Container Carriers Wage Price War to Form Global Shipping Oligopoly

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This is what two unnamed container shipping executives, one from an Asian carrier, the other from a European carrier, told the Wall Street Journal about the containerized-freight fiasco on the China-Europe route:

“We are now shipping at an absolute loss. With the bunker-adjustment-factor surcharge at $300 for Asia-Europe, we are losing more than $50 per box.”

“Unless by a miracle demand grows, we are up for heavy losses in the next quarter and maybe the rest of 2015.”

The rate for shipping a container on that route, after plunging for months, is now below even the cost of fuel.

The China Containerized Freight Index (CCFI), which covers spot market rates and contractual rates from Chinese ports to major destinations around the world, dropped another 1.2% last week, to a multi-year low of 851.4. The China-Europe component dropped 2.5%. The CCFI is now 21% below where it was in February.

The Shanghai Containerized Freight Index (SCFI) paints an even drearier scenario. Unlike the CCFI, it is composed only of spot rates, not contractual rates, from Shanghai to the rest of the world. And this babe plunged 6.8% last week to 581.25, an all-time low, and down 47% from February.

The Shanghai-Rotterdam sub-index plunged 14.4% last week to an all-time low of $243 per twenty-foot equivalent unit (TEU), and don’t even cover the cost of fuel of about $300 per TEU. Hence the screaming by the shipping execs!

But not everyone is screaming.

“I can’t speak for other companies, but small and mid-size carriers controlling a 3% to 5% market share – with very few exceptions – have been unprofitable for the last seven years,” explained Nils Andersen, CEO of the Danish giant A.P. Møller-Mærsk, whose Maersk Line is the largest container carrier in the world.

“After such a long period of not being profitable, it defies logic to continue to invest in the business,” he told the Wall Street Journal, thus proffering his agenda: pushing all but the largest carriers out of the business to build a global shipping oligopoly, with him at the top.

“Some of those companies have not been able to identify an acceptable way to exit the business, so they continue to throw good money after bad money by investing in more vessels,” he said. “It’s highly unlikely that there will be an easy way to make a profit going forward for a small or midsize carrier.”

So they better get out now. That’s the message.

Maersk is deploying its big guns: lots of money and Ultra Large Container Vessels (ULCVs). It just ordered another 11 second-generation “Triple-E” vessels of 19,630 TEU capacity for $1.8 billion, with an option for six more, to be delivered between April 2017 and May 2018, for its Asia-Europe route, Drewry reported. Maersk now has a capacity of about 400,000 TEU on order, or 13% of its fleet. And it will order even more ships, as part of its $15-billion investment program, which central-bank easy-money policies have encouraged it to do.

With shipping rates at “historical lows,” according to Drewry, even a giant like Maersk would “feel the pinch”:

The comments from Andersen perhaps betray a company that knows it is in for a bumpy ride in the short-term at least. The removal of a few pesky competitors would certainly help to lift freight rates off the floor.

Maersk currently controls 15.3% of the global container capacity. The big three carriers together – Maersk, MSC, CMA CGM – control 38%, up from 26% in 2005. Including Hapag-Lloyd and Evergreen, the top five control 48%, up from 37% in 2005. These share gains at the top are “seemingly unstoppable” in a race to add capacity.

So when Andersen exhorted midsized carriers with a share of 3% to 5% to exit the business, he covered just about all carriers other than the top three. If he gets his wish, it will be one heck of a global oligopoly.

The top three, particularly Maersk, are relentlessly adding capacity, and thus global overcapacity, hoping that they’ll have the resources to survive the price war, that easy-money policies that have made all this possible will continue, and that smaller players won’t survive – particularly in an environment of sluggish demand.

But maybe Andersen miscalculated?

Turns out, medium carriers are “displaying their survival instincts” by ordering their own ULCVs, Drewry explained. It’s “a defensive move to fight off attack,” but “it guarantees years of overcapacity that will depress freight rates and profitability for all. No wonder Maersk is annoyed.”

Overcapacity and “sluggish westbound volumes have brought about the worst spot-market rate collapse that this trade has experienced,” Drewry found in a separate report, as shipping volumes in the first quarter had fallen 1% year over year.

With demand expected to grow only marginally, and with these new giant ships adding to overcapacity, things will get tough over the next five years, Andersen said. But being the largest carrier in the world, Maersk could afford the price war to achieve his lofty goal of a global shipping oligopoly. “I don’t think it will backfire,” he said, perhaps not totally certain about the outcome, in light of the rate fiasco and glut in ships that he himself, drunk with cheap money, has helped create.

Other gluts have developed, and this one, only a miracle could stop, but miracles have become rare. Read… Biggest Glut in Recorded Crude-Oil History Taking Shape

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  16 comments for “Container Carriers Wage Price War to Form Global Shipping Oligopoly

  1. Jun 17, 2015 at 9:29 am

    Just wait until China enters its (real) recession and eastbound cargoes vanish, too. What will these shippers do?

    The giant ships will languish in port, waiting for sufficient cargoes to cover fuel, maintenance and crew costs. Maersk operates about 15.3% of container capacity: 15.3% of nothing is nothing. At some point the operators will scrap new ships.

    Broke customers/shrinking demand isn’t just limited to the fuel marketplace …

  2. Vespa P200E
    Jun 17, 2015 at 9:30 am

    SHAGhai containers just got shanghaied.

  3. NotSoSure
    Jun 17, 2015 at 11:18 am

    I am pretty sure the stock market will be going up another 10% today. It’s funny to see the Western commentators complaining how the Chinese stock market has gone up while the economy has slowed down. I mean just look at Uncle Sam. Financial engineering, the Fed, etc are pretty much the mechanism behind the market rising and yet very few people are complaining.

    The grass is always greener on OUR side.

    • Sabbie
      Jun 17, 2015 at 11:22 am

      Pretty wild article in the WSJ today. The grass is brown on both sides to be sure, but in China it’s just wow. http://www.wsj.com/articles/chinese-firms-put-cash-to-work-in-stocks-1434463023

      • NotSoSure
        Jun 17, 2015 at 3:34 pm

        Nothing new. The Japanese did it too during the “baburu” (bubble) years. Zaitech and speculation were pretty much how a lot of companies made their money. Of course we all know how it ended, …….

  4. fledermaus
    Jun 17, 2015 at 12:45 pm

    Thus the capitalist revolution begins to eat its children.

  5. Tom
    Jun 17, 2015 at 2:22 pm

    This is what happens when you let a few inbred oligarchs run the world economy — they can’t work out consequences more than one or two ripples. In this case: move all manufacturing jobs to China = no spending money in the rest of the world. There, wasn’t that easy to figure out?

    • AC
      Jun 17, 2015 at 3:02 pm

      And it isn’t like they haven’t been constantly warned of the inevitiable, obvious, consequences – for decades.

  6. Dead at 18, Buried at 65.
    Jun 17, 2015 at 2:54 pm

    It could be that Maersk is using a strategy to oversee any potential loss to its corporate financial value, through any future capital restrictions or government bail-ins, by moving its vast liquid capital assets, in transferring them into hard capital items. A a new ULCV ship could be sold anywhere in the world, and Maersk could be thinking that they could sell any excess (if necessary), to their competition for any new currency/currencies which are floated into the market.

    Maersk could also be pre-empting a time where any newly introduced currency or “money” could cause a severe revaluation of the stock market, bonds and any liquid assets the company has. Therefore, Maersk is simply repositioning itself for a stronger financial credit assessment in the future.

    The rest: The media presentation it is making is just a corporate play or distraction from its real agenda.

  7. Michael Gorback
    Jun 17, 2015 at 3:29 pm

    IIRC, German banks have a lot of exposure to these companies through ship purchase loans. Some of them divested in 2014 at 90%, others held on, and some of the latter have been downgraded due to their continued exposure.

    Greek debt + bad shipping loans = trouble.

  8. Roddy6667
    Jun 17, 2015 at 9:10 pm

    The Containerized Freight Index is collapsing because so many players have rushed into the shipping business, not because the freight itself has dropped off that much. Most of this article is a wrong conclusion being drawn from statistics.

    • nycjeff
      Jun 18, 2015 at 9:31 am

      When I read the article, I only find one reference to volumes trailing off, ~1%, with most of the article focused on overcapacity. What are the incorrect conclusions?

  9. MC
    Jun 18, 2015 at 10:43 am

    I seem to recall Mainland Chinese shipping groups (the mid-size carriers Andersen speaks about) have embarked in a pretty aggressive expansion program which is backed by Beijing both to increase market share and as a make-work project for local shipyards, which have a lot of excess capacity and cannot fire workers and shut down facilities.
    If these groups are fully backed by the Merchantilist Central Planners (meaning easy loans, fuel subsidies etc), it will be pretty hard to drive them out of business or even bully them into compliance.

    These Mainland Chinese carriers seem to regularly operate at a loss and their executives and creditors don’t give a damn about it. All their care for is increased market share, hinting at the fact Beijing’s blessings go deeper than a handshake.

    In a way we are seeing a repetition of the shipping wars which characterized Meiji-Era Japan. During modernization, trade to and from Japan was pretty much monopolized by two foreign firms, one British and the other American, which had a formed a cartel of the kind Maersk is aiming at right now.
    The Japanese reply was very disorganized at first: YKK, the State-owned shipping company, spent a fortune to purchase up to date steamers from Britain and Germany but was run in comically inept fashion.
    However, in the shadows, a young and cocky ex-samurai named Yataro Iwasaki was building himself a fame for never turning a job down and always getting it done. His shipping concern was known for taking those jobs nobody else wanted and growing fat on them. The name of the company was Mitsubishi.
    When YKK flat out refused to bring Japanese troops to Taiwan for a punitive expedition against Paiwan natives, Iwasaki stepped up to the game. His ships carried the Mikado’s army to and from Taiwan on a tight schedule and on budget.
    Meiji government officials took notice that, maybe, Iwasaki was the man they had been looking for all along. They also took notice of what an embarrassment YKK had become. When, less than a year after Mitsubishi ships had returned from Taiwan carrying the Mikado’s victorious troops, YKK was again in need of a cash infusion to stay afloat, the Mikado’s ministers turned the other way. They also tipped Iwasaki he could have as many modern European-built YKK steamers as he wanted at rock bottom prices.
    Using these ships and his business acumen, not to mention the Mikado’s blessing, Iwasaki not only broke the British-American cartel’s power over Japanese trade, but drove the two companies out of business in a matter of years and became one of the dominant powers in the highly lucrative China trade.

    Cartels are good for business short-term, but they never last: a young and hungry competitor will always show up, perhaps backed by an aggressive government of merchantilist leanings.
    maersk should take notice, less a Chinese Iwasaki appears out of nowhere…

  10. Julian the Apostate
    Jun 18, 2015 at 6:34 pm

    Fledermaus, please don’t label this a ‘capitalist revolution’ since there is nothing capitalist about it. It is a fascist resurgence – government telling business how to run its business at the point of a gun, and the big corporations bribing the government to point it’s guns at their competition. That will boomerang on them at some point.

    • Dead at 18, Buried at 65.
      Jun 20, 2015 at 2:11 pm

      Here! Here! Julian.

      “… there is nothing capitalist about it. It is a fascist resurgence – (of) government telling business how to run its business at the point of a gun, and the big corporations bribing the government to point it’s guns at their competition.” -Julian the Apostate

      In fact, your words are so apt, I will canonise them and use them again and again when ever I need them – as quoting you of course!

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