When will the pain get so bad it’s no longer tolerable? The fate of container shipping in 2012 is tied to this answer.
As long as carriers can stand the pain of losses — and evidence so far suggests they’re not yet at the breaking point — rates in the Asia-Europe market will remain at or near their severely depressed levels but the industry will not be tipped into a true restructuring.
If the pain gets worse, specifically if the world’s largest carrier, Maersk Line, pushes deep into 2012 or even beyond its stated orientation of ushering smaller carriers out of the Asia-Europe market, a round of consolidation could be forced through mergers, acquisitions or bankruptcies that some believe is long overdue.
The pressure that could trigger such a scenario has begun. Several smaller lines exited the trans-Pacific and larger lines such as CSAV and Zim Integrated Shipping Services are seeking capital infusions or strategic partners. CMA CGM has seen its considerable debt downgraded and has been shedding assets. Analysts say rates in the Asia-Europe trade were weaker than what would be suggested by volume that, for the most part, was relatively strong for most of 2011.
“The load factors have not been so bad through roughly the first three quarters, (such that) you would not expect to see rates melt the way they did” during that period, said Janet Lewis, head of Asia shipping research for Macquarie Capital Securities in Hong Kong. “The conclusion is that there has been quite aggressive price cutting.”
She summed up her view on why that is in a report from late October. “We believe that the current pressure on Asia-Europe rates, in particular, is the result of efforts by A.P. Moller-Maersk to push out weaker operators — either financially weak or small scale — along the lines of its public stance that the industry is in need of consolidation,” Lewis wrote.
Such a posture by the world’s largest container line creates a very different scenario headed into 2012, certainly when compared to 2009, the last year when the industry was in the red. That year, upward of $10 billion in losses led carriers including Maersk to withdraw, at one point in late 2009, 11.7 percent of total global capacity to put a floor under rates.
Following 2011, when losses accelerated as the year progressed but were nowhere near as great as the losses sustained in 2009, very little capacity was withdrawn. The total share of sidelined capacity stood at just under 3 percent as of mid-November, according to research analyst Alphaliner.
Could carriers have a change in heart and park ships en masse in 2012? Some industry interests, including former APL chief Ron Widdows, say they expect that. Others argue such an effort would have to be led by the large carriers, and that shouldn’t be counted on.
“They (Maersk) feel they were burned on market share in 2009 when they laid up vessels, and they do not want to give up market share this time around,” Lewis said in December. “Maersk feels they didn’t finish the job in 2009, so now is the time to do it.”
If Maersk chooses to hold firm on capacity and maintain pressure on competitors in 2012, a weakening market could lend backhanded support to its efforts. China-to-Europe exports in November increased 5 percent, a quarter of the pace of July and August, and observers are expecting the debt crisis to take its toll on volume in 2012.
“With the problems in Europe, the likelihood is the volumes in the coming year could be considerably more disappointing than in the past year,” Lewis said. She estimates Asia-Europe growth at 2 percent for 2012, a sharp slowdown from the estimated 6 percent likely to come in for 2011.
So if the industry is pushed into consolidation, what would that mean in practice?
First, it is important to remember many predictions of liner industry consolidation have ended up in the trash heap as carriers managed to ride out losses, whether out of an unshakable long-term commitment to the container business, support from sister businesses or backing — actual or implied — from home state governments.
Some believe any consolidation would be incremental and thus have little market impact. As Drewry’s Philip Damas told my Journal of Commerce colleague Joe Bonney in November, he sees “continuing, slow concentration of market share” as smaller and weaker carriers lose market share by failing to match the investment of larger lines. But he predicted container shipping “will remain very fragmented for quite some time.”
Alphaliner’s Hua Joo Tan agrees, discounting talk of consolidation. “I maintain my view that there is limited potential for consolidation in 2012,” he said.