The coming year will be one of consolidation and strategic alliances given the fact that the industry has been through something of a crisis of confidence in 2016. Some major shipping lines have faced financial strain and at least one is on the verge of a bankruptcy ruling. Partnerships and other forms of working together are therefore seen as the best response.
For the actual buyers and sellers of shipping services; there will be changes in the pricing strategy so as to reflect where the industry is at the moment. Another reason for adjusting prices is likely to be in order to maintain sustainability over the long term. In terms of global trade agreements; the functioning of NAFTA (North American Free Trade Agreement) and TPP (Trans-Pacific Partnership) will be critical. There is a new administration in the USA, one which has already hinted at a more isolationist trade policy. That obviously affects the world at large.
Critical Consideration for the Industry
The first question is whether the shipping industry will significantly affect the aggregate global growth rates and GDP. This trickles down to the individual countries such as the USA and China which are heavily invested in the industry as one of the drivers of economic prosperity. In any case, the experiences of 2016 have already shown us that the global economic outlook is a critical driver of performance within the shipping industry. The impact of such changes in the economic outlook are not always evenly distributed within industries and the same might be said about shipping. Some sectors are more affected than others.
Shippers and the Market
Many shippers are facing challenges at the moment and those are expected to continue in 2017. For example, Hamburg Süd has found itself at the heart of many damaging rumors about a possible sale of what is currently the 7th largest container shipping line in the world. Apparently, the Oetker conglomerate is looking to offload less performing assets. Christiane Krämer, the spokesperson for Süd, refuses to be drawn into the fray about the rumors. Nevertheless many believe that the company is to be bought by the Maersk Line. Another possibility is an acquisition by the Chinese giant Cosco Shipping.
Indeed mergers and acquisitions are the buzzwords in the industry at the moment. For example, Soren Skou of Maersk confirmed that the shipping line wanted some acquisitions as part of its new strategy. For good measure, Hamburg-Süd held merger talks with Hapag-Lloyd between 2012 and 2013. Although those talks ultimately fell through; Hapag-Lloyd got permission from the EU to take over the United Arab Shipping Company. For its part, Hamburg Süd invested in North-South routes going through Latin America as evidenced by the $160 million acquisition of Chile’s CCNI in 2015.
Consolidation and Alliances
European Commission approves Hapag-Lloyd and USAC merger
Companies like Hamburg-Süd may soon become an oddity in an industry that has embraced strategic alliances to the full. These new business configurations are fully supported at the highest levels. For example, the European Commission (EC) has recently granted conditional approval for a merger between UASC and Hapag-Lloyd. The key conditions and requirements are related to competition law as well as the regulatory framework.
For example, the UASC was required to withdraw from any slot sharing agreements for routes on the North European and North American circuit. This ensures that prices will not spike on these routes due to the merged company holding an extremely large portion of these markets, which would affect both consumers and rivals.
The merged company is expected to bring together 1.58 million TEUs; making it the 5th biggest container carrier in the world based on operating fleet capacity. During the assessment process, it was recognized that most shipping lines are made up of cooperation agreements (consortia) which in many instances amount to alliances and partnerships. Such practices are bound to continue in 2017.
Freight Rates
Following typical trends during Q4, China to U.S. cargo rates are expected to drop through the Chinese New Year. However, we do expect to see an uptick mid to late Q4 as many shippers rush to get their goods out before CNY, which will cause space to become tight and GRIs to be implemented as demand increases. These increases will last through the beginning of Q1 as carriers prepare for the buildup of cargo that did not ship prior to the CNY.
As for contract rates, we expect to see increases in order to account for the realities of a tightened market. The competition for the remaining business opportunities will mean that the pricing strategy has to be tempered with lucrative offers. Therefore, each shipping line will have to develop a pricing strategy that is able to keep it afloat whilst at the same time continuing to attract the business that it needs. In 2016 the increments ranged from 3% to 15%. The same levels are expected in 2017.
Trans-Pacific Partnership
Currently, there are 12 Pacific Rim countries on TPP including the U.S.A, Brunei, Australia, Canada, Chile, Malaysia, Japan, Mexico, New Zealand, Peru, Singapore and Vietnam. The aim is to harmonize trade including shipping and the implementation is due within two years. The entrance of Donald Trump throws the equation wide open with his election promise to renegotiate trade deals. For example, there are at least 18,000 separate USA tariffs and barriers that would come back into play if the country was to withdraw.
NAFTA
The same story can be said of NAFTA although in this case, the actors are slightly different. In addition, NAFTA has been in place since 1994 but now faces a harsh review. The danger is that a trade war breaks out and all the sides end up losing. That is precisely why the uncertainty about NAFTA is likely to hit the logistics and shipping industry hard.
The outlook for the shipping industry in general remains uncertain. There are many externalities that have to be taken into consideration when planning. However. if this industry managed to survive the tough year that was 2016 then there is every chance that it will survive 2017 too.
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