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TRANSPORTCEO - 17/01/2018
Container market still competitive.
With nearly 400 different vessel operators plying their trade worldwide there is plenty of competition and potential for more M&A activity.
The collapse of freight rates during the second half of last year, far out of line with the underlying supply and demand fundamentals, suggests that carriers have not yet rid themselves of certain self-sabotaging traits and that talk of a new golden age for carriers was perhaps exaggerated.
However, despite the recent developments, in the latest Container Forecaster report Drewry retains it view that the carriers are heading towards a brighter future, while also acknowledging there are several temporary factors that have created a bump in the road to recovery.
One area that might have been expected to have provided a more immediate benefit was the significant consolidation occurring in the market. The fact that M&A hasn’t so far materially changed anything is not that surprising on reflection. The latest consolidation wave has barely become operational, with most transactions either just concluded or still pending. Moreover, even after all of the latest deals are finalised, they alone do not have sufficient weight to move the industry all the way to being a non-collusive oligopoly, which we previously outlined as being necessary to herald a new era of ‘liner paradise.’
If anything, we perhaps overlooked the risk that the merger activity would make some predators more aggressive with their pricing, to minimise customer attrition.
Following completion of the outstanding deals that will see OOCL become part of Cosco, and the three big Japanese carriers merge their container operations to form the Ocean Network Express (ONE), the leading seven carrier groups (i.e. inclusive of all subsidiaries) will control approximately 90% of the active containership fleet as it stood on 1 October (see Figure 1).
Notes: Based on nominal capacity as of Oct-17, with carrier groups treating subsidiaries as part of the parent (i.e. APL included within CMA CGM) and pending M&A as complete (i.e. OOCL within Cosco and creation of Japanese ONE); No accounting for slot charter agreements; ?The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration, calculated by squaring the market share (in this case the effective headhaul capacity as a proxy) of each company competing in a market, and then summing the resulting numbers, ranging from close to zero to 10,000 (indicative of a monopoly). ?The higher the number the lower the competition, or more concentrated a market is considered to be.?Key: <1,500 = competitive marketplace 1,500-2,500 = moderately concentrated marketplace >2,500 = highly concentrated marketplace?.
Yet, even with such a large swathe of the fleet in the hands of very few lines the industry remains highly competitive by standard measures. Using the Herfindahl-Hirschman Index (HHI) method (see footnotes in figures 2 and 3 for details) the industry resides in the “competitive marketplace” zone if you count all operators either as single entities or group them within parent companies (see Figure 2).
The HHI readings in Figure 2 should be treated with some caution as we we’re unable to assign some ships to operators, meaning that roughly 1.8% of the fleet was not included in the exercise. Nonetheless, we believe the inclusion of the missing data would not drastically alter the findings.
Based on the known ship data series, remarkably there were 379 different vessel operators, all bar 31 of which garnered less than 0.1% market share. With so many operators on the water there is clearly a lot of potential for more M&A, but in reality the majors are unlikely to be interested in the small fry. More likely, the leading carriers will look to lines in the next tier down that have a little more substance.
To try to give a glimpse of the future, we ran two scenarios in which the top 7 carriers control 100% of capacity, again based on the October 2017 fleet. In the first case we evenly distributed the capacity from outside the top 7 among the leading carriers, and in the second case we assigned it all to the current market leader Maersk Line. Interestingly, in both cases the level of market concentration does not surpass the 2,500 threshold that would signify a highly concentrated environment. The inference being that to reach that status there will need to be further M&A within the top 7 carriers.
Notes: Based on effective capacity as of Oct-17, treating subsidiaries as part of the parent i.e. APL is included within CMA CGM; No accounting for slot charter agreements; ?Pre-M&A data is before sales of Hamburg-Sud to Maersk, OOCL to Cosco and the creation of ONE from three Japensese carriers K Line, MOL and NYK; Post-M&A considers all mentioned transactions as complete.?The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration, calculated by squaring the market share (in this case the effective headhaul capacity as a proxy) of each company competing in a market, and then summing the resulting numbers, ranging from close to zero to 10,000 (indicative of a monopoly). ?The higher the number the lower the competition, or more concentrated a market is considered to be.?Key: <1,500 = competitive marketplace 1,500-2,500 = moderately concentrated marketplace >2,500 = highly concentrated marketplace.
While the overall picture appears to indicate that shippers have nothing to fear from consolidation, the competition levels do differ markedly at the trade route level. The Container Forecaster keeps on top of the shifting market concentration levels for key East-West and North-South trades by applying effective capacity (i.e nominal capacity after adjustments for slow steaming, out of scope cargoes, deadweight restrictions and other factors) to the Herfindahl-Hirschman Index (see Figure 3).
The results of the analysis revealed that even after the latest M&A has concluded, the industry remains ‘competitive’ or ‘moderately concentrated’ in most of the routes covered, even if all bar one (the unchanged southbound Asia-West Africa trade) did move further up the HHI scale.
Two of the trades covered (northbound Europe-East Coast South America and westbound Europe-South Asia) do now fit the ‘highly concentrated’ description, but being relatively close to a HHI reading of 2,500, they are at the lower end of the definition (10,000 being a monopoly).
Three trades (the two Asia-Europe headhaul routes and the southbound Asia-East Coast South America trade) moved from ‘competitive’ to ‘moderately concentrated’, where they will likely stay without further consolidation.
The Transpacific, Transatlantic and Asia to Middle East and South Asia headhaul trades are all still ‘competitive’ on the HHI scale. The addition of SM Line to Asia-East Coast North America will see the corresponding HHI number come down next year.
The industry is heading towards a scenario whereby a small handful of dominant carriers dictate matters, but there is still healthy competition in most trades for now. Shippers will need to stay watchful for deals that impact their main routes.
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