State of Ocean Container Supply Chain: Part I

It’s almost June, and the opening of the long-awaited expansion of the Panama Canal takes place next month. Having won a lottery draw conducted at the Panama Canal Administration building in late April, COSCO’s container vessel Andronikos, which has a maximum capacity of 9,400 twenty-foot equivalent units (TEUs), will make the first transit.

If for any reason the Andronikos cannot be deployed, Wallenius Wilhemsen Lines’s car carrier Thalatta will take its place. In addition, more than 100 neo-Panamax ships have already made reservations for commercial transit through the new larger locks, which will begin on June 27, following the ceremonial inauguration and the first voyage.

Providentially perhaps, the historic event takes place at a time when shippers are trying to make sense of quickly shifting ocean carrier alliances and partnerships—with the viability of some players even brought into question.

The mad ocean carrier race toward consolidation began earlier this year with the announcement of the 2M Alliance, comprising Denmark’s Maersk Line, the shipping unit of A.P. Moller-Maersk A/S, and Geneva-based MSC. Together, they dominate the Asia-EU trade lanes with almost 35% of market share.

Hot on the heels of this development came the grouping know as the Ocean Alliance, bringing together France’s CMA CGM SA and China’s COSCO Group, the third-largest and fourth-largest shipping lines respectively. Tagging along beside them were Hong Kong’s Orient Overseas Container Line and Taiwan’s Evergreen Marine Corp. Once the Ocean Alliance begins operations next February, analysts believe that it will control about 26% of Asia-EU share.

All this movement left a scattering of six carriers out on their own. And with their ability to survive—much less thrive—in this new environment brought into question, a final fling into yet another alliance was made. Coming together to form a new vessel sharing agreement (VSA) that’s being referred to as The Alliance are Hapag-Lloyd of Germany, MOL, NYK, “K” Line, Yang Ming, and South Korean line Hanjin, with the possibility of adding HMM and UASC later this year.

According to spokesmen for HMM, “the door remains open” once it has finished its debt restructuring. And that’s a good thing, says Sea Intelligence Consulting analyst, Lars Jensen. “The carrier will have a hard time surviving in its current form unless it joins the new global container collaboration,” he observes.

Jensen also notes that Hapag-Lloyd is in separate merger talks with UASC, and reckons that the Dubai-based carrier will also join The Alliance. Once all the pieces are in place, The Alliance will begin service in April 2017 and will be extended over five years.

This flurry of convenient marriages was widely predicted by a number of industry analysts, including those working for AlixPartners, a global business-advisory firm in New York. Earlier this year, the firm concluded that the long-beleaguered financial state of the maritime container shipping industry would likely worsen in 2016, and that only consolidation would cure the malaise.

“Our outlook found that growing vessel supply, led by the ongoing introduction of giant megaships coupled with demand that shriveled in the second half of last year, left the industry with massive overcapacity, falling profitability, and precarious cash-flow levels,” says Foster Finley, AlixPartners managing director and co-head of the firm’s maritime practice.

A recent study issued by the firm asserts that companies with merger and acquisitions on their minds need to be proactive if they hope to reap the kind of rewards that winners in consolidated industries enjoy—or to prevent becoming acquisition targets themselves. And, along the way, the study points to the successful consolidation of the U.S. airline industry as a possible template for revival.

“Operational overhauls will also be necessary in this industry, which as a whole remains deeply troubled,” adds Finley. “In addition, these uncertain market conditions are casting a long shadow over the annual rate-negotiation cycle kicking off between major importers and their carrier bases.”