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Global Supply Chain News: IMO Rules on Sulfur Emissions Likely to Spur Further Mergers in Ocean Container Sector, but Probably not Enough to Change Overall Market Dynamics


Drewry Says Additional Financial Pressures Drive more Combinations, but Likely Ones would Still Leave Balance on Power In Shippers' Favor

April 23, 2019
SCDigest Editorial Staff

SCDigest has reported extensively on the potential dramatic impact new rules passed by the International Maritime Organization (IMO) in April of 2018 relative to sulfur emissions from cargo ships may have on the industry.

In great summary, those rules, scheduled to go into effect Jan. 1, 2020, require that ships either purchase a new lower sulfur content fuel – expected to be much more expensive than the current bunker fuel – or install scrubbers costing millions of dollars apiece. (See With Deadline for Clean Ocean Fuel Looming, How it will Play Out is Anyone's Guess.)

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It will require a couple of highly unlikely mega M&As to really move the dial" – and regulators are very unlikely to let that happen.

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Some in the industry say that ocean carriers may find it difficult to pass the new costs on to shippers, resulting in more financial woes for the already struggling carriers, with the potential that some could go bankrupt.

The industry analysts at Drewry Shipping also see another scenario – that the higher costs will driver more mergers and acquisitions in an industry that has already seen its share in recent years. For example, there was the merger of Chinese carriers Cosco and CSCL in 2016 and the more recent combination of three Japanese carriers (NYK, MOL and K Line) into the Ocean Network Express (ONE).

"The industry still hasn't fully recovered from the global financial crash and the devastating losses incurred thereafter," Drewry notes in a recent post on its Container Insight Weekly blog, adding that many are still reside in a "distress zone" in terms of their financials.

Drewry then notes that "Without wanting to be too alarmist, there is the potential for IMO 2020 to inspire another major carrier bankruptcy and/or trigger more defensive M&A. It could turn out that the IMO will inadvertently push industry consolidation along, closer to where it needs to be in order to achieve sustainable profitability."

By that, Drewry means a more consolidated container shipping sector would probably be able to finally reduce capacity to where it is more aligned with demand. SCDigest notes that is already happening now to an extent, with recent news that number of ocean ships ordered in Q1 fell to their lowest quarterly levels since 2004, according to marine data provider Clarksons PLC last week. Those numbers, however, include bulk as well as container ships.

But there is a barrier to further combinations in the sector – and that is the regulators. Already, the leading seven carriers now control approximately three-quarters of the world's containership fleet.

As a result, "The possibility of any takeovers among the top seven lines is remote in our opinion, primarily due to the likelihood of such deals being shot down by competition regulators," Drewry says.

But that doesn't mean there could be deals of large carriers buying some of the smaller ones. For example, Drewry sees the following potential deals. That includes CMA CGM acquiring the smaller German carrier Hapag-Lloyd, even thought it would be a deal within the top seven. However, there was interest from the French carrier last year in such a deal.

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Another possibility is Cosco buying Pacific International Line (PIL). Other potential deals are based on common nationality, such as bringing together the Taiwanese lines Evergreen, Yang Ming and Wan Hai, or also a pairing pf HMM and SM Line from South Korea, Drewry says.

Drewry then looked at the impact on various trade routes (e.g., Asia to the North American West Coast) using a technique called the Herfindahl-Hirschman Index (HHI) that is used to measure the competitiveness of markets.

Without going into all of the detail, Drewry says from its HHI analysis that even if all these potential deals occurred, it would only be sufficient to move some lanes into the "moderately concentrated" zone of the HHI. Some trade routes are already characterized as moderately concentrated – but just barely, much closer to "competitive marketplace" than "highly concentrated" on the scale.

"Carriers would gain some modicum of pricing power, but certainly not enough to be able call the shots," Drewry says, adding that "It will require a couple of highly unlikely mega M&As to really move the dial" – and regulators are very unlikely to let that happen.

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