The container shipping industry is undergoing a historic wave of consolidation as carriers seek to tighten supply to offset the historical drop in pricing.
However, the caveat for the supply chain is that those paying for shipping could eventually see price hikes as a result. Also, some carriers continue to increase their capacity by adding megaships to their fleets, which could disrupt the supply chain in a negative way.
In the immediate future, container shipping companies this year are aggressively seeking to slash industry capacity through mergers.
- France-based CMA-CGM, which has an 8.9% share in the container shipping market and is the third-largest container shipping company worldwide, recently received approval from the European Commission to acquire APL Neptune Orient Lines based in Singapore.
- The ongoing merger between China Ocean Shipping Group Company and China Shipping Container Lines Co., ranked sixth and seventh worldwide respectively; will make China's two-largest shipping companies the fourth-largest player worldwide.
Meanwhile, in July, Hapag-Lloyd, Germany’s largest shipping company, merged with Dubai-based United Arab Shipping Company (UASC), making Hapag-Lloyd the fifth-largest container shipping line in the world with 237 vessels and a total transport capacity of around 1.6 million twenty-foot container units (TEUs), according to UASC.
Hapag-Lloyd, South Korea’s Hanjin Shipping, Taiwan-based Yang Ming Marine Transport Co., and Japanese carriers Kawasaki Kisen Kaisha, Mitsui O.S.K. Lines, and Nippon Yusen Kabushiki have also agreed to share capacity. In a statement, Hapag-Lloyd recently said that alliance will create “one of the leading networks in the container shipping industry,” with a combined total of 3.5 million TEUs or 18% share of the global container fleet capacity. All six partners operate fleets with more than 620 ships in total.
Price Hikes Murky
The reduced capacity in the wake of the mergers during the worst downturn in the container shipping industry should, by definition, eventually give carriers more pricing power. However, while carriers may be able raise costs “in theory” as they reduce capacity through mergers and acquisitions, it could be a while before prices begin to recover, Jock O'Connell, an international trade economist for Beacon Economics, told EBN.
“Which lines will agree to lay up or scrap their ships for the ‘greater good’ [of the industry]?” he said. “I'll wait for the intramural politics to play out before concluding just how much excess capacity will be reduced by this latest round of mergers.”
A main issue to the detriment of the supply chain is that some shippers will continue to seek to cut their losses by adding even more large ultra-large vessels, often with 18,000 TEU capacity, to their fleets. They may seek to cut capacity on an industry-wide scale through consolidation and scrapping smaller ships, but some carriers may even boost their ships’ capacity in parallel to maintain margins by packing a larger number of containers per ship than the industry average.
A case in point is CMA CGM’s decision to add transpacific shipping routes between China served by six mega-ship with 18,000 twenty-foot equivalent unit capacity, following Cosco Holdings Co.’s decision in 2015 to invest $1.5 billion in 10 mega ships.
This practice will likely add to the fleet congestion problem as well. Port congestion due to megaship vessels entering ports not equipped to handle such larger container ships could cause shipping delays. The issue is also systemic of ongoing dysfunctional industry practices that hurt the supply chain, while also not helping to solve carriers’ capacity glut problem, O'Connell told EBN.
“For at least the past decade, individual shipping lines have been going their own way, answering to what each perceived to be its own economic imperatives, while giving little thought to how their decisions would affect the entirety of maritime supply chains,” he said.
Despite the merger moves and alliances created to reduce capacity, the index rate for container ships continues to plummet, according to UK-based analyst firm Drewry, which said the World Container Index's composite index is now 60% lower than the average of the past five years and has decreased by 62% in the past year.