Overcapacity Catches Box Ship Industry in Undertow

 

The containerized-ocean-freight industry suffered in 2015. Its continuing financial woes accelerated because nearly all key financial indicators declined from 2014. At the heart of the industry’s problems, a persistent global supply-and-demand imbalance is to blame. All signs point to a continuation of that theme into 2016 and beyond. 

 

The most-recent forecasts expect global container fleet capacity to grow by 4.6% in 2016, and another 4.7% in 2017, though spot prices for major routes have dropped 21 to 44% from a year ago because of plunging demand, now about half the current growth forecast. 

 

Since the Great Recession of 2007–09, carriers have struggled to find feasible solutions to this systemic problem. Most chose to act independently, embracing such initiatives as slow steaming, vessel idling, organizational cost-cutting, and information technology (IT) modernization. 

 

Although those initiatives have provided some tangible benefits, the carrier community may finally be coming to grips with the need for significant industry consolidation. Such consolidation will likely happen operationally, through more-powerful alliances, and financially, through mergers and acquisitions (M&A). 

 

At the close of 2014, Hapag-Lloyd announced the acquisition of Chilean-based CSAV, effectively setting the stage for an active year in ocean carrier M&A. Notable 2015 deals were French line CMA CGM’s agreeing to acquire Singapore-based Neptune Orient Lines and its APL brand, which provided a significant market share boost in the transpacific trade. 

 

Meanwhile, the Chinese government orchestrated the merger of China Shipping Container Lines and COSCO, thereby combining two meaningful players in the container trade lanes into and out of Asia.

 

The argument for industry consolidation is sound. Fewer competitors controlling more vessels should lead to moreeffective management of existing capacity and future vessel orders that would be more in line with demand forecasts. 

 

Scale can also reduce the cost of moving containers from point to point, so those carriers not actively pursuing consolidation or operational collaboration risk being marginalized or getting acquired.

 

However, carriers—and their financial backers—have to be wary of the cost of consolidation fueled by debt. And even though money is still relatively cheap in the global financial markets, the carrier industry has produced dismal results in the past five years and lenders will be looking for a premium to cover those risks. 

 

If the market for container shipping services does not turn in favor of carriers in the near term, carriers with increasing costs for servicing their debt could be at risk.