The cargo container industry continues to undergo massive consolidation aimed at improving efficiencies and competitiveness, all the while dealing with uncertain market conditions.
Freight rates have bounced up and down in the last year, and fuel prices have steadily risen, but the major ocean carriers have maintained a healthy financial status thanks in part to a generally robust global economy. At the same time, strides have been made in modernization of the supply chain and sustainability.
However, there are potential storms on the horizon in the form of protectionist policies, increased costs and overcapacity.
Michael A. Khouri, acting chairman of the Federal Maritime Commission (FMC), testifying this month before the House Committee on Transportation and Infrastructure’s Subcommittee on Coast Guard and Maritime Transportation, said the container shipping industry “plays an integral role in America’s international trade and commerce.”
Khouri said in 2017, roughly 34 million Twenty-foot equivalent units (TEUs) moved through U.S. ports, a 4 percent increase from 2016. The U.S. imported more than 22 million TEUs last year valued at $754 billion, an increase of over 6 percent by volume from 2016. Meanwhile, the U.S. exported 12 million TEUs in 2017 with a value of $266 billion, a 1 percent increase over 2016 by volume, he noted.
Consolidation
“In 2016, there were significant changes to the ocean transportation services marketplace, marked by merger and acquisition activity among shipping lines and the bankruptcy of a Top 10 ocean carrier,” Khouri said. “As a result of these events, the number of major multi-trade lane shipping lines operating in the international trades has dropped from 21 in 2011 to 12 global carriers following the merger of the three Japanese carriers into Ocean Network Express and COSCO’s acquisition of OOCL.”
He said nine of the remaining 12 ocean carriers are currently members of three global alliances—2M, OCEAN and THE. These alliances–joint operating agreements of ocean carriers to discuss and agree on the supply of vessel capacity through the deployment of a specific service string or strings–each operate services in the major trade routes and supply 90 percent of the vessel capacity in each.
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Khouri said a positive trend is that even with the wave of mergers and acquisitions and new carrier alliance groupings, “the individual ocean carriers within each alliance continue to independently and vigorously compete on pricing.”
Industry stakeholders have noted the alternative to carrier alliances is further consolidation in the industry with fewer ocean carriers and less competition, Khouri explained.
The FMC responded to the recent and ongoing structural changes in the international liner shipping industry with aggressive negotiations on proposed agreements and enhanced monitoring programs.
“With the increased size and market share of carrier alliances over the last four years, the FMC has insisted on narrower authorities, more specific language and enhanced monitoring requirements,” Khouri said in his testimony.
For A.P. Moller – Maersk, a highlight of 2017 was the purchase of Hamburg Süd as part of its growth strategy. Combined with Maersk Line, the two carriers now have roughly 19 percent global capacity market share and more than 4 million TEUs in container capacity. Maersk said cost synergies from the merger are expected to be between $350 million and $400 million by 2019, primarily from integrating and optimizing the networks, as well as standardized procurement.
“After a successful acquisition of Hamburg Süd, the integration is off to a good start, with both carriers growing volumes during the first months,” Søren Skou, CEO of A.P. Moller – Maersk, said.
CMA CGM Group integrated APL services into the group in June 2016. APL carried more than 5 million TEUs in 2017 and contributed to the group’s operating income by $340 million in 2017.
Commenting on their own year-end results, Rodolphe Saadé, chairman and CEO of CMA CGM Group, said, “The quality of the Ocean Alliance service offering [was] particularly appreciated by our customers. Launched on April 1, 2017, it covers 40 shipping services on the East-West trades [and] the Transpacific market, where the CMA CGM and APL brands are particularly strong.”
Saadé said the acquisition of local players reinforced the company’s global offering. In October, CMA CGM acquired Sofrana, an operator in the South Pacific islands. In December, CMA CGM closed the acquisition of Mercosul, one of the main players in Brazil’s domestic container shipping market. Last year, CMA CGM carried nearly 19 million containers, an increase of 21.1% compared to 2016. This increase was driven by the contributions of all the shipping lines operated by the group, in addition to APL’s full-year contribution. Annual revenue for 2017 rose 32.1% and surpassed the $20 billion mark for the first time, reaching $21.1 billion.
Khouri said even with the reduction in the number of major shipping lines, the container industry remains competitive. At the beginning of 2018, ocean carriers deployed 21.1 million TEUs of ship capacity globally, a 70 percent increase from 2009.
“Overcapacity in nearly all trade lanes, including both major and minor lanes, has been an overarching theme for the container shipping industry in recent years, as carriers have increased capacity without a corresponding increase in demand,” Khouri told the committee. “However, as consumer confidence and spending has grown, and the demand for ocean transportation services has increased, carriers have been able to fill their ships relatively close to capacity in the past year, despite having increased the total capacity on the major trade lanes.”
While ships are sailing relatively full, Khouri said, rates have remained comparatively low and are 22 percent below their peak in 2010.
“There are some signs that the industry is moving toward a recovery from overcapacity and low freight rates,” he said. “The percentage of the idled fleet has decreased. Many carriers have recently reported operating profits.”
A.P. Moller – Maersk, primarily driven by Maersk Line, the largest ocean freight carrier in the world with a 22.7% market share, reported a profit of $356 million in fiscal 2017, compared to a loss of $496 million in 2016. The profit consisted of $1 billion related to the transport & logistics business. CMA CGM, the third largest ocean cargo carrier, reported net income for the year of $701 million, compared to a loss of $452 million in 2016.
Khouri noted that other factors that can affect moving to a recovery are continued economic growth in the U.S. and U.S. trade policies. However, he said, “An economic downturn or trade restrictions would have an adverse effect on demand for shipping and would slow down any recovery, thereby having a dampening effect on rates.”
The producers of the Global Port Tracker–the National Retail Federation and Hackett Associates–said this month that a potential trade war would threaten cargo imports, jobs and the infrastructure at the nation’s major container ports.
“In the long term, we could see a loss in cargo volume and all the jobs that depend on it, from dockworkers on down through the supply chain,” Jonathan Gold, the NRF’s vice president for supply chain and customs, said.
Modernization
The major carriers also noted the continued modernization of the sector and its businesses.
Maersk said it made progress on digital transformation, moving customer transactions online and digitizing the way assets are operated. A series of digital initiatives were launched during the year to accelerate the transformation of the industry from legacy paper-based, to digital customer-centric processes and services. These include a partnership with Microsoft for cloud computing and digital product development, and a blockchain joint-venture with IBM.
CMA CGM noted that last year it launched several strategic projects in the digitization arena. For one, it implemented organizational changes to accelerate its digital transformation and take advantage of innovations to reinforce the added value provided to customers.
The shipping industry has also moved toward greater energy efficiency and an improved environmental footprint.
In November, CMA CGM selected liquid natural gas to propel its nine new vessels of 22,000 TEUs expected to be delivered starting in 2020, and MOL made a similar commitment.
The move, according to CMA CGM, will significantly reduce the emission of greenhouse gases and fine particles and is part of the company’s overall strategy that has already resulted in a drop of its CO2 emissions per container transported by 50 percent with an objective of an additional 30 percent reduction by 2025.