December 19, 2013

Brewing boxship bloodbath

The P3 alliance is in the news again- another step forward towards the likely eventual cartelisation of large segments of shipping. What is happening in the box trade today- massive ships, player consortiums et al- will be replicated elsewhere pretty soon, I think. These alliances will threaten to destroy operators lower down the food chain.

Starting mid-2014, the P3 Alliance- between the top three container giants Maersk Line, CMA-CGM and MSC- will together start operating well over 250 vessels (a seventh of global capacity) with the ability to move a staggering 2.6 million TEUs. The Alliance will then control 42% each of the Asia-Europe and the trans-Atlantic box trade and a quarter of the trans-Pacific container trade. Many of the largest ships in the world will be positioned on these runs; the Alliance will also share extensive port facilities that each member has access to, or has a stake in. 

On the eastern side of the world, members of what we know as the G6 Alliance– Hapag-Lloyd, OOCL, NYK, APL, Hyundai and MOL- are planning to take the P3 guys on with a total of 118 ships of their own, either on the Asia- US West Coast run or on five transatlantic loops. 

Although the P3 Alliance has raised some hackles and resulted in the U.S. Federal Maritime Commission calling for a meeting with European and Chinese regulators to discuss cartelisation and unfair advantage, I doubt that this is going to stop them. For one, the EU seems to be behind the alliance as they see it as a deal made by European firms. Interestingly, each of the three P3 member companies has been under investigation, at one time or another, for price fixing by the European Commission, judging from reports.

My oft-stated opinion that the near future is going to see a consolidation in shipping that will kill smaller players will probably be tested by the slaughter that I think we will see, over the next few years, in the box trade. 

Leaving cartelisation aside for a moment, the biggest risk to trade is the possibility that another global recession is going to hit us soon. Market pundits like Jim Rogers and Marc Faber are repeatedly saying that the next economic collapse is a certainty. That it is a question of when and not if; that the profligate policies of countries across the world spearheaded by the US’ Quantitative Easing have made the next collapse inevitable. 

Even if that view is alarmist, the fact is that container shipping is in a bad place today anyway. The order book is severely bloated - 55 large ships will be delivered this year, 40 are due next year and another 45 the year after that. Each is in the 8000-10,000 TEU range. Do the math and you will begin to see some alarming capacity numbers.

 Not just that, but shipowners continue to order these large boxships; even smaller players, squeezed by the scale advantages the bigger shipowners presently enjoy (and perhaps looking at the fact that Maersk and CMA CGM have outperformed other boxship owners) continue to order these behemoths. 

Then there is the problem of what I call hidden capacity. Earlier recessions used to result in ships laid up- ‘cold’ or ‘hot.’ With slow steaming, that has changed this time around. There is, today, massive container tonnage sailing at slow speeds around the world. And huge boxships- all relatively new- are operating at considerably less than full capacity. All the time.

Whenever trade picks up significantly, there will be this large ‘hidden capacity’ ready out there- ready to increase speed whenever faster voyages become worthwhile. This will mean, effectively, that hundreds of thousands of additional container slots will become available to the market. The direct and indirect impact of the release of this hidden- and readily available- capacity can well be the final nail on the already hammered coffin of an industry that is struggling to remain profitable. 

All of the above- overcapacity, hidden capacity and present near-reckless pursuit of large new builds included- were going to end up in an oversupply nightmare even without the P3 Alliance or the G6’s retaliatory moves. With those in the pipeline, things can well become much worse. Forget small container shipowners, even second rung ones will be squeezed extremely badly. 

How extemely? I dunno exactly, but the word bloodbath comes to mind.


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