Sector shows signs of revival after deals and new sector alliances shake up market
At first glance, it is not obvious watching the cargo moving on and off the Leverkusen Express at the Port of Southampton that the container shipping industry has been contending with the biggest financial crunch in its 60-year history.
Cranes lift boxes over the towering sides of the 367m long vessel, just as they did before a glut of ships and a slowdown in global trade sent freight rates tumbling.
But on a closer look, there are signs of financial stress on the Southampton quayside. The decks of containers on the Leverkusen Express, operated by Hapag-Lloyd, are notable for being speckled with the colours of at least five other shipping companies, highlighting intense efforts to ensure that the vessel is filled to capacity. In the past, ship operators used to only put their own containers on their vessels, plus maybe those of one or two partners.
Operators have of late engaged in increased co-operation to fill their ships because that is the only way they will make money out of the giant vessels.
Much of the container shipping industry has been running up losses for years, but there are good reasons — including this enhanced collaboration between companies — to think that the sector has reached a critical moment in its battle to secure a course to sustainable profits.
A recent wave of deals is reducing the number of lines, while South Korea’s Hanjin Shipping last year became the first big container ship operator to enter bankruptcy since 1986.
Some executives think that the shake-up, which involves almost all the top 15 lines in mergers and new industry alliances, has stopped the decline in freight rates. According to Drewry Shipping Consultants, average revenue per 40-foot container recovered to a profitable $1,645 in December, from a lossmaking low of $1,113 in April.
Yet other sector observers believe that the industry’s longstanding issue of excessive numbers of container ships chasing inadequate volumes of cargo will reassert itself.
The current changes, they say, also pose risks. In the worst-case scenario, manufacturers that put their goods on container ships could find billions of dollars worth of their products stuck at sea on a bankrupt operator’s vessels, as happened following Hanjin’s collapse.
Rolf Habben Jansen, chief executive of Germany’s Hapag-Lloyd, highlights high levels of ship scrapping last year as a reason to be optimistic. Maersk Line, which last week reported a net loss of $367m for 2016, also expects a strong recovery and predicts that it will record a profit of about $600m for 2017.
“I expect that the industry will be far better off in financial terms within the next 12 to 24 months,” says Mr Habben Jansen.
But Lars Jensen, chief executive of Sea Intelligence Consulting, points to a continuing imbalance between demand to move cargo and the supply of ships.
Shipyards are due this year to deliver large numbers of huge vessels, which could put fresh downward pressure on freight rates, and Mr Jensen says: “We shouldn’t lose sight of the fact that the global supply-demand balance is basically where it was 12 months ago, when the market collapsed. Despite the record levels of [vessel] scrapping, that hasn’t improved.”
The key question is whether a restructured container ship industry — as the new mergers and alliances take effect — can exercise discipline on freight rates and restraint on vessel orders.
The deals are vital to fill new vessels capable of carrying as many as 20,000 20-foot containers. In the biggest of the current transactions, Hapag-Lloyd is acquiring the container shipping operations of UASC, while Maersk Line is buying Hamburg Süd.
Three of the four alliances that have dominated the industry will also disappear on March 31.
They will be replaced the next day by two new groupings — The Alliance of five container ship operators led by Hapag-Lloyd, and the Ocean Alliance of four companies spearheaded by France’s CMA CGM. The 2M alliance of Maersk Line and Mediterranean Shipping Company may also change if Korea’s Hyundai succeeds in its attempt to join.
A senior executive at one shipping line expresses confidence that the overhaul of the market should help to prevent excess capacity and problems on freight rates. Lines will have to seek approval from other members of their alliances before buying new vessels, which should put a brake on orders.
“From that point of view, it’s contributing to some form of stability,” says the executive. It is also positive, she adds, that consolidation and Hanjin’s bankruptcy have removed from the market some struggling lines that were “pricing quite aggressively” with their freight rates.
Mr Habben Jansen agrees that the market is functioning more rationally. “We already see the first improvements,” he says.
Yet Simon Heaney, analyst at Drewry, is cautious. He highlights how a new Korean shipping company called SM Line has taken over some of Hanjin’s vessels and might drive down freight rates on trans-Pacific routes.
“When you’re an underdog, you have to buy your way into a market,” Mr Heaney says.
Ron Widdows, a consultant and former chief executive of Neptune Orient Lines, which was bought last year by CMA CGM, has deeper concerns.
He says that shipping lines might cut freight rates to pursue market share for their new alliances, or order ships to beef up services. The record numbers of ships currently lying idle could be put back into operation, driving rates down again, he adds.
Mr Widdows also fears that the market overhaul will lead to instability. He points out that in 2005 a single deal — Maersk’s €2.3bn takeover of P&O Nedlloyd — caused considerable disruption.
This time around, as a battered industry prepares for multiple transactions simultaneously, the potential for disorder could be far greater.
“Imagine what that does in terms of the instability and continuing volatility of the environment,” Mr Widdows says.
Source: financial times.