Today’s edition of the Financial Times reports that two of Germany’s largest ocean container shipping companies, Hapag-Lloyd and Hamburg Sud, are engaged in talks over a possible merger of the two lines.  Both companies issued statements indicating: “if, and under what conditions, a merger of both companies would be of interest.”  FT notes that if this merger comes to pass, it would represent the world’s fourth largest container shipping line with a capacity of more than one million TEU’s, a combined fleet of 250 vessels and over €11 billion in revenues. The deal, if consummated, would represent a stronger challenge to industry dominants Maersk Line and Mediterranean Shipping Company.  FT further notes that the last time consolidation occurred in the ocean container transport  sector was six years ago.

Supply Chain Matters has been continually reinforcing our belief that the ocean container industry is currently anchored in way too much capacity and arrogance toward shipper needs. Current business and rate setting decisions are geared more toward justifying a level of profitability in spite of customer needs for reliable and cost efficient rates.   As more and more overseas shippers elect modes for surface transportation, ocean container lines respond by slowing down steaming times to lower fuel consumption costs while imposing multiple interim container shipping rate increases, all with a global economic environment of declining shipping volumes.

There is also another linking part of this ongoing problem for the global ocean container industry. Business news channel CNBC featured a recent New York Times story, that certain German banks have a problem of titanic proportions.  According to Moody’s Investors Services, 10 of Germany’s largest banks hold an estimated $128 billion in outstanding credit and other risks related to the global shipping industry. That amounts to double the debt held from countries such as Greece, Ireland, Portugal, Spain and Italy.  It turns out that financing ship purchases is a popular German tax shelter and thus these banks helped to fuel the glut in purchases of more and larger container ships.  We would add that these efforts also provided a boom for Germany’s shipbuilding industry. One German banking executive is quoted as indicating that grave mistakes were made in the years prior to 2009. Certain German banks are now making provisions for potential losses on industry loans.  Meanwhile, some estimates indicate that some 300 container ships continue to lie idle around the world while other lines can literally acquire an older excess vessel for the mere cost of its scrap metal. Great bargains abound for any existing shipping line or governmental agency in the market for a container ship.

The good news from this latest development is that finally, the ocean container industry may be moving towards efforts of consolidation which in our view, is good for shippers and the industry as a whole.  The status quo is obviously not sustainable and neither is targeting shippers to compensate for both container and banking industry missteps.

Bob Ferrari