaisha, Ltd. (“K” Line), Mitsui O.S.K. Lines, Ltd. (MOL) and Nippon Yusen Kabushiki – which will begin operating in April.
   Overall, those seven global super carriers have now arranged themselves into three large alliances along with Yang Ming and Hyundai Merchant Marine (HMM).
   Maersk and MSC operate in the 2M Alliance, which had reached a space sharing deal with HMM back in 2016; CMA CGM (including APL), COSCO (including Orient Overseas Container Line), and Evergreen operate in the Ocean Alliance; and Hapag-Lloyd (including Hamburg Süd), ONE and Yang Ming are members of THE Alliance. Previously there were four such global alliances.
   Looking ahead, Jensen believes Yang Ming and HMM will have difficult strategic decisions to make in the coming years.
   He believes both companies are “too small to have a realistic chance of becoming a super carrier, no matter how many ships they build,” adding how they are “caught in the middle ground” between the very big global carriers and smaller regional firms.
   While the Israeli carrier ZIM is becoming more of a niche carrier by focusing on certain trade lanes, he believes Yang Ming and HMM have the wrong fleet profile for that kind of change.
   Jensen believes that while Yang Ming and HMM may continue to operate for a number of years as they are, they eventually will have to move in different strategic directions.
   For example, he said HMM may become more of a regional carrier and compete with other Korean shipping companies focused on the Korean trade, improve its profitability so that it can become an attractive acquisition target, or continue to depend on support from the Korean government.
   He also believes the Taiwanese government may tire of subsidizing the shipping industry and that Yang Ming and Evergreen will merge, even though he says the companies have told him he is “bonkers” for making that prediction.
   While consolidation among the largest carriers is likely coming to an end, he said “we are just getting started” with consolidation among smaller carriers, where 15 of the top 50 carriers have disappeared in the past five years. He said many niche carriers are increasing the size of vessels they are operating. While that may make them more efficient, he said they are bringing in too much capacity and “there is not enough room for all of them to play the scale game.”
   Jensen had no predictions specifically on which companies will disappear.
   “This is not about who is most competitive,” he said. “This is about who is most adept at getting access to more capital before they run out. Whoever is best at that game ends up running.”
   Jensen said the downturn in 2020 may accompany a further restructuring of the three major shipping alliances. He does not believe regulators would allow the reduction of those three groups into just two alliances, but he does believe there may be some switching of partners by the carriers in two to four years as they seek to link up with partners that have a similar commercial strategy.
   “If you have two carriers – one pursuing extreme low cost and don’t really care about, for example, reliability and the other doing the opposite, you have a problem,” he said. “If you have an approach of saying we would like to do ad hoc inducement calls for the individual customers and the other one saying we absolutely have to stick to schedule, we have problem.”
   Jensen offered a caution about COSCO, which he said is the liner shipping industry’s “elephant in the room” because of its desire to grow.
   “Keep in mind their objective does not seem to be financial profit, their objective seems to be support of the Chinese Belt and Road Initiative, which we need to take into a 30-40 year context,” he said. “Whether they make money in the next two years is relatively immaterial. All the other carriers need to think – do you want to fight a freight rate war with COSCO to maintain your market share?… That might not be the wisest choice.”
   He suggested some carriers might seek to compete with COSCO by adopting a strategy that focuses on factors other than price, but said, “realistically, there is a much higher risk that at some point in time, this is going to spark off another rate war.”