Shipping and Consolidation

Container shipping, which carries around 95% of the world’s manufactured goods, has suffered for the past decade from overcapacity, which has led to falling freight rates. Over the past few years, the world’s 20 biggest container operators have formed alliances that have cut their operational costs through sharing of ships, port calls and networks.

Analysts estimate global containership overcapacity at about 15%. Many large ships ordered during the sector’s heyday went into service just as the global financial crisis in 2008 crimped shipping demand, sending freight rates spiralling down. China alone will build ships with a total carrying capacity of 80 million tons next year, equal to the forecasted increase in global demand.

A slowdown in China has sent commodity prices swooning and dealt a blow to global growth. Now a stuttering recovery in the world’s second-largest economy could spark the biggest shipping union in years. The shipbuilding industry will continue to shrink amid decline in global orders and overcapacity. As a result the container shipping industry is facing another period of upheaval, with consolidation among top carriers threatening to disrupt the mega alliances even as the lines settle into their relatively new vessel tie-ups.

China October imports fell 18.8 percent in value from a year ago. Exports also declined. 1.6 million twenty-foot equivalent unit (teu) of capacity is being added to the world container fleet this year, which is equivalent to container shipping growth rate of 7.7 percent – far above its forecast of just 2.2 percent. While import volumes for some commodities rose on stockpiling, iron ore import volumes fell 4.9 percent on year, hitting the BDI as dry bulkcarriers ship more iron ore than any other commodity.

Orders for new ships have slumped amid weak commodity prices. The Baltic Dry Index (BDI), a measure of freight rates for shipping bulk cargoes such as iron ore, coal and grains plunged to an all-time low since it was launched three decades ago. The index has sunk 95 percent since its peak in 2008. With shipping companies facing intense price pressure, something was bound to give. The cost to ship a container from Shanghai to Rotterdam stood this week at $739, a fall of 26% from this time last year, when rates stood at $1,000. A reasonable rate for Asia-Europe is between $1,300 to $1,500. This means many companies are operating at a loss.

Container shipping is set for another three years of overcapacity and financial pain due to slowing global trade and a bloated order book of large vessel capacity—placed when China was gobbling up large amounts of raw material imports that are now slowing. Many blame the industry’s fragmented nature for its struggles. With few companies controlling more than 5% of the market, reducing the oversupply of ships is taking longer than industry observers had anticipated.

Now, consolidation appears to be picking up, with much of the activity centering on Asia. France’s CMA CGM—the world’s third largest container shipping company has agreed to buy Singapore’s Neptune Orient Lines, owned by Singapore’s state fund Temasek Holdings for roughly $2.4 billion in cash, a deal that would bolster its presence in the Pacific Ocean trade routes and provide some consolidation among the world’s beleaguered container-shipping fleet. The merged entity would have an 11.4% share of the world’s container capacity, up from CMA CGM’s present 8.8% market share. Maersk currently controls 14.7% of the market, and Switzerland’s MSC handles 13.3%.

CMA CGM plans to bring NOL’s liner division APL into the Ocean Three Alliance that the carrier operates in with China Shipping and United Arab Shipping Co. By sharing ships and port calls, the alliance will control 20% of all cargo moved from Asia to Europe and 14% of that shipped across the Pacific Ocean. The tie-up is expected to cut operational costs for the three partners by about $1 billion annually.

In the meanwhile, merger talks between state-owned Chinese shipping giants China Ocean Shipping Co. (Cosco Group), and China Shipping Group Co. are now in advanced stages and are focused on combining the groups’ container-shipping units, according to people familiar with the matter. Cosco Container Lines operates 175 container vessels and CSCL operates 156, making them the world’s sixth- and seventh-largest container companies in terms of capacity, with a combined global container capacity share of around 8%.

The merged entity would become the world’s fourth-largest container company, behind the Maersk Line unit of Denmark’s A.P. Møller-Mærsk A/S, Geneva-based Mediterranean Shipping Co. and France’s CMA CGM SA. The government wants the merger to happen by 2017. The merger would end the rivalry between the country’s largest shippers, creating a domestic monopoly with a bigger slice of the global market.

Past experience suggests that such consolidation will take some time to have an effect and savings may not turn out to be as much as anticipated. But there is a growing view that the current situation is unsustainable for these businesses, and consolidation might be the least worst of the available option

Experts say it is about time the industry got serious about realignment. What consolidation does and scale gives is the ability to defend against a terrible market and perhaps even put others out of business. But without disposals, without demolitions, without layups or putting ships on idle, you can’t get rid of this overcapacity.