Well, the game of alliance musical chairs in the ocean container shipping sector appears to have come to an abrupt halt, with potentially all the major carriers displaced in alliances by recent moves perhaps finding seats.
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| The core factor driving the alliances is the dismal state of the container shipping market, which has overcapacity of as much as 30%, resulting in dramatically falling rates that are often below even variable operating costs. |
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The new "THE Alliance" (obviously not much time was put into creative naming), consists of the Japanese trio of Nippon Yusen, Kawasaki Kisen Kaisha, and Mitsui O.S.K. Lines; Germany’s Hapag-Lloyd; South Korea’s Hanjin Shipping Co.; and Taiwan’s Yang Ming Marine Transport. The new partnership was announced simultaneously in Hamburg and Seoul late last week. The new alliance said to go into operation in April of 2017, assuming approval by regulators in the US, Europe and Asia.
This move came just weeks after the announcement of a new "OCEAN Alliance" made up of France’s CMA CGM, newly merged China Cosco Shipping, Evergreen and OOCL. That moved busted up three existing alliances, and left eight "orphans" - major carriers without an alliance - when adding in the M2 alliance involving the two largest container carriers, Maersk and MSC, which started in early 2015.
Six of the eight orphans are included in this latest alliance, which are vessel sharing agreements in which the carriers pool capacity but maintain separate sales, marketing and pricing programs. Part of the goal is drive better utilization of the new generation of 18,000+ TEU megaships and therefore realize the potential per container savings they can deliver with high levels of utilization.
But even the two carriers left out of the new alliance are likely to join before long. The statement announcing THE Alliance noted that talks involving Hapag-Lloyd acquiring Dubai-based United Arab Shipping Co. are progressing and that the latter is expected to become the seventh member, without saying if that was contingent on a merger taking place or not. It is also understood that the financially embattled Hyundai Merchant Marine of South Korea will be considered for membership if and when it can sort out its problems through a debt restructuring.
It is clear this was something of a shotgun polygamous wedding, with the orphans looking for a home as alliances become the way the container shipping market will operate going forward.
"Nowadays, you have to be in an alliance because you need these really big vessels to be competitive per unit cost," said Jan Tiedemann, one of the analysts at Alphaliner. "I am not sure if it’s a marriage of partners who are deeply in love with one another, but they just have to join."
Upon the announcement of the OCEAN Alliance, the analysts at Drewry Shipping thought it was unlikely that the three Japanese carriers would be willing to enter the same alliance, but the pressure to join a VSA obviously overcame whatever relunctance there was. Now Drewry thinks it is likely that Nippon Yusen, Kawasaki Kisen Kaisha, and Mitsui O.S.K. Lines will eventually merge their contain shipping businesses.
In terms of capacity, even with the first six members THE Alliance will be the about equal to the OCEAN Alliance, with the former combining 3.5 million TEU of capacity, spread across more than 620 ships in East-West trading destinations. The Ocean Alliance involves a fleet of 350 container ships, also with an estimated capacity of 3.5 million TEU, while 2M has a fleet of 185 ships and capacity of 2.1 million TEU.
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In terms of capacity share today on the critical Asia to Europe and Americas routes, the OCEAN alliance will control 34% of capacity, versus 32% for THE Alliance, and 29% for 2M, as shown in the graphic below.
Alliance Share of East-West Container Capacity
Source: Drewry Shipping
The announcement of THE Alliance was short on operational details, but claimed there would be several benefits to shippers as a result of the agreement, including "frequent sailings, high reliability and very attractive transit times."
That last benefit may involve increasing vessel speeds to deliver faster transit times, which would reverse the near decade-long slow-steaming policy of all major carriers and alliances.
Of course, the core factor driving the alliances is the dismal state of the container shipping market, which has overcapacity of as much as 30%, resulting in dramatically falling rates that are often below even variable operating costs, leading to major losses by nearly all the carriers quarter after quarter, with some in deep financial peril.
"The market must come to its senses. Many participants find their financial means exhausted because of the ruinous competition," said Bodo Knop, managing partner with logistics consultancy SRTS, who added that "some players will quite possibly leave the market altogether."
In its overall commentary on this latest moves, Drewry noted that "The former orphan carriers of the previous split alliances have reacted," adding that "While some uncertainty has been removed from the market it should be remembered that alliances are only as stable as their member carriers, so they should not be seen as the silver bullet that will save the industry The formation of the other alliances, for example, have done nothing to halt the dramatic slide in rates over the past year.
What do you think this latest container shipping alliance? Are these going to be good or bad for shippers in the end? Do you see rates heading back up any time soon? Let us know your thoughts at the Feedback section below.
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