Container cannibalisation or consolidation?

Michael Bentley, a partner at Revenue Analytics, argues that in the wake of the Cosco/OOCL deal the race to the bottom on pricing among liners is coming to an end.

The ocean freight industry is navigating uncertain waters as major changes in technology and a fiercely competitive environment continue to disrupt traditional business practices. Most recently, Cosco Shipping has offered to buy Orient Overseas International Ltd (OOIL) for $6.3bn – a deal that will result in the mainland China group becoming the world’s third largest container liner behind Denmark’s Maersk and Switzerland’s Mediterranean Shipping Company.

This deal is the fourth big merger announced in the past year. In less than 12 months, buyouts, mergers and failures have continued to reduce the number of major carriers. Last year, we witnessed the downfall of Hanjin Shipping, the largest container shipping bankruptcy in history. Earlier this year, Maersk Line, the world’s largest carrier in container shipping, further cemented its leading position in the market by acquiring smaller rival Hamburg Süd.

While this consolidation is to be expected in a maturing industry, some experts consider what’s happening in the ocean freight industry to be cannibalisation rather than consolidation. As a result, the biggest companies continue to grow by merging with smaller competitors, leaving a few major players to control a disproportionate share of the market.

But what’s the motivation behind all of this consolidation? These mergers and acquisitions are a means of survival amid low rates and global oversupply. It’s no secret that the ocean freight industry has been hemorrhaging money. In the third quarter of 2016 alone, losses reached $1bn. This resulted in increased pressure on freight rates, leaving many companies in a race to the bottom on pricing. By merging, shipping companies can increase economies of scale and grow networks without increasing the overall capacity with new ships.

Furthermore, these mergers, including the Cosco/OOCL deal, will likely continue to boost ocean freight rates. This latest deal in a wave of consolidation will leave the top seven ocean carriers with control of more than 75% of the market by 2021. This reduction in the number of competitors in the market could lead to more rational behavior and, at the end of the day, could create more stability in the market from a pricing standpoint. Many experts also expect the Cosco/OOCL merger to be the last major merger we see for a while, as OOCL is considered the last feasible takeover candidate. The industry will likely experience greater stability in the coming months as this marathon of mergers and acquisitions comes to an end.

We’re already seeing some of these positive changes as the industry appears to be on the road to recovery. Last month, prices for shipping containers rose to their highest since October 2015. The Harpex Shipping Index climbed 40 points this year and Maersk beat first-quarter net profit forecasts in May.

Fortunately, this new focus on driving profitable growth is occurring at a time when there is more data available than ever. The industry has begun to embrace technological advances and enter the world of e-commerce. The digital revolution of shipping is producing more new data that can be leveraged to help ocean freight companies better understand their customers and help eliminate some of the unknowns that make this such a challenging industry. From tracking containers to monitoring competitive pricing and market share, an enormous amount of information is available at the click of a mouse. For an industry that hasn’t always been data-rich, this is a big deal.

Yet none of that will matter if the industry doesn’t move away from old ways of thinking and start running shipping like a business. That means continuing to ensure operational efficiency, but with an increased focus on making commercial decisions as well as making operational ones.

And it means an end to the race to the bottom on pricing – a race in which there are no real winners.

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