Better Times for Box Carriers Ahead?
By Barry Parker
In the choppy wake of the liner alliance reshuffle, industry consolidation and the (long awaited) boost from expanded Panama Canal traffic, a glimmer of hope appears.
The situation for the liner carriers has clearly improved since the doldrums of 2016. Consultants Drewry were estimating that container carriers could book profits of $5 billion in 2017 – coming on the heels of half a decade of losses. In early 2017, improvements were seen in the market compared to the previous two years; Soren Skou, the CEO of conglomerate AP Moller Maersk, describing 2017 Q1, told investors: “Both spot freight rates and contract rates have increased during the quarter, lately also on the North-South trades.” Earlier, he was estimating that the 2017 results for its eponymous liner company, Maersk Line, would be better, by $1 billion, compared to 2016 (when the line saw a deficit of nearly $400 million).
In 2017, demand growth may finally eclipse increased supply (reflected by TEU capacity). Maersk presentations to investors were forecasting that, for 2017: “Global demand for seaborne container transportation is still expected to increase 2-4 percent.” Supply growth, year on year, was estimated to be less than 1 percent. Rebounding freight rates have been the result.
Port Volumes, Fundamentals & Consolidation, too
Ports in the U.S. also saw a rosy start to 2017. Logistics data provider Descartes noted in their online blog, “So far in 2017, import volume at the Port of Los Angeles has grown 5.2 percent compared with the same period in 2016. The Port of Savannah has seen continuous month-over-month growth vs. January-April 2016, with imports up 10.3 percent over the first four months of 2017. Notably, 18 of the top 20 U.S. ports increased in TEU import volume this April vs. April of last year.”
The improved fortunes of carriers are fueled by improved fundamentals, but also by consolidation, which has been fast and furious lately. Liner shipping, like other sectors of maritime marketplace, suffers from the near-permanent bouts of oversupply that are endemic to the industry. But, in contrast to drybulk and tanker sectors mired in doldrums, the liners (defined as container carrying vessels on regular runs) have fought back through “consolidation,” which can take the form of commercial alliances (typically taking the form of VSAs – “Vessel Sharing Agreements”) or outright mergers between companies.
Lately, the mergers have been receiving all the headlines. In early July, the ongoing rumors of a deal between Cosco Shipping Lines and the listed company Orient Overseas International (OOIL, controlled by the C.Y. Tung family) quickly morphed into a deal announcement. Cosco, joined by Shanghai International Ports, is now on a path to purchasing OOIL (which controls Orient Overseas Container Line- OOCL) in a deal valued at US$6.3 billion. If the deal moves to fruition, the entity would control a fleet with capacity of 2.4 million TEU- ranked number 3 on the world leaderboard (with approximately 11.6 percent of world TEU capacity).
Olaf Merk, a European based observer of maritime economics who publishes the highly regarded “Shipping Today” blog, noted via his Twitter feed that: “Market share of top 4 carriers after COSCO takeover of OOCL: 53.8 percent. The container shipping industry has ‘officially’ become an oligopoly.”
A little more than a year earlier, Cosco had seen its size bolstered following an early 2016 hookup with China Shipping Container Lines. In the weeks prior to the Cosco / OOIL news, the trio of major Japanese container carriers, Nippon Yusen Kaisha (NYK), Mitsui O.S.K. Lines (MOL) and Kawasaki Kisen Kaisha (K Line) finalized their plans to merge their businesses into Ocean Network Express, or “ONE”- effective in Spring, 2018. The merged entity’s capacity would be roughly 1.4 million TEU, putting it at number 6 on the carrier roster (with a share around 7 percent).
Other mergers in recent years include Hapag Lloyd’s acquisition of United Arab Shipping Company, in the works for two years and finally completed in the Spring of 2017. Hapag Lloyd, which controls 1.53 million TEUs, had previously bought CSAV in 2014 (in an unusual share exchange), and, in earlier round of company combinations, bought CP Ships, in 2004. Another major deal saw Singapore’s Neptune Orient Lines (NOL), which had been largely owned by the governmentally linked Temasek Fund prior to being swallowed up in late 2015 by CMA CGM in a US$2.4 billion deal. CMA CGM, controlled by the French businessman Jacques Saadé, ranks third (but will be usurped by Cosco- OOIL), controlling 2.3 million TEU (around 11 percent of the market).
More narrative surrounded yet another 2017 deal; Maersk’s acquisition of the German company Hamburg- Süd, for the equivalent of around US$4 billion. In explaining the rationale, CEO Skou, said that the transaction: “… represents a unique opportunity to combine two complementary businesses and realize sizable operational synergies as well as commercial opportunities. Combined, the two companies will be able to realize operational synergies in the region of USD 350-400 million annually over the first couple of years…” He continued, adding, “The cost synergies will primarily be derived from integrating and optimizing the networks as well as standardized procurement. In addition, APM Terminals’ global portfolio will benefit from increased volumes.” Of particular importance in this merger was the terminal business’s recent growth in South America, where Hamburg- Süd remains very active.
In late August, APM took an important step towards sharpening its shipping / logistics focus with the announcement of a $7.5 Billion deal to sell its oil production unit, Maersk Oil, to the French oil company Total.
A Long Strange Trip
The voyage to market dominance is not without its freak waves. One arrangement that would not move forward, blowing up in mid 2014, was a VSA dubbed “P3”, which would have brought a combined set of services from top seed Maersk (controlling 16 percent of mid 2017 capacity with 3.35 million TEU), the number 2 player Mediterranean Shipping Company (presently controlling 3.06 million TEUs, or just under 15 percent of capacity), and CMA-CGM.
The consolidation trend also brings ripple effects to other aspects of the business. In another wrinkle on such deals, landside terminals tied to affected carriers may change hands – for a combination of financial, tactical and strategic reasons. In a deal that finally closed in July 2017, NOL’s not so new parent, CMA CGM, recouped more than $800 million (used to pay down company debt) from the sale of a 90 percent stake in the Global Gateway South Terminal, in Los Angeles that had been held by NOL. The buyers were a pair of infrastructure funds and such investors seek assets with long term deals. For fund packagers, carrier business combinations with a short time fuse may fly in the face of arrangements with terminals typically predicated on decade-long commitments to cargo throughputs.
With the announcement of the OOIL acquisition by Cosco, concerns have been raised about Chinese ownership of OOIL’s terminal business, which includes a commitment through the year 2051 to move cargo through its newly constructed Long Beach Container Terminal (owned through other companies in the Tung Group) in Long Beach, California.
With the U.S. political mood and the Trump administration’s attitudes towards China’s state-owned companies more unpredictable than freight rates, the situation in Long Beach bears watching. There is some history here; observers may remember the 2006 flap when DP World (controlled in the Emirates) took over the venerable P&O Ports. Following intense objections regarding foreign control, the U.S. terminals were sold into a company that evolved into Ports America (originally part of AIG, but now held by an entity linked to shipping investor Oaktree Capital).
On a mainly economic front (tinged with a heavy dose of sentimentality for the days of U.S. leadership in the sector), long time shipping watchers will note that it was NOL that acquired American President Lines (APL) in 1997. A small carrier with the US Lines nameplate (evoking the famous brand that suffered a failed re-invention in the 1980s), was acquired by CMA CGM in 2007.
Just Over the Horizon
What’s in store for the industry? Its economics may remain unchanged. Mr. Hua Joo Tan, Executive consultant at Alphaliner, offered that, “Consolidation in itself does not necessarily lead to pricing power or improved financial health. The container shipping market is fundamentally driven by demand and supply factors and until the capacity overhang comes under control, it is highly likely that price competition will continue to prevail.”
Consultants who provide strategies for shipping companies of all stripes are always advising their clients to gain ‘pricing power’ by moving away from ‘commoditization,’ where one slot is indistinguishable from another. Interestingly, CMA CGM announced that commencing in Q4, it would be teaming up, in a VSA, with refrigerated cargo specialists Seatrade and Marfret, to offer a weekly service to shippers of cargo such as fruits and meats. According to CMA CGM, “13 modern geared ships with a nominal capacity of between 2,200 and 2,500 TEUs will be deployed on this new line.” Each will have minimum 600 Reefers on board necessary to transport refrigerated goods…” on north-south trades.
Nevertheless, established smaller carriers could be vulnerable to acquisitive tendencies of consolidators; in July, Alphaliner was pointing to Pacific International Lines (PIL), an independent based in Singapore, as the next acquisition target. PIL is a niche play – with Alphaliner emphasizing the carrier’s positioning in the burgeoning Africa trades.
The present firming of the market may not be indicative of a long-term structural change. Citing the industry’s natural economic tendencies, Alphliner’s Tan told MLPro, “The market moves in cycles so it would be foolish to suggest that pricing power can ever be a permanent. There is bound to be overly enthusiastic ordering when the market recovers.”
In contrast to the centuries-old rules of economics and the tendency towards over-ordering, geopolitics is dynamic, with a steadily changing seascape. Liner shipping is strategic; where state-owned Cosco is concerned. In a recent blog by Olaf Merk, he opines that “Cosco will not stop until it is the biggest.” In his discussion, he adds that: “As a state-owned company, Cosco has a logic that is not only commercial, but also geopolitical, maybe even predominantly so. China wants to secure its supply chains and strengthen its naval presence: dominating in container shipping can help achieve this.” At the highest level, some political analysts are considering Cosco to be an instrumentality of China’s “Belt and Road” initiative.
For those keeping score of which carrier is dancing with another, political factors may trump the economic rationale for combinations, with Mr. Merk noting that “P3 would have forged an alliance of the three largest global container carriers: Maersk, MSC and CMA CGM – all European – in a way that would have transformed the classical vessel sharing agreement into a more strategic form of cooperation.” Stressing the reason that P3 was never finalized, he says, “… the Chinese authorities did not give regulatory approval, officially because it would distort competition and quite likely also for geopolitical reasons: namely to avoid the emergence of a European champion. European regulators were prepared to bless this alliance.”
The political motivation also drove Mr. Merk, in his blog, to offer a hypothetical, albeit tantalizing possibility, an alliance between CMA CGM and Hapag Lloyd. Though infusing less hegemony than P3 might have, such cooperation, although unlikely, might bring a powerful “European” brand into the marketplace.