The global container market is poised to consolidate in the next few years as AP Moller Maersk and other major shippers roll out bigger vessels, potentially forcing smaller rivals to drop out of an already oversupplied market.
Medium-sized container firms warn that a move by the majors to flood the market with mega ships could spark a “rate war” similar to 2009 when the market plummeted and most firms fell into the red in one of the industry’s worst downturns.
“We believe that ... the largest shipping companies will continue to expand the scale of economies of the industry,” said Thomas Knudsen, Maersk Line’s chief executive for Asia-Pacific region, at an industry conference in Singapore. “As we drive these scales of economy, it will be difficult for the smaller carriers in these industries to compete. That will drive consolidation.”
Maersk, the world’s top container shipper which holds a 15% share of the container market, is expanding its fleet by around 8% annually to keep up with economic growth.
“We are not doing this aiming at taking market share,” Maersk chief executive Nils Andersen told reporters at an industry event. He agreed that consolidation would be the most likely outcome.
Industry leaders in the container markets have placed multi-billion dollar orders for the world’s biggest vessels to meet growing demand in Europe and the United States for Chinese manufactured goods.
Maersk in February ordered 10 of the world’s largest container ships for US$1.9bil and took options on 20 more vessels of a similar size to capitalise on expected growth on the benchmark Asia-Europe route.
Due for delivery from 2013, Maersk’s 18,000 twenty-foot equivalent unit (TEU) container vessels would surpass the current largest box ship of 15,000 TEUs, also owned by the company. Switzerland-based Mediterranean Shipping Company and French privately held CMA-CGM, which are the next two biggest container shippers after Maersk, are also looking to expand their fleet with ships above 10,000 TEUs, according to analysts.
About 50 mega container ships with 10,000 TEU capacity or more are expected to be delivered this year, making up nearly half of the total new capacity of 1.35 million TEUs due for 2011, according to the leading industry consultancy group Alphaliner. The orderbook showed 59 mega ships for 2012.
“Bigger is better if you can fill the ship,” said Randy Chen, special assistant to the president at Taiwan-based Wan Hai Lines . “If your ships are not full, you need to put the vessels away for the short period of time to make sure the revenue covers the costs.”
But major shippers were unlikely to idle new ships, placing the burden of plummeting freight rates on smaller rivals. Spot rates on the Asia-Europe container route have tumbled by about half in the last nine months, trading last week at around US$978 per TEU from more than US$1,800 in July 2010. Although the market was expected to rebound slightly in the second half, the battle for survival has already become too difficult for some container firms.
Norway-based The Containership Company has announced it will suspend its container shipping operations on poor cargo volumes and excessive competition, industry group Alphaliner said. Others are poised to follow.
US-based container shipper Horizon Lines warned last month it could also be forced to seek bankruptcy protection for not being able to comply with its debt agreements.
“In container ships, a lot of companies are not making money right now,” said Janet Lewis, shipping analyst at Macquarie Securities, adding that Chilean CSAV was also under pressure.
Last month, Standard & Poor’s cut its outlook on CSAV’s corporate credit rating to “negative” from “positive” to reflect its view of the container shipping company’s weak business risk profile and aggressive financial risk profile.
Vulnerable container companies are likely to be allowed to fall into bankruptcy instead of being saved by a larger firm through an acquisition, experts said.
“I doubt if operators have any interest in taking over an organisation. They are more interested in buying fleets, just buying the ships and hardware,” Harald Serck-Hanssen, head of global shipping for DnB Nor, told Reuters.
Industry executives said smaller companies could turn to shorter niche routes. — Reuters
“I don’t fully support the notion bigger size is necessarily better. It depends on your shipping network,” said Eng Aik Meng, president of APL container shipping line, a unit of Singapore’s Neptune Orient Lines .
“Shipping lines are quite flexible. There are many other trades in the world, not just Asia-Europe and transpacific, but also Latin American and intra-Asia trades.”
Industry officials, however, pointed out that the smaller players would not be easily pushed out of the market as many are family-owned or subsidised by governments.
“In a rate war, no single line can be the winner,” said Kenichi Kuroya, chief executive of Japan’s third largest shipping firm Kawasaki Kisen Kaisha . “What 2009 showed ... is that any rates quoted by the leading lines can be matched by others in one week’s time. The rate war will continue until the bottom line is where no single liner can bear.”