After the huge container sector consolidation of 2014-2017, which reduced the number of major operators to a relative handful, the expectation was that this would hand them genuine pricing power, give them a chance to regain profitability, and bring stability to this sector - reducing risk for other stakeholders. Has this actually happened?
In 2017, when COSCO bought a majority share of OOCL, the playing field for the largest container operators was effectively reduced to seven major participants, with three or four smaller players. While not exactly a monopoly, the expectation amongst many analysts and stakeholders was that liner companies would finally exercise some degree of pricing power and lift commercial rates. Shippers will of course usually never want to pay higher rates - they want both stability and better service levels, and this utopia, logically, can only ever happen if carriers finally start to consistently make money. All container operator executives would privately agree that shippers want to have their cake and eat it, given the carriers’ collective USD 45bn investment in newbuildings over the last decade
No genuine lift for global spot freight rates
The tabled liner profitability data tells us that volatility remains and that progress is varied amongst the lines. The reality is that while the financial statements of many liner companies give prominence to their growing volumes (due to in many cases, acquisitions and the deployment of larger fleets), their average freight rate levels remain relatively weak by comparison. This trend is also set against the backdrop of increasing operational costs (bunkers and charter rates). Carriers had some success in 2017 and 2018 lifting spot freight rates on many core trade lanes, but 2019 saw significant slippage of up to 15% year-on-year in the case of the headhaul transpacific. This lane, together with Asia to Europe are where operators deploy their largest vessels, and is where they need to make money.
Are profits being realised for container operators?
While detailed accounts are not available for all, some of the largest container operators have shown a very mixed quarterly bottom-line performance over 2018-2019. Seasonality, supply/demand and, to a degree, the relative acquisitive states of the named parties during this period, are clear drivers. On a very broad level, however, the companies appear to be struggling to generate consistent profitability, with the exception of Hapag-Lloyd, whose acquisition of UASC and absence of a vessel orderbook seems to have reaped rewards. ONE’s case is also a little unique, as it had a disastrous start in 2018, with notable operational issues, which are now understood to have been resolved. Essentially, any perceived pricing power is not consistently showing at the net profit level yet for many key liner operators. Many of the top players continue to re-structure operations and/or shed assets, which is a reminder that all may not be entirely well. Analysts have also pointed fingers at CMA CGM for its expensive acquisition of CEVA Logistics, which has definitely brought additional costs and long-term debt commitments.
It may be the case that the two to three year period is not enough to see a turnaround, and that the liner operators continue to be in a transition phase. Such a transition will hopefully include a move to more sensible pricing models than have been seen to date. Indications on this front are not particularly promising, with HMM's imminent membership of "THE Alliance" from April 2020 seeing the line deploy its 24,000 TEU newbuildings in the Asia to Europe trade, potentially bringing further instability and fighting amongst lines to fill additional slots on a route that is not exactly in rude health in terms of cargo growth. Intra-Asian carriers continue to be under severe pressure with perennially low earnings, and trading in the largest and most competitive of all container lanes. The recent merger of Heung-A and Sinokor is a result of this pressure, although it is far too early to see if it will reap genuine rewards for these two. Recent media articles about Singapore-headquartered Pacific International Lines are also ringing alarm bells in the marine supplier sector, despite the warm reassurances from the company’s CEO. Nobody is wishing to tempt fate here, but could there be a major distressed acquisition in 2020?
IMO regulations and more pressure on profits
The elephant in the room remains the impact of the new IMO low-sulphur regulations. Liner players opting for scrubbers and continuing to burn HSFO will be feeling fairly comfortable right now due to the prevailing price spread against VLSFO, but it is early days to see how successful lines are in recovering scrubber installation costs and/or VLSFO premium from shippers this year. This should be watched closely.
Increased risk
What does this consolidation mean for other container industry stakeholders? After all, an unhealthy liner industry has clear and important ramifications for suppliers. Given that the fleets of the major container operators have grown steadily (and will continue to do so through the orderbook), these companies systematically require increased credit lines, or at least in some cases, will want to use their given credit limits in full. For bunker suppliers at least, does this become an additional credit risk or a flow risk or indeed both? Our research has shown that the acquisitive lines have usually become the dominant contractual party, acquiring bunkers and other marine consumables for the smaller lines that they have bought. In the case of one major shipping line, the fact that these payments are now processed through a central procurement department at head office has led to serious delays in payments to multiple suppliers.
Clearly establishing whether such indications of stress are operational rather than structural is key. Our view is that the container market consolidation has not (at least yet) reduced risk. Concerned parties should remain watchful given that the first call for container operators is still usually to fill slots, rather than book cargo at compensatory rates.
Infospectrum continues to closely follow the commercial and payment performances of both the main and regional container operators to determine when and where some of these risks may be increasing.
