Along with the companies that won them, getting bigger are the hulking container ships that transport sneakers, bananas and barbie dolls around the world.
One year after excess capacity caused the sector’s worst-ever crisis — the bankruptcy of South Korea’s Hanjin Shipping Co., the survivors now enjoy big economies of scale and increased demand and a massive consolidation is underway in the $500 billion global industry.
It would pay more than $6 billion for rival Orient Overseas International Ltd., owner of the world’s biggest vessel — a carrier longer than the Empire State building, Asia’s largest container line, China’s Cosco Shipping Holdings Co., last month said. Denmark’s A.P. Moller-Maersk A/S boasts its own fleet of mega ships, including one that can carry about 180 million iPads and is in the process of buying a German competitor.
Much more pricing power over manufacturers and retailers like Wal-Mart Stores Inc. and Target Corp is wielded by these super-sized shipping companies. According to data provider Alphaliner, about 60 percent of the global market is controlled by the five biggest container lines. About 22 percent higher than it was a year earlier is an index tracking cargo rates on major routes from Asia and this indicates that shipping rates are climbing.
“Container shipping is now a game only for big boys with deep pockets,” said Corrine Png, chief executive officer at Crucial Perspective, a Singapore-based transportation research firm. The rising market concentration will “give the liners greater pricing and bargaining power,” she predicts.
In much the same way that the bankruptcy of Lehman Brothers roiled the financial sector during the 2008 crisis, Hanjin’s collapse, in August last year, also upended the industry. as supply outstripped demand in the industry, weakening pricing power and profits for carriers, Hanjin, one of the world’s largest shipping firms at the time, faced a cash crunch. And after a South Korean court declared it bankrupt in February, it is now in the process of being liquidated.
“Since the demise of Hanjin Shipping, flight to quality has become more noticeable in the container shipping business,” said Um Kyung-a, an analyst at Shinyoung Securities Co. in Seoul. “That’s why the market is becoming more and more dominated by top players with big ships and those that don’t have could become more and more obsolete.”
Key to the turnaround is the growing use of mammoth ships. Um said that to benefit from higher rates, more cargo on a single journey is able to be moved and deploy fewer vessels is possible by companies who own them.
While the number is expected to double in two years, there are now about 58 of these huge carriers worldwide that can transport more than 18,000 containers, by her estimates. The biggest firms will add about half the new vessels.
As new entrants expand and as older vessels still remain, the excess supply that derailed growth last year hasn’t completely disappeared. According to Crucial Perspective, this year there is expected to be a growth of 3,4 percent in capacity in the container shipping industry and next year that is expected to be 3.6 percent.
(Adapted from Bloomberg)