Container shipping has good opportunities, says analyst
Date: Tuesday, March 12, 2019
Source: American Shipper
Lars Jensen says while individual carriers and freight forwarders may be under threat, the industry is not.
While individual carriers and freight forwarders may be under threat, he said the industry is not.
“This is a vibrant industry which is going to continue to provide good opportunities,” he said.
He said while the industry still has an overcapacity of supply, it is “slowly climbing out of that hole. The bottom was in 2016 and markets are getting better. A balance between supply and demand is a couple of years out.”
Because of overcapacity, carriers are increasing the amount of transshipment they perform, offering fewer weekly services, and increasing the number of “blank sailings” in which a regular weekly service is canceled, he said.
The growth in the size of ships, which carriers have embraced as a way of lowering costs with economies of scale, is another factor that has increased the amount of transshipment as carriers need more containers to fill the bigger ships and also driven the decision by carrier to form alliances.
While carriers will see fuel prices spike later this year when the International Maritime Organization agreement that carriers use low-sulfur fuel takes effect on Jan. 1, 2020, Jensen saw this as an issue the industry and shippers will take in stride.
“Even in the case where fuel oil prices increase $200 per ton ... fuel prices in January will still be lower than they were five years ago. And who paid for it five years ago? The shippers, obviously.
“How did they do that? Through a lot of floating bunker agreements,” he said. The bunker-adjustment formulas devised by carriers then varied from carrier to carrier, and he said as carriers negotiate new contracts with transpacific shippers for the 2019-20 contract year, they are “not reinventing the wheel.”
Jensen sought in his talk to dispel what he sees as myths that are distracting the industry from strategic thinking, including:
• By quoting prices online carriers will undercut each other and engage in a “race to the bottom.” But he said after reviewing data from shippers, he found that 49 percent of the time shippers did not choose the lowest price. He said carriers spend too much time worrying about competing about price instead of “building up a standard brand promise.”
• Shippers will not pay for service.“We should not be surprised that shippers, of course, think about more than just the price in front of them,” he said.
• Shippers want real-time transparency on their cargo. Instead, he said, this is a symptom of shipper mistrust of carriers, that “they will not tell them if something goes wrong.” What shippers really want, he said, is that “if something goes belly-up they will proactively tell them something has gone wrong.”
• Carriers collude. “Carriers have been loss-making for a decade. If this is what happens when they collude, then let them collude.”
Jensen believes that consolidation among container carrier will continue.
He said if one looks at the list of the 100 largest container carriers from the year 2000, one would find that only 40 of those companies remain. The other 60 have been absorbed by other companies or gone out of business.
Looking forward 19 years, he said he would not be surprised if those 40 carriers had been reduced to just 16 and the 24 had been acquired, gone bankrupt or sold off their services.
(Of course there are still more than 100 container carriers, as this chart from Alphaliner demonstrates. Some are very small indeed, with as few as one or three ships.)
The 10 largest container carriers now control about 80 percent of container traffic compared to just 10 percent 20 years ago. Despite that, Jensen said price volatility in the industry has increased.
“In the pursuit of consolidation, none of the carriers have really figured out how we are going to use our consolidated status,” he said.
He predicts “that is about to change” and the top seven carriers — Maersk, Mediterranean Shipping Company, COSCO, CMA CGM, Hapag-Lloyd, ONE and Evergreen — will remain “the stable of global container carriers for many years to come,” though he allows they may acquire some nice carriers.
“They are going to change focus from, ‘How are we going to grow massively?’ to, ‘How are we going to stabilize a market in which we are not making money?’”
The major east-west container trades are now dominated by three alliances — the 2M, Ocean Alliance and THE Alliance. Jensen thinks this is the end of the line in terms of alliance formation, saying the regulators in the U.S., Europe and China would be unlikely to permit the carriers to form just two alliances.
“If you are not in that top seven club now, it is very difficult to see how you will ever have a hope of getting in there,” he said. “You can go out and get a lot of money and buy ships with a million TEU, but how are you going to fill them?”
Jensen said some carriers, however, may be able to continue to compete with the largest companies because they are supported by their governments.
An alternative is for companies wanting to be in the container shipping business to become niche carriers, he said.
He said there are opportunities for carriers to handle special types of cargo such as refrigerated goods, offer specialized services, operate ships in a particular geography rather than globally or operate special ships.
He pointed to companies such as Xpress Feeders based in Singapore and the transatlantic carrier Atlantic Container Lines that have ships that not only carry containers but are equipped with roll-on-roll-off decks that can accommodate a large variety of other cargo types as well. Independent Container Line serves four less heavily served ports — Chester, Pa., and Wilmington, N.C., in the U.S. and Antwerp and Liverpool in Europe.
There are ports in many parts of the world that can only be called with shallow draft vessels or have such small populations that large carriers have limited interest in serving them.
Other trades such as routes between ports within the United States are protected by cabotage laws (in the U.S. this is commonly referred to as the Jones Act) or the shippers in a country may have a preference to do business with a homegrown operator.
He noted that some carriers have been able to compete with large carriers by offering exceptional transit time. He pointed to Matson’s China-Long Beach Express or CLX service as an example.
Finally, he said that carriers may find success by satisfying the “informational” preferences of carriers.
“When we talk about the digital revolution, we make it sound like all shippers want the same information. They don’t. Some want specialized pieces of information.”