By Jide Ajia
The $500 billion world’s shipping industry appeared to be rising well from the ashes of the sector’s worst-ever crisis a year ago with a consolidation mission that is seeing operators determined to get bigger and bigger, according to a report.
Container ships used in the transportation of sneakers, bananas, and dolls to different parts of the world along with the companies that own them were also getting bigger, the report noted.
As a result, consolidation was seen as survivors from the crisis of last year are now enjoying big economies of scale along with increased demand; last year, excess capacity had plunged the industry into its worst-ever crisis, involving the bankruptcy of South Korea’s Hanjin Shipping Company.
Last month, China’s Cosco Shipping Holding Company, Asia’s largest container line, said it would pay more than $6 billion for rival Orient Overseas International, owner of the world’s biggest vessel, a carrier longer than the Empire State building. Denmark’s A.P. Moller-Maersk A/S was also in the process of buying a German competitor and boasts its own fleet of mega ships, including one that could carry about 180 million iPads.
According to data provider, Alphaliner Shipping, those super-sized shipping companies wield much more pricing power over manufacturers and retailers like Wal-Mart Stores Incorporated and Target Corporations with the five biggest container lines control about 60 percent of the global market.
The Chief Executive Officer at Crucial Perspective, a Singapore-based transportation research firm, Corrine Png, said container shipping was now a game only for big boys with deep pockets, adding that the rising market concentration would give the liners greater pricing and bargaining power.
However, Hanjin’s collapse, in August last year, upended the industry in much the same way that the bankruptcy of Lehman Brothers roiled the financial sector during the 2008 crisis, even as one of the world’s largest shipping firms at the time, Hanjin faced a cash crunch as supply outstripped demand in the industry, weakening pricing power and profits for carriers, which is now in the process of being liquidated after a South Korean court declared it bankrupt in February.
“Since the demise of Hanjin Shipping, flight to quality has become more noticeable in the container shipping business,” said,
An Analyst at Shinyoung Securities Corpoation in Seoul, Um Kyung-a, also said growing use of mammoth ships was key to the turnaround and companies who own them were able to deploy fewer vessels and move more cargo on a single journey to benefit from higher rates.
By her estimates, there are now about 58 of these huge carriers worldwide that could transport more than 18,000 containers, and the number was expected to double in two years, about half of the new vessels would be added by the biggest firms.
Meanwhile, the excess supply that derailed growth last year has not completely disappeared as new entrants expanded and as older vessels still remained with capacity in the container shipping industry was expected to grow 3.4 percent this year and 3.6 percent in 2018, according to Crucial Perspective.
Still, recovery in demand seems to be on track, especially after posting losses in 2016, companies were seeing signs of business picking up.
Earlier this year, Maersk, South Korea’s Hyundai Merchant Marine Corporation and other shipping lines reached agreements with their customers to raise annual rates from May for cargo headed from Asia to U.S. stores like Wal-Mart and Target.
Already, retailers in the U.S. usually increase inventory during the third quarter, ahead of the year-end holidays, and Lee said freight rates are expected to rise further as the peak season for the container shipping industry kicks off.
Nonetheless, a number of deals have been consummated since 2015 that were clear signal to the effort at creating super-sized companies in the industry and the deals include: in 2015, Cosco Group and China Shipping Group announced a merger to create Asia’s biggest container line, Cosco Shipping Holdings Corporation.
In addition, Maersk agreed to buy Hamburg Süd and Japan’s three shipping companies agreed to consolidate their container shipping businesses; in 2017, Hapag-Lloyd AG completed its acquisition of United Arab Shipping Corporation and Cosco Shipping offered to buy Orient Overseas International of Hong Kong.