The emergence of four large alliances among the world’s largest container shipping lines is creating a two-tier market that could doom smaller carriers to hanging on to niche trades or going out of business.
Unless an unexpected growth in global demand can rescue smaller shipping lines from this dire scenario, the top carriers will continue to dominate the market and set freight rates, according to the outlook for the industry sketched Wednesday by panelists at the 6th Annual Capital Link Freight Forum in New York.
The 17 carriers that belong to the four big alliances — the 2M and the Ocean Three, which are now being formed, and the existing G6 and CKYHE groupings — will control 97 percent of container shipping capacity in the main east-west trades. “This is a big change in the market, and the smaller independent lines may disappear,” said Richard Heath, managing director of the World Container Index in London, who moderated the container market panel at the forum.
The big four alliances will also tend to set the benchmark for freight rates. “The pricing power of the alliances is incredible,” said Jean-Marie Lamay, head of Commodity and Freight Solutions at HSH Nordbank, a major German ship finance bank. “The market share of the smaller players is dwindling.”
He said that if the alliances start to carry more containers at lower prices, the smaller carriers will run the risk of disappearing from the east-west trades.
As carrier alliances take over a greater share of the east-west trades, container services will become even more commoditized. “A slot is a slot,” Lamay said. “The simple fact is that customers are happy not to look too much at the performance or the quality of the service, which has gotten worse in the last 12 months, but at the cost, which governs the markets.”
The coming dominance of the four alliances in the east-west trades marks a sea change in the container shipping industry, which enjoyed double-digit increases in demand during the halcyon years before the Great Recession, but is now experiencing volume growth of only 3 to 4 percent.
“The increase in fuel prices brought a complete redesign of the container industry,” said John Coustas, president and CEO of Danaos, a container ship owner and charterer.
When Maersk Line ordered 20 Triple E ships of 18,000 20-foot-equivalent units that could burn 40 percent less fuel, it marked the first time a container line placed an order for bigger ships that “had nothing to do with supply and demand,” Coustas said. “Other carriers felt they had to follow, which created supply, but not in response to demand.”
He said the G6 Alliance, which doesn’t have any 18,000-TEU ships in its network, is getting ready to order them, “which, of course, is not in response to demand.”
Although the capacity of new ships on order is below 20 percent of the existing container fleet, the balance between supply and demand will still take “a couple of years more” to come back into equilibrium. “We also have record low growth in demand, and the ratio of the order book to growth is actually increasing, not decreasing,” he said. “And with Europe now slowing down, I am not optimistic.”
One sector of the container industry that is not suffering from overcapacity or losses is the container-leasing business. “Container supply and demand has remained in balance throughout the cycle,” said John Burns, CEO of Tal International, a container lessor.
The reason for this balance is that it takes only 30 to 60 days from order to fulfillment, so supply can be quickly adjusted to demand, while it takes at least two years between a ship order and delivery.
Burns said the opening of the Panama Canal’s large new locks in 2016 will be “positive” for container demand because the longer transit distance from Asia to the U.S. East Coast will require more ships carrying more containers.
Lamay said the new locks would also be “positive for trans-Pacific carriers because the larger ships that will be able transit them will offer more competition to mini-landbridge intermodal service to the East Coast. “We will have to see how East Coast ports will develop the infrastructure to handle the big ships,” he said.
JOC, Peter T. Leach, Editor-at-Large | Sep 18, 2014 12:44PM EDT
