To mitigate the effect of the global decline in the ocean shipping industry, the three largest shipping companies in Japan have recently announced that they will merge their container-shipping units to create the sixth-largest ocean freight carrier in the world. Kawasaki Kisen Kaisha Ltd., Mitsui O.S.K. Lines Ltd., and Nippon Yusen K.K., which round out the three top shippers in Japan (based on revenue) have said that this new arrangement will save them $1.05 billion annually. The three companies are investing a collective $2.87 billion into the merger, including the value of the terminals and ships. This will give the new entity a 7% share of the global shipping market. The company plans to start operating in April 2018.

Consolidation is Becoming Commonplace

Even though this causes a seismic shift in the industry, it should come as no surprise to those who have kept tabs on the global container business lately. The downturn in business has resulted in consolidation across the entire industry, as well as the bankruptcy of South Korea’s Hanjin Shipping Co., formerly the 7^th largest ocean carrier in the world, which has led to a slew of repercussions including billions of dollars’ worth of cargo being stranded at sea which has left retailers scrambling during the holiday shipping season.

In fact, the 20 largest container operators in the world are currently in the middle of a giant push of consolidation. In the last two years, there have been some major changes in the global shipping industry.

• Two of the largest shippers in China, China Shipping Group and Cosco group, merged their shipping operations.

• French carrier CMA CGM, the third largest container operator in the world bought Singapore-based Neptune Orient Lines Ltd.

• Hapag-Lloyd AG merged with United Arab Shipping Co.

• CMA CGM and Cosco group have merged to form “The Alliance” which will rival shipping giant M2 in the Asia-Europe trade lane.

The Experts Weigh In

Experts agree that consolidation is a great tool to overcome a down market. Bail Karatzas, CEO of New York-Based Karatzas Marine Advisors & Co., said that “It’s another example of consolidation in a distressed market, which makes economic sense and checks several boxes, including accommodating the shipping concerns of a major exporting economy. But the market still remains oversupplied and fragmented.”

A distressed shipping industry means that smaller carriers will be absorbed by larger lines or forced to go out of business.  SeaIntelligence Consulting Chief Executive Lars Jensen added that “The pressure on smaller lines is tremendous. They have been losing money for years and at some point, you will either go belly up or be swallowed by bigger fish.”

All in all, a push for consolidation will open doors for carriers that may not be available via other means. Maersk Line spokesman Mikkel Elbek Linnet says that “Consolidation can unlock fixed and variable cost efficiencies not possible in a Vessel Sharing Agreement.”

Industry Outlook is Grim in the Near Future

Experts agree that consolidation should help the economics of the shipping industry. However, the consensus holds that the overall outlook is still bleak and it looks like things will get worse before they get better. Many factors have contributed to a downturn in the shipping industry, including the marginal growth of dry bulk commodity trade, particularly iron ore and coal, lower demand in China, geopolitical uncertainties, Gas and oil producing countries, and low commodity prices.

However, the biggest culprit is overcapacity. A recent report by The Boston Consulting Group Inc. stated that “shipping capacity will outstrip demand by between 8.2% and 13.8% in 2020, compared with a 7% gap today.” Although global trade has slowed down, the shipping industry hasn’t. Shipping lines continue to invest in new capacity and larger vessels to drive costs down. This overproduction of capacity has created an influx in supply which has contributed to falling freight rates. BCG suggested that carriers will need to improve technology and service, cut costs, and streamline operations to stay competitive – but that the key for carriers is consolidation. This looks to be more of a long-term play as many experts agree that the industry outlook is poor for the near future.

Photo source: splash247.com

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Ashley Boroski Mendoza

Ashley has worked in the George W. Bush Presidential Administration in both the White House and DHS. She later worked as a policy advisor in the Senate and representing top retailers to the federal government at the premier retail trade association. Currently, she is the Head of Business Development at ShipLilly ensuring exceeded growth annually.