By Jan Hoffman
Chief, Trade Facilitation Section at UNCTAD (Linkedin)
Containerships have never been bigger than today, container freight rates have never been lower, and never has so much container carrying capacity been idle. Not a trilemma, but three sides of the same coin. And after several years of calmness at the M&A front, we have new mergers among liner companies.
Individual carriers typically react to this situation by a) trying to reduce their costs, and b) growing their market share. From an individual company’s perspective, this often means a) investing in modern large containerships to save fuel and achieve economies of scale, and b) seeking mergers to better control the market, which is necessary to fill the new large ships. This makes sense from the individual company’s perspective, but it doesn’t if we look at the big picture, and here are three reasons why/ not:
- When replacing old ships with new ones, the old ones don’t exit the market. The overcapacity usually stays on, unless scrapped. And most of the containership fleet is simply too young to be demolished. In the end all carriers are confronted with the historically low freight rates. The overinvestment is not in the interest of the liner business.
- The larger ships may cut unit costs for the carriers, but the total system costs are not reduced; in fact, they may actually go up. As pointed out by Hercules Haralambides, Olaf Merk, Jean-Paul Rodrigue and Drewry, the costs of the megaships to the logistics system may out-way the benefits. The ports, the hinterland connections, and the network structure (more transhipments with fewer direct services) will lead to more costs as the vessel size goes up. This not only applies to those ports and routes which have to accommodate the largest ships, but due to the cascading effect it is also relevant in many smaller and developing countries markets. The overinvestment is not in the interest of the carriers’ logistics partners.
- As ships get bigger faster than trade grows, there is space for fewer carriers in individual markets. We observe a continued process of concentration (see also illustration below). While the lower freight rates may be good news for the shipper in the short term, in the longer term, there will be more and more markets with oligopolistic market structures. The overinvestment is not in the long term interest of shippers.
Source: UNCTAD, Review of Maritime Transport 2015. Averages of fleet deployment per country for 160 countries.
Now, it happens that these three reasons are not relevant for the individual carrier. He has to look at his own returns, and will not accept staying behind his competitors. So, what may happen?
There is still scope for further consolidation. Globally, the industry is not very concentrated. Maersk has a share of 14.6% of the TEU carrying capacity, followed by MSC with 12.9%, CMA CGM group (8.7%) and COSCO group (7.5%) (20 March 2016). The logistics partners (ports, intermodal connections) will do their best to adapt to growing vessel sizes, and in the long term, perhaps, the “optimal” vessel size will be larger than today. In the meantime, the pressure on the maritime freight rates will continue, and the resulting low trade costs help the global economy recover. Thank you to containerization and the maritime business.