Are shippers staring at the possibility of significant capacity being laid up by container lines and non-operating shipowners next year? Could the industry be heading toward further consolidation, not just minor carriers exiting the trans-Pacific, but established names merging to form new and larger entities better able to compete with the “big boys?”
With rates taking a beating in the major east-west trade lanes, and industry losses almost certain to be in the multibillion-dollar range this year, these questions are emerging as 2011 begins its final chapter.
Setting up the dynamic is a growing gulf between the two main east-west trades, ultimately supporting the idea that change may be coming. Although capacity has come out of the trans-Pacific, in the form of four smaller carriers — CSAV, The Containership Company, Horizon Lines and Grand China — leaving the trade and six established carrier strings being withdrawn, no similar development has occurred in Asia-Europe, where “carriers are locked in a destructive price war and where capacity withdrawals are limited to smaller-scale loops,” research analyst Alphaliner said last week.
As Martin Dixon, business development manager at Drewry Supply Chain Advisors (and a scheduled speaker at the TPM Conference in Long Beach next March), said last week, “The characteristics of the trans-Pacific and Asia-Europe trades are diverging. The removal of capacity from the former is proving sufficient to put a brake on further rate erosion. However, the absence of any such action on the Asia-Europe trade means that rates have further to fall.”
There is disagreement on whether the Asia-Europe trade will see a large-scale capacity pullback next year. If not, and if rates fall further, the consolidation scenario gains currency. Some believe a pullback of significant scale is inevitable — in general, not necessarily in Asia-Europe — given the losses lines are seeing. Others aren’t so sure.
“With the rates at the level they are today, they are not sustainable, so at some stage there needs to be some rebalancing of supply and demand, and that should come after Chinese New Year,” Damco CEO Rolf Habben-Jansen said in an interview last week.
Former NOL CEO Ron Widdows told a New York apparel conference last week that U.S. shippers should expect lines to sideline capacity. “I do believe there will be a substantial amount of capacity that will be parked,” he said. “That huge bump in ship idling we saw before, something like that will happen again. Will it happen before the trans-Pacific contracting period? It could, but probably not.”
Others are skeptical. “I’m not sure carriers are really in a hurry, by looking at several things,” said Johnson Leung, senior vice president of transport analysis for Jefferies Group in Hong Kong. “First, the carriers are still getting something like $700 per TEU including (terminal handling charges), which are still way higher than what it was in the spring of 2009 when they got maybe $400 to $500 per TEU all-in.
“Second, the ships have become bigger and the utilization now is way higher than what it was in the spring of 2009, which leaves them with lower unit costs, too. So some operators with large ships may even be making a cash profit in this market.”
Maersk Line, the largest Asia-Europe carrier, would seem to have little motivation to park ships, and indeed seems to be digging in its heels.
“We are not leading a price war … but we are determined to stand firm,” A.P. Moller CEO Nils Andersen said in a conference call last week. This would mean two things: Maersk as the industry trendsetter can’t be counted on to lead in idling tonnage, especially because doing so could affect its recently introduced Daily Maersk Asia-Europe service. And if Maersk doesn’t lead the way, other carriers will hesitate to make the first move and risk losing market share if others don’t follow.
Thus, the war of attrition in Asia-Europe could continue, and that could lead to an historic next round of consolidation. Whether it actually happens, it wasn’t surprising to see the possibility of a merger of Japanese carriers, raised in Lloyd’s List. Another possibility could be Cosco and China Shipping.
Although nothing has been said, it doesn’t seem inconceivable. In the bulk trades, China has a stated goal of moving 50 percent of the iron ore and other commodities it buys on China-controlled bottoms, implying a policy of achieving a large market share in its maritime trades.
Yet while China represents roughly 30 percent of global container port volumes, Cosco and China Shipping together account for only 7.5 percent of global capacity. Meanwhile, the largest carriers are only going to expand their dominance because of their mega-ship orders.
So will China make a move? Maersk itself seemed to suggest that consolidation wouldn’t be such a bad thing. As Andersen said last week, “It’s not an environment for small players and those without strong balance sheets.”