From SCDigest's On-Target e-Magazine

- Oct. 13, 2015 -

Global Supply Chain News: As Ocean Container Shipping Capacity Continues to Exceed Demand, Maersk CEO Calls for More Consolidation in the Industry

If Rates are to Stay Low, Only Answer is to Spread Fixed Costs Across More Containers, Soren Skou Says

SCDigest Editorial Staff

While Maersk Lines itself has managed to remain reasonably profitable of late, the ocean container shipping industry as a whole is in poor economic shape, says Maersk Line CEO Soren Skou, and will need to pursue further consolidation to be economically viable.

The basic problem is that the carriers individually and collectively have been adding capacity faster than demand for container movements grows, leading to a supply-demand imbalance that continues to push rates to bargain basement prices. Great for shippers and importers, but lousy for the bottom lines of most carriers, though they have been helped some in 2015 by sharply falling prices for bunker fuel.

SCDigest Says: Skou indicated that Maersk was unlikely to make acquisitions any time soon, but seemed to be encouraging his competitors to make such moves. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

Skou said in an interview recently with The Wall Street Journal that "This year, demand growth is extremely weak, around 1.5% to 2%, much less than anticipated, while capacity will grow around 7%. Coming into the year, we expected demand [growth] of 3% to 5%."

Adding to the industry's challenges are the newest generation of megaships, vessels capable of carrying 19,000 to 20,000 TEU. These ships are not cheap - Maersk itself is spending some $150 million each for 11 new megaships it ordered in early summer from South Korea's Daewoo Shipbuilding . The goal is to reduce operating costs per container through more volume per loop, but that low rate environment make such investment poor ones for now and add pressure to consolidate to bring enough volume to fill up the giant vessels.

For most of this year, freight rates have again fallen to levels that barely cover fuel costs. They are currently hovering around $300 per container on the main Asia-to-Europe trade lanes where the latest megaships are used , well below the $1,300 or so average that ship operators say they need to just to break even.

"Global growth is very disappointing, and if we knew what we know today, maybe some of the [investment] decisions we did three years ago we wouldn't have done or they would have been different," Skou told the Wall Street Journal. Yet, Maersk placed the order for those 11 new megaships just a few months ago.

The industry has been in consolidation mode for the past two years. The first form of that is outright acquisition, such as example Hapag-Lloyd's purchase of CSAV in April, and the current rumors of a soon to be announced merger between China's two largest carriers, China Ocean Shipping Company (COSCO) and China Shipping Container Lines (CSCL).

But to date the growth of shipping alliances between groups of carriers has been the stronger form of consolidation. Under these arrangements, carriers continue their own sales and marketing but pool capacity across members in terms of putting containers on a ship and port calls. The 2M alliance between Maersk Line and MSC saves about $700 million in operating costs annually, Maersk estimates.

The most notable of these arrangements are the 2M, the Ocean Three (CMA CGM, UASC, CSCL) and CKHYE (COSCO, K-Line, Hanjin, Yang Ming, and Evergreen). If COSCO and CSCL do merge, the combined company will need to leave one of these last two alliances.

Skou told the Wall Street Journal that in a low rate environment, the only way to be profitable is to reduce costs, so that certain fixed costs can be spread over more total container volume.

(Global Supply Chain Article Continued Below)