2015 was weak in demand growth for ocean carriers, leading to initiatives that will dramatically change the face of the container shipping industry. With the advent of mega ships, current trends show the lack of growth in demand cannot keep pace with this new capacity. Thanks to vessel-sharing agreements, several carriers reduced operating costs. Even though next year predicts demand growth of 3% to 5%, major ocean carriers like Chinese government-owned companies, China Ocean Shipping Company (COSCO) and China Shipping Group, along with Dutch-based Maersk Line, are taking action to mitigate their losses resulting from demand not keeping pace with capacity.
After China Shipping Container Lines (CSCL) reported losses of $163 million and COSCO lost $267 million loss in the third quarter, the carriers are leading the move to consolidation. COSCO and CSCL parent company, China Shipping Group, confirmed they will merge and create the fourth largest global carrier. The merger will restructure the sixth and seventh largest carriers in the world into four entities — container shipping, finance, ports and terminals, and oil and gas transportation. It is likely that China Shipping will quit container shipping, but manage the tanker operations, vessel ownership and financing and leasing activities. COSCO will operate the vessel and service network, and manage the container terminal portfolio.
Theoretically through this consolidation, COSCO finally has the scale to compete with industry giant Maersk Line and survive the down cycle. Maersk Line CEO Soren Skou supports consolidation and believes that it “is needed as demand looks set to stay in the doldrums.” Skou can advocate for consolidation because last year the Geneva-based Mediterranean Shipping Co. and Maersk Line formed the 2M Alliance, bringing together the two largest players in the industry. The vessel-sharing agreement resulted in combined savings of $700 million annually in operating costs, through sharing of vessels, networks and port calls.
“We are getting the expected benefits from vessel-sharing agreements, but more can come from consolidation,” Skou said in an interview with The Wall Street Journal. Many considered this relationship a huge step forward for the container shipping industry, but it was not enough to avoid Maersk changing strategies as the line’s full year profit plummeted after freight rates by 60% over three weeks in August. As a result of the serious oversupply and the container line’s $600 million shortfall in annual revenues, Maersk continues service cuts.
While this year saw much fanfare from mega ships coming online, Maersk idling the 18,000 TEU’s Triple-E freighter represents the true state of affairs in the marketplace. Under normal circumstances, the newer and more expensive ships are the prized asset of a carrier and see the most activity. Given the current market conditions, Maersk had no choice but to anchor one of the largest and most cost-efficient container ships in service. Larger ships should translate to lower unit costs. However, until global trade rebounds, building bigger and bigger ships and upgrading major canal passages will add little value for the industry.
With so many new vessels expected to come into service over the next two years, meeting capacity will be a complex issue. If capacity continues to far exceed demand, then consolidation will be a growing theme for the carriers to avoid some despair in 2016. However, some experts see this current state of consolidation as a redistribution of the ships to fewer owners and will not improve industry profits. So, shippers can only hope 2016 will be prosperous enough to return global trade levels to normal. If not, next year the global shipping industry can expect more consolidations and vessel-sharing agreements to address the combination of low demand and high capacity.