On an even keel ? Consequences of consolidation in the container liner sector Part 1

11 May 2017

 The last two years have seen a wave of consolidation within the container liner industry: CMA-CGM’s acquisition of NOL, Hapag-Lloyd’s acquisition of CSAV, and the merger between COSCO and CSCL drove a notable increase in industry concentration in 2016. The bankruptcy of Hanjin, the merger of Hapag-Lloyd and UASC, the J-lines merger, and Maersk’s acquisition of Hamburg Sud will see concentration increase significantly further in 2017.

Prior to this, while container shipping saw significant corporate activity, both in the form of shifting alliances and major investment in capacity as competitors jockeyed for leadership, the degree of concentration (as measured by the Hefindahl-Hirschman index, a standard measure of industry concentration) remained relatively flat.

The key question facing the liner industry is whether this more concentrated competitive environment will herald a new period of improved profitability for the sector after years of poor performance?

 

Container liner market 1

 

Cost reduction is often given as a key reason driving M&A in container shipping. At an individual company level the current wave of M&A will certainly present significant opportunity, with line rationalisation, back office savings, and procurement improvements all offering large potential for cost savings. However, from the perspective of the industry as a whole, these savings are unlikely to have a significant impact on profitability.

As can be seen from the graph below, container liners have been highly successful at reducing the average cost per TEU* since the beginning of the industry downturn in 2008. A combination of increasing vessel size across most trades, combined with cost reduction programmes at the liners has reduced the average cost per TEU by almost 40% since 2008. Despite this, sustained profitability has remained elusive, as the competitive structure of the industry has ensured that the benefits of reduced costs have been competed away by lower rates.

 

Container liner market 2

 

Similar issues face many of the other arguments in favour of M&A within the industry. An improved customer offer through wider and more frequent services for example, may help to improve yield at an individual player. However, this is largely a zero sum game for the industry as a whole, particularly if most other competitors are also engaged in consolidation. 

This is not to suggest that liner companies should not be taking part in consolidation. Those that do not risk being at a cost and service disadvantage. But if container shipping profitability is to improve, consolidation will need to increase pricing power in order to prevent the next round of cost savings being competed away.

The prospects for improved pricing power will be discussed in the second part of this blog.

 

*TEU or Twenty Foot Equivalent Unit is a standard measure commonly used to describe the capacity of container ships.

 

David Smith |  Director, Strategy
Profile | Email +44 (0)20 7212 4148

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