Date: 05.05.2020

Coronavirus accelerates rise of the super-carrier

Despite sharp drops in cargo volumes and fuel prices, freight rates have remained stable as the container shipping lines demonstrated their ability to control the market and there is no sign that they intend to let go.

Reduced demand has so far not translated into lower prices for customers of container shipping services, since the system of alliances and consortia in container shipping can control prices to a certain degree.

The first two decades of the millennium has transformed container shipping and the shipping lines.

The first decade was characterised by consistent volume growth, while the second was dominated by inter-carrier pricing wars as the carriers attempted to maintain the high-growth regime from the prior decade.

Will the 3rd decade see the emergence of a small number of dominant shipping lines, controlling the market, minimising choice and driving up rates.

The Coronavirus crisis has created the environment for a third fundamental shift in global container shipping, which follows the commoditisation of container freight and price-wars that have dominated the last 20 years.

Prior to the consolidations, carriers were niche carriers, by geography or vertical. That all changed as the larger consolidated carriers needed to embrace the needs of a diversified customer base, accelerating commoditisation.

The second change followed the 2009 financial crisis.

Container shipping enjoyed high growth rates for decades, driven by the boom in off-shoring and outsourcing of production, to China especially.

But this boom in outsourcing reached a premature endpoint after the 2009 financial crisis, leaving container lines with growth “only” driven by the underlying economic growth.

This was a fundamental shock to an industry where the most important strategic objective for decades had been to grow rapidly.

The change to focus on yield management and unit profitability has driven continued consolidation as the route of least resistance to continued growth and as cost reduction through scale.

The type of highly fragmented competitor landscape we see in freight forwarding reflects the myriad of forwarders serving distinct niches that challenge the biggest 3PL’s.

But in the commoditised world of global container shipping, its high fixed costs is not a sustainable business landscape, as it leaves pricing power with the buyer and drives down margins.

Despite these unfavourable head-winds, the only significant liner casualty was Hanjin Shipping five years ago.

The steep decline in volumes will wreak havoc on carriers’ balance sheets, leaving many to seek state subsidies. A move that would have been decried in the past, but which may not be needed to maintain any semblance of market competition.

The last three months shows the carriers flexing their newfound strength, to protect revenues, despite sharp drops in cargo volumes and fuel prices.

This is not a development we have seen before and is sign of the change in pricing power in the millennium’s third decade.

Upscaling to ever-larger vessel sizes and consolidation into ever-larger carriers has created a landscape where the barriers of entry are now so high that it is next to impossible for new entrants, of any material size.

The emerging oligopoly reduces competition and minimises the environment for price wars, because the lack of choice puts the lines in control.