2016 was surely a year that will be remembered for a few major events that will have lasting impact for the world of ocean container shipping for years to come. It was a year of turmoil and upheaval, with the formation of new alliances, mergers and acquisitions (M&A), spot rates diving to all-time lows, and most notably the collapse of Hanjin Shipping, the industry’s former seventh largest container line. While forces like weak demand market dynamics and very low rates conspired to eventually bring about the demise of that company, it can be seen as the catalyst for the number of mergers and acquisitions that occurred in 2016; a veritable dam had burst and everyone seemed to be going down the route of consolidation.
To get a clearer picture on the state of the industry as it stands now and for an outlook on the future, LM sat down with industry experts Mr. Lars Jensen, CEO & Partner, SeaIntelligence Consulting; and Neil Dekker, Research Director at Drewry Shipping Consultants.
A Record Breaking Year
Even before 2016, there were several consolidations and failures of large players in the industry, but last year an unprecedented number of high profile mergers took place. One of the first notable mergers was that of China Shipping and COSCO. The merger of the two state-owned Chinese liner giants was a foretelling event. Following suit, we saw the three major Japanese shipping lines, “K” Line, MOL, and NYK (‘J-3’) announce a merger in an effort to increase synergies and cost savings that will take effect April 2017, and the commercial merger commences in April 2018. Other major mergers also occurred, and in this increasingly volatile and weak market many shipping lines had been left with one option; succeed together or die alone.
Mr. Dekker says that while this has been building for years, no one could have predicted that 2016 would be the year of such a high-profile container line collapse and the slew of consolidations that occurred. “As the year went on, the ongoing problems driven by the weakness of the market were not just about the demise of Hanjin Shipping. The consolidation juggling was already in place and we can see this with the Chinese merger. I can only assume something had to be done and it made sense to bring together those two similar companies to form one entity. It was the first major driver of 2016 that acted as a catalyst for much of the merger activity that was to follow.”
Mr. Jensen says many people having been asking him if what happened in 2016 could have been predicted, and he says that if you look at the consolidation game you cannot find the answers in the performance of the carriers. “The game the carriers have been playing for many years has been a game of who is most adept at getting more money before you run out. Given the ownership structure of many shipping lines are either fully state owned or owned by very wealthy families, that makes it extremely difficult to predict when someone will say, enough is enough.”
He continued, “I think 2016 was the year that it finally dawned on most of the main players that the downturn, and the bottom was in 2016, that the downturn this time around was different in nature. It wasn’t about the normal cyclicity we see in shipping, and if we wait around everything will be good. So, it’s not a single straw that broke the camel’s back, it’s more a matter that this has been building slowly over a very long time, and finally we saw some action on it.”
All the action last year was compounded by the fact that on every major trade route globally saw the lowest spot rates ever for each route by the period between mid-2015 and mid-2016. Mr. Dekker said, “It was a combination of this awful rate war that was going on – not helped of course by the weak cargo flows on many routes. It had to stop, the industry was destroying itself. Hanjin Shipping’s failure at the end of August was an inevitable conclusion of this race to the bottom. It shocked and alarmed a great number of shippers and global supply chains were also tremendously disrupted.”
“I think 2016 was the year that it finally dawned on most of the main players that the downturn, and the bottom was in 2016, that the downturn this time around was different in nature.”
Mr. Lars Jensen
Drowning in Capacity
However, through this doom and gloom if you compare last year to 2008-2009 when the world was going through a global recession, the market in 2016 did drastically better. Part of the reason why the market could stay afloat, was the record number of TEUs scrapped during the year, almost 700,000 TEUs, helping to balance supply and demand. With the number of older vessels available to scrap becoming scarcer, and the surge of available space mega vessels will bring when they come online, the outlook for the ability of the market to balance itself is looking continuously difficult.
Mr. Jensen had an enlightening view on the forthcoming mega vessels that are set to go into operation and why they were ordered. “If you go back about 3 years ago, we already had a problem with overcapacity, and yet there were still 100 mega-vessels on order. That makes no logical sense, because it’s very evident if carriers do order these ships, they’ll just make an overcapacity situation even worse. But that’s the wrong perspective. The carrier makes decisions from their own position in the market, not from a global aggregate viewpoint. For the individual carrier, it seems to them that if they do not have megaships and their competitors do, they will have higher costs and when the market rebalance they will lose. On the other hand, they can order megaships, knowing it will postpone market recovery even further, but at least they’ll be on equal footing with their competition. It’s a lose/lose situation. From the view point of the individual carrier you basically didn’t have a choice, you had had to go down the path of purchasing mega ships, which leads us to the situation we’re in now with overcapacity that’s still going to years to resolve.”
Stabilizing a Rocky Market
With the aforementioned mega ships ready to come online in 2017-2018, one would hope that the ordering of these vessels ceases in an effort to rebalance supply and demand and bring about a better state of affairs. “There’s lot of caveats, but at the end of the day this massive reorganization of the industry could ultimately be good,” said Mr. Dekker. “I think in 2017 – 2018, we’ll continue to see a lot of volatility on the freight rate front on a number of trades. There’s an awful lot of capacity coming in and there’s a huge element of the cascade effect that has yet to play out, where these vessels will be put into the ‘lesser trade’ routes. Around 75-80 ships of at least 10,000 TEU are due for delivery in 2017 and this will be a major headache for the lines to effectively deploy and ensure they do not cause damage at the trade route level. MSC is now deploying 13,000 TEU ships on the Asia-West Africa trade not because of huge trade growth but because there is nowhere else to put them.”
“By 2019 we do see the market being more positive after this huge downturn since the 2009 recession, providing the orderbook stays muted. The remaining new and bigger players should emerge in 2019 – 2020 in better shape once all this M&A activity has settled and the new alliances are in place.”
Mr. Neil Dekker
Mr. Dekker continued, “There’s also a question mark over a new Korean line (SM Line) taking advantage of cheap ships, and chartering upwards of 20 plus, that could upset the dynamics of the transpacific market. Back in 2010, several new entrants came into the transpacific trade and tried to take cargo, but all of them disappeared quite quickly. By 2019 we do see the market being more positive after this huge downturn since the 2009 recession, providing the orderbook stays muted. The remaining new and bigger players should emerge in 2019 – 2020 in better shape once all this M&A activity has settled and the new alliances are in place.”
Mr. Jensen concluded by saying, “I don’t expect to see much more major consolidations in 2017, but what I do expect is a high likelihood of a pricing war. Once the two new alliances start their services in April, they need to go out and assert themselves. They’ll battle it out through 2017 and we may enjoy relatively stable markets in for a couple years, but resolving and rebalancing the market is just going to take time. What the carriers are doing now with mergers and consolidations is a step in the right direction, allowing them to trim their networks and reduce their cost base by forming alliances. The most obvious next step is to tap into the digitalization that’s coming. There’s no magic wand to fix these issues, but tools like automation that digitalize the ocean container market will help make carriers better at the commercial game and bring more stability to the market.”