On March 16 2017, Hyundai Merchant Marine (HMM) inked a three-year strategic cooperation agreement with Maersk and MSC’s 2M alliance. Under that agreement, HMM increased its Basic Slot Allocation (BSA), primarily on the US West Coast services and gained some financial stability due to alliance-related volumes. As all good things go, this one has an expiration date in early 2020. The question on many industry minds is the post-2020 future of this agreement and the viability of HMM as a business. You could imagine HMM’s board channelling The Clash and humming: “Darlings, you got to let us know, should we stay or should we go?”
What will Maersk and MSC decide is a question of timing and trade developments currently unsettling traditional trade alliances, partnerships and trade flows.
From the outside, 2M appears to have the upper hand in the negotiations. This is due to the high percentage of volumes that HMM agreed to move under the BSA. As part of the restructuring agreement, HMM committed to acquire substantial new capacity in addition to their existing fleet. That capacity is going to be tied in ultra large vessels, which fit some, but not all, rotations and port calls. HMM’s network design was under tremendous pressure before the wheels came off Hanjin Shipping and effective utilisation of a much bigger fleet of ULCVs will test its skills. Depending on the details of the BSA, lowered slot costs could improve HMM’s margin as long as 2M+H produces sufficient volumes to fill up the holds. Alternatively, lower costs would have to be passed on to the partners. Keep in mind that practically all new tonnage will be coming online near the end of the current agreement, so HMM will be hoping for a multi-year extension, thus giving even more negotiating power to Maersk and MSC.
Alternative to staying cosied up to 2M would be to negotiate joining up with other alliances or go alone. Considering the makeup of Ocean Alliance and THE Alliance, it is hard to see significant value of HMM to those groupings. The strength of HMM would be on the Asia-US West Coast tradelane. However, the trade volumes on this tradelane will be under tremendous pressure due to the ongoing tit-for-tat trade war between China and US, as well as the reopening of the US-South Korea FTA. If the number of Chinese and South Korean containers drops as a result, it could be safely assumed that the Ocean Alliance would pass on negotiations with HMM to keep the diminishing volumes of Chinese containers on their own ships. Japanese exports to the US are also coming under pressure, which means that THE Alliance might not be able to send the overflow cargo the way of HMM and their new ships.
The option of HMM going alone looks the least appetising. That particular model has been tested by PIL, albeit with much smaller ships in its fleet and without grand expectations to significantly grow its market share. PIL accepted a niche position of being big enough to serve its current customers, but not big enough to count in global trade reach of its competitors. HMM, with its order for massive ships and an organisational structure geared to alliance business, would not be as nimble and agile as PIL, which makes the option of going alone risky and highly unlikely.
That brings us back to the 2M option and the ‘should we stay, or should we go’. In 2020, HMM will have a different argument representing a slightly different fleet with a slightly different cost base, so it needs to be clear in its discussions with 2M as to ‘exactly whom we’re supposed to be’ inside 2M+H from 2020 and what services will work with them the best. Without clear objectives from HMM and an unclear position from 2M, customers of HMM might feel like putting their eggs into multiple baskets, not exactly what any party in the 2M+H would wish for.