Still reeling from the loss of Hanjin Shipping and after enduring six years of losses, the container shipping industry is probably the most fragile it has ever been and if the three mega-shipping alliances launching in April don’t drive profitable freight rates, shippers can expect more bankruptcies and mergers, former Hyundai Merchant Marine CEO, David Arsenault, warned an audience in the US.
The key to improved carrier profitability will not be further cost-cutting by container lines, which may have gone as far as it can go, but rather higher freight rates.
Many would argue that the lines are already moving in that direction with rates at a 20 month high and carriers delaying service contract negotiations to give the market more time to peak during the pre-Chinese New Year period when ships are full and shippers are paying a premium for space.
Speaking on the need for the new alliances to succeed, Arsenault said, “If this doesn’t work, you won’t like the next step.” The next step would be rapid consolidation through mergers and acquisitions that would leave the industry with a handful of extremely powerful shipping lines that could set freight rates at will.” He said.
Arsenault, said container lines collectively lost about $10 Billion in 2016. The last time the liner industry reported a collective profit was 2010, when a huge number of vessels were laid up at the same time that cargo volumes unexpectedly spiked following the recovery from the 2008 to 2009 recession.
Carriers have already responded to six straight years of losses through high-profile mergers or acquisitions that were completed last year or will be in the coming year. They include Cosco Container Lines with China Shipping Container Lines, CMA CGM with APL, Maersk Line with Hamburg Süd and a merger of the three major Japanese carriers, NYK Line, ‘K’ Line, and MOL.
The single most significant event to unfold recently will not be the collapse of Hanjin but the change in the global container trade from four alliances to three, Arsenault said, as the more powerful alliances should be able to nudge the container lines into a better balancing of supply and demand.
Ostensibly, supply and demand on the major east-west trade lanes should not be difficult to achieve, with predictions that cargo volume this year will increase 2.4% and capacity will grow about 3%.
However, Arsenault noted, with an overcapacity overhang of as much as 30% globally, there will be enough pressure on ocean carriers to prevent rates from escalating rapidly, although he added that “all it takes is one or two carriers to cut the rates” to collapse the market.
If a positive scenario is to develop in the coming years, and a viable shipping industry is to emerge, everybody must give a little, Arsenault said. Carriers must improve service so that they can compete on the quality of their service instead of how low their rates are and shippers must expect to pay compensatory freight rates for improved service, and they must stop demanding extended free time for equipment.