Endgames in liner shipping

Whitepaper

What are the consequential next steps for carriers?

Container shipping is in an era of low rates and low operating margins. Despite a recent period of consolidation and a recent recovery of rates, the outlook for the industry remains ambiguous. In fact, no problems have been solved yet in regards to the supply and demand imbalance or the inefficient industry dynamics. A large consolidation wave in the industry has helped limit overcapacity in the short term. However, the current conditions – where demand growth exceeds supply growth – will disappear once carriers have integrated their acquired capacity and operationalised their alliances during 2017. Demand growth remains under pressure from an unpredictable economic and political environment. Supply growth remains a challenge as overcapacity problems have been pushed forward. Little capacity has been removed after it has been redistributed between the new alliances, and only a fraction of the planned deliveries have been postponed. While current short-term optimism among carriers prevails, attitudes from independent analysts indicate a return of previous industry problems.

Are you appropriately positioned for the future?

Are you appropriately positioned for the future?

Until the shipping industry changes its approach towards the fundamentals, carriers will be unable to obtain a sustainable return on capital. Carriers are currently too dependent on high freight rates to be profitable, and they therefore need to reposition themselves in four key areas to obtain a sustainable return:

A. Supply consolidation

B. Process streamlining and efficiency

C. Commercial optimisation

D. Customer experience

FIGURE 1: Industry profitability, freight rates and industry consolidation

“Mega-ships and strategic alliances reduce supply chain efficiency and rivalry on important parameters of competition, including capacity, sailing frequency, transit times, ports of call and associated service quality”.

— Global Shippers Forum, 2016

FIGURE 2: Four key focus areas for carriers

Global or regional scale is required to stay competitive

Global or regional scale is required to stay competitive

Recent developments in supply and demand indicate balanced conditions in the short term. However, short-term optimism should be reconsidered as inefficient industry fundamentals remain unchanged: demand growth rates are projected to recover, but not enough to offset the supply growth, and the industry will likely return to imbalance already in 2017. In order to address the upcoming imbalance and to stay competitive in the long run, carriers need to opt for global or regional scale. Improved industry dynamics stemming from alliance operations and M&A consolidation have resulted in both increased idle capacity and capacity discipline. The primary driver of capacity discipline has been alliance operations, i.e. a coordinated use of capacity (full M&A effects will only be realised when companies become fully integrated). The discipline will likely continue during 2017 through more consolidation and redeliveries of idle capacity to non-operating owners. However, a high degree of idle capacity will to some extent limit further price increases.

Despite an expected recovery in demand growth in developing economies, industry consensus finds it unlikely that historical levels of trade growth will return. Instead, the industry will likely face a moderate imbalance in the next 2-3 years for two reasons: a low-demand growth environment and a continued high growth in supply. Recently voiced demand projections may turn out to be overly positive due to recent developments in trade barriers, increased protectionism and tightened global financial conditions. The new US administration adds further uncertainty. We will likely see trade barriers and protectionism materialise into continued re-shoring of manufacturing processes to developed countries, which will negatively affect trade growth of finished goods. Capacity will continue to grow at a faster pace than the demand during 2017 and 2018 for two reasons. First, excess capacity has not been removed, but merely redistributed between the new alliances. Second, few mega vessels have been postponed and new capacity will continue to be delivered to a congested market with a high idle capacity.

Curious to know more?

Take a closer look at the endgames in liner shipping and the steps carriers need to take in our white paper, or reach out to Nikolaj, Jesper or Jesper.

Nikolaj Bisgaard Lisberg nikolaj.bisgaard.lisberg@qvartz.com +45 29 69 69 85

Jesper Adeltoft jesper.adeltoft@qvartz.com +45 29 69 69 36

Jesper Kjerside jesper.kjerside@qvartz.com
+45 26 71 35 75