NEWS

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CONTAINER SHIPPING

Changes in the container shipping landscape

CMA-CGM’s acquisition of Neptune Orient Lines, with its container activities operated under the well-established APL brand, and Cosco’s merger with China Shipping Container Line (CSCL), prompted the need for a few changes in the current capacity-sharing agreements amongst the shipping lines. These two events, highly significant in their own right, have now been followed by various other announcements and lots of speculation about further industry consolidation.

While the container shipping industry was celebrating 60 years of containerisation, CMA CGM, China Cosco, OOCL and Evergreen signed a memorandum of understanding on 20th April to form a new alliance - the Ocean Alliance.  Less than a month later, on 13th May, virtually all the other remaining global lines - NYK, Hanjin Shipping, Hapag-Lloyd, K Line, MOL and Yang Ming - announced that they will form a third group for a period of five years called THE Alliance. The latter agreement does not include Hyundai Merchant Marine but it may well be incorporated at a later date subject to improvements to the line’s financial position. It is also likely to embrace UASC as their discussions with Hapag-Lloyd on some form of merger or takeover continue.

These announcements imply that the new alliances could start in spring 2017, with their deployment schedules ready in time for the 2017 contracting season.

As they stand at the moment, none of the existing alliances on the East/West routes have a combined market share (in terms of capacity) of over 30%, as shown in Figure 1.

Figure 1: Deployed capacity, market share by alliance on the East/West routes - current agreements (excludes Far East – Middle East)

 Source: MDS Transmodal Containership Databank, 2016Q2

Annual deployed capacity of 49.5 MTEU, based on 2016 Q2

However, the latest ownership changes make it quite challenging for the biggest shipping lines to redefine their capacity-sharing agreements in such a way that their aggregated market shares remain below 30% on the major routes. Based on the current capacity deployed by the members that are intending to form the Ocean Alliance, we estimate that they could have a market share of 36% on the East/West routes (see Figure 2).

Figure 2: Deployed capacity, market share by alliance on the East/West routes – 2M,  Ocean Alliance and THE Alliance

 Source: MDS Transmodal Containership Databank, 2016Q2

Annual deployed capacity of 49.5 MTEU, based on 2016 Q2 *THE Alliance assumed to include UASC.

Note: the routes in this analysis are: Asia-North Europe & Mediterranean, Asia-North America and North Europe & Mediterranean-North America and include all routes operated in these markets by alliance members even when not explicitly included in the agreements.

The lines that were not within the 2M Alliance and the Ocean Alliance had to find a way to combine their resources in order to remain competitive.  Looking at the services on the East/West routes, an alliance between the Japanese lines alone (i.e. K-Line, MOL and NYK) would have been insufficient to capture a competitive share of the market. Based on the capacity deployed during the second quarter of 2016, we estimate that they would have a collective market share of less than 10%.  However, the three Japanese lines combined with Hanjin Shipping, Hapag-Lloyd and Yang Ming would secure a more robust 28% share, which could become 34% in the event of Hyundai and UASC joining THE Alliance.

How will the regulators react and what will the implications be for the container shipping industry?   If regulators allowed three alliances, then there might be the means of accommodating smaller lines within one of the alliances with a viable scale. However, if regulators insist on no fewer than four, then one or more might be uncompetitive given that 2M (at more than 25% on the East/West trade lanes combined) has already established the scale likely to be required for long term stable viability.

The next few months could be decisive in redefining the container shipping industry for many years to come.