After running up heavy losses for several years thanks to overcapacity and volatile rates, 2016 marked an inflection point in the ocean freight market. Reaching historic low rates, the market proved unsustainable for some while for others it was an opportunity.After running up heavy losses for several years thanks to overcapacity and volatile rates, 2016 marked an inflection point in the ocean freight market. Reaching historic low rates, the market proved unsustainable for some while for others it was an opportunity. M&A activity picked up including:
• CMA – CGM and NOL
• Hapag-Lloyd and United Arab Shipping Company
• COSCO Container Lines and China Shipping Container Lines
• Maersk – Hamburg Sud
And new alliances were announced:
• THE Alliance
• Ocean Alliance
• 2M + HMM
As a result, by February 2017, the top three carriers, Maersk, MSC and CMA-CGM consolidated their positions as the Big 3 pulled further away from the rest of the carriers with global shares of 15.8%, 14.2% and 10.4% respectively.
Less May Be Best for Carriers and BCOs
Some executives think that the 2016 shakeup, which involved almost all the top 15 lines in mergers and new industry alliances, will stop any further declines in freight rates. FT, citing Drewry Shipping Consultants data, noted that the average revenue per 40-foot container recovered to a profitable $1,645 in December, from a lossmaking low of $1,113 in April. While rates may be showing signs of improvement for the carriers, Drewry projected total market losses of around $5 billion for 2016, which would make it one of the worst in the industry’s history.
For beneficial cargo owners (BCOs), service could be improved with the establishment of more direct port-to-port services according to Lars Jensen, CEO of SeaIntel Consulting. However, according to Jensen, the fewer, larger alliances could result in a loss of business for transshipment ports as BCOs have additional options for direct port calls.
….But Maybe Not for NVOCCs and Shippers
“Consolidation scares me in that competition is good. Vessels are full now. If you book cargo outbound from the U.S., you may wait three or four weeks. Twenty-four months ago, you could book today and be on a ship next week.” - CEO of Mallory Alexander, a NVOCC
Indeed, as the number of carriers dwindles and the new alliances get set to begin operations in April, concern from NVOCCs and shippers are mounting as capacity decline and the likelihood of higher rates occur.
Will the New Carrier Landscape Stabilize the Market?
So much uncertainty continues to surround the ocean freight market and it appears the dust is not yet ready to settle. Continued consolidation is expected this year and as the acquirers from 2016 digest their acquisitions, its likely instability will continue for the next year or so. In fact, one industry analyst cautions that the market overhaul will lead to instability. He points out that in 2005 a single deal — Maersk’s €2.3bn takeover of P&O Nedlloyd — caused considerable disruption. This time around, as a battered industry prepares for multiple transactions simultaneously, the potential for disorder could be far greater.