The Wall Street Journal reports (Paid subscription required) that a new ocean container shipping alliance is being formed.
This alliance would include China’s Cosco Group, Hong Kong’s Orient Overseas Container Line (OOCL); Taipei based Evergreen Marine and France’s CMA CGM. This new grouping, to be termed the Ocean Alliance, will operate nearly 350 vessels across various global routes, and by CMA CGM estimates, could account for 26 percent market share in Asia-Europe routings.
The Ocean Alliance is being put forward to rival the market dominance of Maersk Line and Mediterranean Shipping Co., (MSC) which formed the 2M Alliance in 2014 that reportedly now controls roughly 34 percent of the Asia to Europe trade route. Maersk, MSC and CMA CGM had previously proposed the termed P3 Network which was eventually scuttled by Chinese regulators in 2014. CMA CGM and Cosco currently operate in the Ocean Three alliance the reportedly controls 22 percent of cargo moving on the Asia and Europe trade route.
This newly proposed alliance is also subject to regulatory approval from the European Union, China and the United States under the supposed guidelines that any alliance does not benefit from domination of an individual trade route.
In its report, the WSJ indicates that operators have already met in recent days with the U.S. Federal Maritime Commission (FMC) as well as the other regulators. However, a quote from the commissioner at the FMC indicates that existing alliances seen today will change significantly. That could well be an indication of continued industry turbulence and ongoing changes.
Now at this point, readers may well be confused by all of these alliance names and arrangements. That should not be a surprise since this is all about compensating for gross industry wide over-capacity in vessels and positioning for pricing control over major trade routes. The fact that maritime regulators would continue to agree to such alliances is yet another concern since shipper’s interests are not necessarily the prime motivation for such actions.
In February, the WSJ noted that that the industry, in-essence, had three options, either shrink, merge or continue to ride out one the worst downturns in decades. Some consultants recommend consolidation though a combination or merges and alliances, but the question comes down to overall timing.
According to Drewry Shipping Consultants, utilization of ships across the world’s busiest shipping routes fell to 87 percent in 2015, down from 93 percent in 2014. Rates charged on the Asia-Europe routes fell by 42 percent in 2015. In March, Drewry noted that an index of spot rates on 11 trade routes between Asia, Europe and the United States had fallen 62 percent. According to a Globe and Mail report published in early March, the oversupply of massive new container ships serving the China-Europe route had pushed smaller vessels to Atlantic Ocean routes, consequently depressing rates between North America and Europe.
Obviously, shippers who now rely primarily on spot rates are experiencing the benefits the current industry bloodbath, while those who opted for longer-term contracts more than likely question their decision. The ongoing dynamics for so long since industry changes are about to get even more messy.
This week, a posting on Supply Chain Brain poses a very timely question: Are Carriers Changing Their Minds on Megaships? That commentary reinforces what we at Supply Chain Matters have noted for months, namely that shipping lines chose to ignore the consequent implications of introducing far larger mega-ships.
Besides exacerbating a condition of overcapacity, the impacts on various global ports in terms of truck chassis scheduling, added crane and rail and truck throughput capacity, and impacts to existing trade union contracts were literally thrown over the wall for others to figure out. Industry supply chains felt the pain of the initial effects in the fall of 2015 with four months of disruption across U.S. West Coast ports.
The Supply Chain Brain posting cites a Drewry director as indicating at a recent industry conference that the estimated current excess capacity is near 2 million TEU’s (trailer equivalents units) and that an estimated 5 percent of ocean container vessels, nearly 1 million TEU’s sits idle generating zero revenues.
Any way you elect to look at it, the ocean container transportation segment has serious problems that by one means or another will have to find resolution. The open question remains, how-long will the process continue?
Shippers who are currently benefitting from the fallout of depressed rates, but paying the price in slower service and unreliable scheduling, should not be lulled into a perspective of sticking one’s head in the sand, and assuming such conditions will eventually work themselves out. When the dam eventually breaks, there is a lot of water that will flow out.
The time is long overdue for industry shippers, logistics providers, transportation brokers, shipbuilders and indeed global regulators to have their collective voices heard. The ongoing ocean container industry crisis needs solutions with both customer and global supply chain interests in mind. This litany of alliance formation prolongs the solving of an obvious and inescapable problem.
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