High-level mergers among the world's largest container shipping companies are reshaping the global ocean transport industry, as plummeting shipping prices and over capacity are prompting the sector to consolidate. However, the bad news for those paying to ship goods is that supply chain costs should eventually rise as the merger and acquisition activity reduces available shipping capacity.
Among the top-five largest shipping companies, France-based CMA-CGM, which has an 8.9% share in the container shipping market and is the third largest container shipping company worldwide, has agreed to acquire APL Neptune Orient Lines (NOL), based in Singapore. The merger between China Ocean Shipping Group Company (COSCO) and China Shipping Container Lines Co. (CSCL), ranked sixth and seventh worldwide respectively; will make China's two-largest shipping companies the fourth-largest player worldwide.
Upon completion of these mergers, slated for this year, the top-four shipping companies will control 48.3% of the world's fleet compared to 41.3% today, according to AlixPartners data.
In an industry that ships more than 90% of all goods sold worldwide, a smaller group of companies will thus account for an ever larger segment of global shipping. CMA-CGM and APL Neptune Orient Lines, for example, have a combined revenue of over $22 billion and 563 vessels, totaling over 2.4 million twenty-foot equivalent units (TEUs) in shipping capacity.
“The top-four lines are individually two to three times the size of most of the other individual lines. This difference in scale offers opportunities for driving unit cost reductions that will put the rest under continued pressure,” Lian Hoon Lim, managing director of AlixPartners, told EBN. “This sort of situation, that is, bigger players getting relatively stronger versus the rest, increases the pressure on the rest to consolidate.”
For international shippers, the mergers are necessary to fight back against cost pressures, following a plunge in shipping transport prices. According to analyst firm Karatzas Marine Advisors, for example, the average pre-downturn pricing to ship a container from China to Europe, for example, was $1,500 to $2,000 dollars per container, compared to $500 per container (and oftentimes less) today. Shipping prices from China and Asia to North America have fallen by similar magnitudes of scale.
A slowdown in the world economy, lower trade volumes worldwide, and growing inventories of electronics and other goods are largely responsible for weak container shipping demand, and consequently, increased capacity and shipping transport pricing pressures. With continued weakness in shipping volumes in China and Europe, as well as signs that the U.S. economy is slowing down, visibility for when shipping capacity will decrease remains cloudy, despite the merger activity.
“The market continues to move lower,” Basil Karatzas, CEO of Karatzas Marine Advisors, told EBN. “There is little hope for an imminent market recovery or a substantial improvement.”
However, the shipping industry consolidation will likely lead to increased pricing for shipping, which is obviously bad news for supply chain shipping costs.
The trend towards consolidation sparked by these massive mergers will indeed help shippers but will also thus drive up costs as capacity decreases, Lim told EBN. “This [consolidation] leads to higher shipping rates and profitability for the liners, which becomes more of a reality after each merger. The profitability helps the industry become more sustainable as debt/EBITDA levels are still very high, at greater than 1.5 times more than they were in 2010.”
In the long term, rising shipping costs will likely have an effect on the global supply chain, as shorter sea transport distances are sought after.
“If shipping rates rise substantially this will force shippers to rethink where they manufacture and buy their goods,” Lim told EBN. “Bulky, low-value goods will be affected the most as transportation is a relatively higher percentage of their unit cost. So the viability of making such goods far away from the markets where they are sold will come into question.”