There’s bound to be plenty of news over the next few weeks about the proposed P3 Network as regulators in the U.S., Europe and China decide whether a massive vessel-sharing agreement among the world’s three largest container shipping companies is anti-competitive and therefore shouldn’t be allowed to take effect.
In the end, although the scale of the agreement is unprecedented in liner shipping, I expect regulators will find no basis to block the agreement among Maersk Line, CMA CGM and Mediterranean Shipping Co. for one main reason: The P3 ultimately is no different from any of the dozens of vessel-sharing agreements in effect today around the world.
Container lines for years have shared vessel space as part of single or multiple trade lane agreements, involving two to six carriers. The agreements allow them to offer more sailings from more ports than they could by using their own ships exclusively.
The fact these agreements are solely operational, with marketing and pricing remaining the exclusive domain of the participating carriers, is why they consistently have been allowed to take effect with virtually no opposition from customers or regulators. No recent revision to shipping law in the U.S. or Europe has restricted carrier operating alliances.
The only difference with the P3 is its scale — there has never been a larger alliance proposed. Deploying 28 services in the three east-west trades, the P3 would control 42 percent of capacity in the Asia-Europe trade, 40 to 42 percent of capacity in the trans-Atlantic and 24 percent in the trans-Pacific, according to Maersk Line estimates cited by the Federal Maritime Commission.
It came as no surprise that the industry had to pause to consider the implications, with some believing the sheer size would inevitably affect competition. “It’s so big it raises immediate, obvious questions about the market implications of pricing and competition among the carriers,” Bruce Carlton, president of the National Industrial Transportation League, told CNBC this month.
But absent a view that the carriers would outright collude on rate-setting, which would be illegal, there is no clear connection between the formation of even a mega-alliance such as the P3 to a negative impact on pricing from a customer perspective. The most direct route I can think of involves a scenario where the P3 carriers acting individually would use the lower operating costs they achieve by deploying only the largest ships to drive weaker competitors out of the market through predatory pricing.
The P3 will indeed reduce costs for the three carriers; that’s actually the point. The alliance will deploy 255 ships, down from 346 vessels that Maersk, CMA CGM and MSC currently operate, on future P3 routes, yet there will be no reduction in capacity. The average size of the ships will be larger, and operating costs consequently lower.
But there is no evidence to suggest that predatory pricing enabled by a lower-cost base will drive out weaker competitors. Earlier attempts at that failed; despite billions of dollars in collective losses, no major carrier has gone out of business since well before the financial crisis. Given that most carriers can count on support in a pinch from their home country governments, there’s also no telling when or if a major carrier bankruptcy will occur in the foreseeable future.
A more likely scenario is that the P3 will do exactly the opposite of what shipper advocates fear, which is to increase pressure on rates. The reason is that the other alliances, most notably the G6 and CKYH, will be forced to invest in larger ships simply to keep pace on costs. A recent SeaIntel analysis concluded that the average size of a P3 ship in the second quarter of 2014 would be 12 percent larger than the average G6 ship and 27 percent larger than the average CKYH vessel, forcing the other alliances to keep pace.
Investment in larger tonnage would be motivated squarely by the desire to reduce cost, not to accommodate higher demand. The carriers, in fact, know that container growth is slowing over the long term, so tonnage growth theoretically should moderate.
But that isn’t the carriers’ focus right now. Having given up any hope of controlling pricing, the carriers’ overwhelming focus is on cost, whether it’s repainting hulls or redesigning bulbous bows to reduce drag and save on fuel, or joining the JOC Port Productivity project to find ways to improve vessel turnaround times at port so as to be able to take greater advantage of slow-steaming, and thus cut fuel cost.
That leaves pricing solely within the domain of supply and demand, and it’s why analysts such as Alphaliner’s Hua Joo Tan say the P3 will, if anything, increase volatility in pricing and under no circumstances on its own lead to higher rates.
And that’s why I’ll be very surprised if there is no P3 ready to be unleashed on the industry next spring.