Drewry: Orphaned Carriers Will Have to Find New Partners

The formation of the Ocean Alliance by CMA CGM, COSCO Container Lines, Evergreen Line and OOCL means that carriers who have been left out of the major alliances will have to act quickly to remain competitive on the market either through mergers or finding new partners.

Shipping consultancy Drewry expects that by mid-2017, there will be only three main global alliances comprising at the most 13 carriers (following one or more mergers, one or more takeovers and a possible carrier failure) and replacing the current four alliances- CKYHE Alliance, Ocean Three, G6 and 2M.

“In other words, the structural industry change is about fewer, larger alliances comprising fewer, generally larger carriers than ever before,” Drewry says.

Based on the current capacity shares the OCEAN Alliance, scheduled to start next year, will take over as the largest carrier Vessel Sharing Agreement (VSA) on the Transpacific with a share of just under 36%, while in Asia-North Europe it will be within five percentage points from 2M with a nominal capacity share of 31%.

According to Drewry, the next big question is – what will happen to the orphans? Will they club together to take on 2M and OCEAN, or will they form other (smaller) cliques to maintain the four-alliance structure?

It appears that clues on potential developments are emerging very quickly, as the day after the OCEAN announcement Hapag-Lloyd (G6) confirmed that it was in talks with UASC (Ocean Three for now) about a potential merger of container businesses.

A combined Hapag-Lloyd/UASC would give it a 7.6% share of the Asia-North Europe market and 6.5% of the Transpacific, based on current nominal capacity. To compete with 2M and OCEAN in those routes they would need to bring in other carriers. Outside of those trades UASC will be very keen to find a replacement partner to CMA CGM to help it fill its 13,000 teu units in the Asia-Middle East route.

Maersk and MSC are expected to maintain their status quo, primarily because they are already close the maximum capacity thresholds set by European regulators.

“However, we have heard rumours they are considering a takeover of a major European carrier, while they might be amenable to one smaller partner joining if there are obvious synergies. Japanese carrier MOL, for example, has recently partnered with Maersk and MSC in the Asia-East Coast South America trade and already works with the Danish giant on the Europe-South Africa SAECS service. This would be more relevant if the alliance wanted to extend its geographical scope,” Drewry added.

Were all eight of the orphan lines to join together into a third alliance they would be a match for 2M and OCEAN in both Asia-North Europe and Transpacific.

However, Drewry believes it unlikely that all eight will agree to a new integrated alliance, because they have very varied interests and HMM in particular has serious financial problems. There has always been reluctance for all three Japanese lines to work together and if they do somehow find themselves in the same club it would add further pressure on them to merge their respective liner divisions (but not their bulk businesses).

As a result, a more likely scenario could see formation of a looser, smaller alliance while others will switch to service-by-service VSAs with the two main alliances.

Ultimately, carriers’ end game behind opting to form alliances will be to optimise their fleets and minimise costs. But, they have thus far  failed to solve the most elusive conundrum of stabilising freight rates, and Drewry does not expect this to change.