Larger companies and bigger ships dominate container shipping.
For more than a decade, American Shipper has published an annual list of the 20 largest shipping lines.
Most of those 20 carriers today are global operators.
Indeed, 16 of them belong to one of the four major alliances that dominate the east-west container trade:
- 2M, the alliance of the world’s two largest container-shipping companies, Mediterranean Shipping Co. and Maersk Line.
- Ocean Three, the newest alliance whose members include CMA CGM, United Arab Shipping Co. and China Shipping Container Lines.
- G6 Alliance, which includes APL, Hapag-Lloyd, Hyundai Merchant Marine, MOL, NYK, and OOCL.
- CKYHE, the alliance of COSCO, “K” Line, Yang Ming, Hanjin, and Evergreen.
The other four are Hamburg Süd, a strong player in the north-south trades; Singapore’s PIL and Taiwan’s Wan Hai , strong intra-Asia carriers which are growing in other markets including the transpacific; and ZIM, the Israeli carrier that has undergone financial restructuring and trimmed its network in the past year.
But maybe being a top 20 carrier isn’t what it used to be.
Maersk, MSC and CMA CGM have pulled away from the rest of the pack. Respectfully, they operated 16.2, 13.2, and 9.2 of the container capacity of the 100 largest carriers on July 15, according to the information service Alphaliner.
The fourth largest, Hapag-Lloyd has 5.1 percent and fifth place Evergreen, 5 percent.
In June, Nils Andersen, chief executive officer of Maersk Line’s parent company, raised questions about the competitiveness of smaller carriers.
“I can’t speak for other companies, but small and midsize carriers controlling a 3 percent to 5 percent market share—with very few exceptions—have been unprofitable for the last seven years,” Andersen told The Wall Street Journal. “After such a long period of not being profitable, it defies logic to continue to invest in the business.”
In the wake of that comment there have been rumors that Temasek—the investment company owned by the government of Singapore—is considering the sale of Neptune Orient Line, the parent company of the twelfth largest container carrier, APL.
In August, it was revealed that the sixth largest, COSCO, and seventh largest, China Shipping Container Line, are having discussions about increased cooperation or a merger.
Could these or other mergers come to fruition?
Dirk Visser, senior shipping consultant at Dynamar and managing editor of its DynaLiners newsletter, said he doesn’t know, but sees “Hapag-Lloyd (badly wanting to catch up with the top three) and UASC (with its deep-pocketed Qatari majority owners) as the two main contenders. In both cases, there are complementary advantages to be achieved.”
“China Shipping with COSCO Container Lines seems to be underway now, for actualization by 2017,” and the oft-rumored combination of Hapag-Lloyd and APL would involve a marriage of carriers within the same alliance, he added.
Esben Christensen, a director with AlixPartners in its global maritime practice, said this may not be the right time for consolidation, because this year’s earnings, while better than they have been for many companies since the depths of the recession, show a trend toward reduced revenue.
“The bigger picture is there’s a lot of investment going on from some of the more aggressive carriers in new ships. And so for those carriers that want to be top 10, top 20, I think the bigger question is, either you get on the bus so to speak and you aggressively invest in bigger, more fuel-efficient vessels, which seems to be the trend, or if you don’t, then you know you’re probably more likely to look at strategic solutions—and selling yourself off is one of them,” Christensen said.
He believes companies with few ships on order are the ones most likely to be merger candidates, because “they are the ones that need to decide whether they are going to build ships or acquire another company that has the assets.”
Christensen noted that mergers within alliances are more likely than combinations of carriers from different alliances, adding “it’s hard enough already to integrate two large companies with complex networks, but if those two companies are in different alliances that is another level of competition.”
While liner companies have captured “operational, vessel sharing, slot sharing, joint strings, those sort of synergies,” by forming alliances, he said, there are selling, general and administrative cost reductions that might be realized, “scale benefits around procurement, managing inland networks, depending on how complementary or overlapping the networks are.
“So yes, I think that there are benefits, but I don’t think they are order of magnitude anywhere near to two competitors merging in an industry that is not already heavily dominated by alliances,” he said.
“The bigger benefit potentially here is not a short-term synergy play. It is more of a longer-term capacity discipline perspective. That the fewer players that you had competing for the market share, the better the likelihood from the carriers’ perspective that those carriers exercise better discipline on their supply, on the ordering of new capacity,” Christensen explained
Carriers continue to benefit from low fuel prices, but Christensen said “I remain concerned about the overall macro-picture for the carriers. I think the rate environment is still weak, weaker in Europe than in the U.S. And with the capacity coming online and the sort of macro-growth numbers, I just don’t see that picture getting a lot better for the carriers, or better at all over the near term.”
“The concentration of power among the leading carriers is a seemingly unstoppable trend. The only real deviation in the previous 10 years was when the financial crisis forced major carriers to off-hire and lay-up (mainly chartered) ships in 2009,” London-based Drewry said.
The industry analyst said there is a “league-within-a-league with the biggest carriers providing most of the overall growth. Between 2005 and 2015 the compound annual growth rate (CAGR) of the top 3 carriers was 12.5 percent, significantly faster than the CAGR for the top 20 lines and the total fleet at 9.6 percent and 8.7 percent, respectively.”
That seems to be a trend that’s continuing: each of the half-dozen largest carriers have ships with aggregate capacities of more than 300,000 TEUs on order, with the exception of Hapag-Lloyd. Another carrier with big expansion plans: UASC with ships able to collectively carry more than 200,000 TEUs on order.
“The market remains oversupplied, but the order book has continued to rise, with significant new orders announced in the last two months,” H.J. Tan, principal of Liner Research Services and executive consultant at Alphaliner, told American Shipper on July 15.
The orders, calculated Visser, on July 1 stood at about 21 percent of the existing fleet.
That is not out of line with the past, he said. In 2000, the order book stood at 20 percent of capacity; 2005, at 45 percent; and 2010, at 34 percent.
So the size of the current order book “is on the decent side, even if considering the current slow developing container trades, and always considering that ships are built for some 25 years of trading,” Visser said.
“However, looking at the size categories, the order book appears to be totally out of balance with an immense focus on the very largest ships,” he said.
Visser figures about 70 percent of capacity on order is for ships of more than 10,000 TEUs.
It’s easy to understand the attraction of the big ships. Maersk, which has been one of the leaders in moving to larger vessels with its “Triple E” ships, said when it reported its second quarter earnings last month that it now needs only 0.902 tons of bunker fuel to move a 40-foot container, compared with 1.791 tons back in 2007. (This does not account for changes in short-/long-haul volume mix.)
The company has also benefited from the reduction in bunker fuel, so the cost of moving a 40-foot container is now $2,246. That is a whopping $808 less than it averaged in 2012.
“Exactly because of the current lackluster trades in which they operate, it would be wise to show restraint in the ordering of the very largest ships of over 18,000 TEUs,” Visser said. “However, it looks as if every carrier is determined to deny its nearest competitor enjoying somewhat lower costs resulting in a [higher] profit. If, for that reason, carriers of three of the four alliances would indeed want to catch up relative to their current overall capacity shares, the impact would be nothing less than dramatic.”
With the members of 2M, Maersk and MSC, having ordered 51 ships with more than 18,000 TEUs of capacity, Visser figures the other alliances would have to order 76 such units just to keep pace: CKYHE, 27; G6, 32; and Ocean Three, 17.
Maersk in July ordered eight 14,000-TEU ships and in June ordered 11 ships with capacities for 19,630 TEUs.
MSC, christened the latest in a series of 19,224-TEU ships, MSC Zoe in August at Hamburg, and plans a similar ceremony for the next, MSC Maya, in Antwerp later this month. (The initial ships in the series are being named after the grandchildren of MSC founder Gianliugi Aponte.) There are an additional 16 in the series, the largest containerships yet to be built.
Tan said there are already ships of 21,000 TEUs being built, even though they have the same dimensions as the 18,000-TEU ships.
“These 18,000-21,000 TEU ships of 400 meters length and 59 meters breadth have essentially similar laden container capacity. I expect they will be the maximum size for a while as there are both commercial and operational constraints to larger ships,” he said.
This is not to say smaller ships aren’t being ordered: Maersk ordered seven 3,600-TEU ships in March, Evergreen ordered 10 ships with capacities for 2,800 TEUs in August from the Taiwanese yard CSBC, and Lloyd’s List reported Evergreen might place a similar order with Japan’s Imabari in September or October.
What’s the most important factor driving the orders? Is it low shipyard prices, low borrowing costs, near-term demand, or a desire to lower fuel costs?
Tan believes it is none of these, but the desire for market share.
Alphaliner’s analysis of the world containership fleet and orderbook on June 1 showed 49.6 percent of the capacity in the current world container fleet is chartered from non-operating owners—companies such as Seaspan or Rickmers. An even larger percentage of the capacity on order, 61.8 percent, was from the non-operating owners.
“I think that for each and every intended order, operators are collecting offers from various non-operating owners and financiers to pick out the most competitive one for their purposes, while keeping an eye on their preferred share of ownership versus chartered/leased,” Visser said. “It seems that, over the years, there never have been real problems obtaining finance for ships, though seemingly amply available ‘new money’ has other considerations than the more traditional [but now tighter] money.”
Statistics from VesselsValue.com show a half-dozen of the largest containership owners are not the liner majors, but in fact are companies that charter containerships to them. They include Seaspan, Shoei Kisen, Costamare, Zodiac, Claus-Peter Offen, and Quantum Pacific Shipping.
“Over the course of 2015 we have seen container values firm across the board as the spot rates have improved. We saw rates reach their peak at the end of June/start of July, back to levels last seen in mid-2011,” VesselsValue.com said.
The website further stated this has led to an increase in activity in the sale and purchase market during the last few months. There is also a healthy order book, with the largest orders being in China.
With the opening of the new Panama Canal locks next year, some companies are building ships that are in the 13,500-14,000 TEU range, about the maximum size for the new locks. China Shipping, for example, recently disclosed it will buy eight 13,500-TEU ships.
It is not just large ships that are in demand. Charter rates for current panamax-size ships with capacities of 4,000-5,000 TEUs that can fit through the current locks have risen this year.
During a conference call to discuss the second quarter results of Seaspan, Chief Executive Officer Gerry Wang noted few ships of that size have been built in recent years and the supply remains tight.
The current panamax ships of about 4,000-5,000 TEUs are “very flexible,” Wang said, adding that they are particularly suited for intra-Asia, transpacific, and trades to Australia and New Zealand.
“We look at certain improved designs for this type, because we do feel the industry will need this type of vessel for flexibility, for different trade lanes. Yes, there would be a trickle-down cascade impact from larger vessels, but due to the restrictions and the geophysical situations, the bigger vessels will have difficulties going to certain parts where those 4,000 or 5,000 TEUs can go,” Wang said.
While the economic outlook remains uncertain, Wang said the container industry is still looking at growth of 5 percent to 6 percent this year and into 2016.
“If you look at the inside of a container, you’re looking at the furniture, you’re looking at the clothing, you’re looking at TV sets and all those things and occasionally iPads and iPhones for certain periods of time. So those are consumable products, so they are fairly stable,” he said.
“One could argue when you go through tough times, you would demand more low-end products and, therefore, the volume would only go up. That’s the disconnect. A lot of people have now figured out our business is all about volume,” Wang said.
“Our business is not about value. We are looking at the number of boxes. We’re not looking at how many millions of dollars in the container boxes,” he added. “We are fairly isolated from the dollar-related situations… We are talking about consumers wanting shoes and furniture and clothing from manufacturers all over the world. They are seeking these for the lowest cost. At the end of the day, we feel that the container-shipping business will continue to be robust.”
This article was published in the September 2015 issue of American Shipper.