Running out of options

Running out of options

When Maersk Line in 2011 ordered 20 Triple E vessels capable of carrying 18,000 TEUs each, it marked a sea change in the container shipping industry. It was, after all, the first time a carrier placed an order for ships not to meet demand, which is still flagging in the wake of the 2008-09 recession. Instead, the ships were designed to cut operating costs, burning 40 percent less fuel.

As usual, other big carriers have been playing “follow the leader,” like lemmings following each other into the sea. Now some are racing to outdo each other by ordering ships of more than 19,000 TEUs, even though the demand isn’t there and the big gateway ports in the east-west trades where those ships will be deployed aren’t ready to handle even the smaller ships. This became clear this summer with congestion at the ports of Rotterdam and Los Angeles-Long Beach.

More slots should mean more competition for cargo, resulting in better service and lower freight rates for beneficial cargo owners. But that’s probably not true of service, as the east-west liner services become increasingly commoditized and carriers stop competing on service and focus more on price. Rates, however, may stabilize after several years of decline, and even ramp up if competition among carriers falters.

How do carriers plan to fill these new giants? The answer, of course, is mega-alliances, which are sprouting like weeds in the main east-west trades. As the pioneer, Maersk led the way, forming the P3 Network with Mediterranean Shipping Co. and CMA CGM. When China kayoed that grouping in June, Maersk formed the 2M, with MSC alone. Not to be outdone, CMA CGM formed the Ocean Three Alliance with United Arab Shipping Co. and China Shipping. The other two big alliances — the G6 and CKYH — are scrambling to catch up, but don’t yet have as many mega-ships as 2M and O3.

The CKYH Alliance among Cosco, “K” Line, Yang Ming and Hanjin, responded by adding Evergreen to become the CKYHE. The G6, composed of Grand Alliance and New World Alliance carriers, has been expanding its joint service network as its members contemplate new mega-ship orders, which they will need if they hope to match the leaders.

What does all this mean for shippers? Less competition, according to container industry participants. Jean-Marie Lamay, head of Commodity and Freight Solutions at Germany’s HSH Nordbank, termed the pricing power of the alliances “incredible” and said the market share of the smaller players is dwindling.

As they get squeezed out of the east-west trades by alliances with lower operating costs, smaller carriers will get shunted off to niche trades where they may find a place. They may turn to the north-south trades, but even on those faster-growing trades, freight rates are getting clobbered as the big carriers cascade their older, less fuel-efficient ships onto them.

If smaller carriers can’t make a profit in those trades, they risk going out of business. That would leave those trades open to new services by the big alliances, which have not yet ventured into them. And that means shippers would have fewer choices.

Maybe China was right to veto the P3.

Contact Peter Leach at pleach@joc.com and follow him on Twitter: @petertleach.

Comments

Peter, of course well done as we all come to expect from you. But a question of those who see alliances as a route to higher prices; when carriers had anti-trust immunity in virtually every trade in the world, did they really take advantage of it? No, and why not? because ocean shipping is not like most business, many participants are not typical businesses but adjuncts of one sort or another of their governments with agendas that don't equate to normal businesses who have to make a profit to sustain themselves. So if they didn't do it with anti-trust immunity virtually globally, why would Alliances make them do it?