Hapag-Lloyd and Hamburg Süd have called off merger talks after three months of negotiations. Hapag-Lloyd’s majority owners - the Albert Ballin consortium, led by Kuehne + Nagel chairman Klaus-Michael Kuehne – released a statement to say that the two companies had not been able to reach agreement on the transaction and that Hamburg Süd’s owner, the Oetker family, had asked for negotiations to be stopped.
The negotiations followed months of rumours about a possible merger that, on the face of it, made sense. “If it went ahead, it would make a lot of sense,” SeaIntel Maritime Analysis chief executive Lars Jensen comments. “If you look at the vessel portfolio and, more importantly, the market portfolio and the trades the carriers are exposed to it would make for a very interesting combination. You would have a carrier that is very large but not excessively exposed to the main east-west trades. This would be a carrier that would be very strong in Latin America and transatlantic trades that are less prone to the wide fluctuations seen in Asia- Europe and to some degree in the transpacific. From that perspective it would be a very strong carrier.”
He adds that the two German carriers’ combined size would mean that they would be a considerable force to deal with. It would probably allow them to rationalise some of their services and upgrade some of the sizes of their ships in the smaller, emerging markets. This would therefore lower costs.
Hapag-Lloyd and Hamburg Süd were the most obvious contenders for a merger among European carriers. Mr Jensen comments: “I do not see a merger between the largest European carriers (Maersk Line, CMA CGM and MSC). A main reason for this is that it would be difficult to achieve with the European competition authorities.”
Ocean Shipping Consultants senior consultant Dean Davison comments: “The likelihood of some smaller operators being consolidated is reasonable, though has that not always been the case? Good operators will always be appealing to prospective buyers.”
Industry insiders seem to agree that much more likely than mergers is the growing use of carrier alliances to cope with the difficult economic climate. “An alliance operation can be a shorter-term, less costly option over an acquisition and one that would enable future flexibility,” says Mr Davison. “A consolidation is such a big investment in terms of money and effort, but by working with an alliance the benefits are felt straight away.”
He adds: “In recent years, shipping lines have shown an ability to work together when necessary, to get through the toughest times. Several years ago, the prospect of Maersk Line, MSC and CMA CGM sharing services was unfeasible, but now it is an accepted fact that when there is a need to do so, it will happen.”
Certainly, since the G6 alliance started operating services between Asia and Europe in March 2012, its role has snowballed. The group of six carriers that make up the alliance are planning to expand it to include trades between Asia and the North American East Coast this May. Hapag-Lloyd is a member of the G6, and in the executive board’s foreword to its 2012 financial results, the role of the super alliance is praised, and its benefits highlighted. The foreword says: “Within alliances, the partners make joint use of their vessels, enabling them to offer their customers a better product with more direct connections and a shorter transit time – twinned with lower costs. At the same time, higher rates of capacity utilisation are achieved on ships within an alliance because more partners provide the cargo.”
These significant advantages made the G6 a resounding success last year, which will bring long term benefits to the carrier, Hapag-Lloyd adds.
It is no surprise that the trend to work as part of an alliance is growing, particularly as cascading means that ship sizes are increasing across many trades. Drewry Supply Chain Advisors director Philip Damas says: “The upsizing of box ships and the surplus of larger ships will speed up the trend for larger alliances. If a surplus of large ships from Asia-Europe is cascaded onto a medium-sized trade, then the incentive to operate within an alliance is there.”
Mr Jensen’s opinion is that the industry will not see the launch of more, larger, formal alliances, but carriers increasingly buying slots with each other. He says: “Especially on Asia-Europe, carriers are controlling capacity by blanking individual sailings. They can do this rather than cancelling whole services, by buying slots with each other.”
He points out that this is a strong advantage for both carrier and shipper, as it allows the former to control capacity and not have to cancel an entire string while the latter has more choice of services if strings are not cancelled.
But there is a down side to the increase in alliances. Many industry experts agree that it commoditises services, meaning that there is less choice overall and that service differentiation is based on price, rather than quality.
“By increasingly shipping their boxes on the same vessels, carriers are almost incapable of offering any kind of service differentiation. When your boxes are moving on the same ships, you are selling a commodity - something that is exactly the same product. Shippers are increasingly realising this,” Mr Jensen says. “This means that as more carriers use each others’ vessels, more compete on price and not on service level. I do not think carriers see this as a positive development but they are trapped, as unless they do this they cannot control cost and capacity. If they say they do not want to share vessels, and so have more differentiation on service, they will have higher running costs and risk being run out of the market.”
Mr Jensen says that in his opinion this is not a new development, but that the industry has been highly commoditised for 10-15 years. However, he argues that the growth of mega alliances and the increase in vessel sharing space is adding fuel to the fire in terms of commoditisation, as – in his words - price is the paramount competitive barometer.
Nevertheless, while he argues that the industry is commoditised, he explains that there are nuances. For example, while main trades between main ports – such as Shanghai to Rotterdam – are commoditised, smaller, emerging market trades, such as those between inland China and Africa, are not commoditised.
Mr Damas also points out that a growth in alliances will lead to less differentiation between services. “The negative is that there will be even less differentiation between carriers. It is probable that there will be fewer, but larger, ships and fewer loops.”
The benefits of increasing alliances in the current difficult market are obvious. But it seems that even if the market picks up in Europe, increased collaboration is here to stay. Mr Jensen says: “We will still see alliances as many carriers do not have enough super post-Panamax vessels for an independent string, so are dependent on alliances.”
Rates: uncertainty is the new certainty
After a rollercoaster year of volatility in Asia-Europe rates in 2012, carriers are desperately trying to raise prices and maintain some stability.
A major focus of their efforts has been the March general rate increase (GRI). At the time of writing the picture was mixed. According to the World Container Index (WCI) the rate per teu from Shanghai to Rotterdam had fallen from US$2,344 on 21 March to US$2,109 on 11 April. But the price per teu moving from Rotterdam to Shanghai rose from US$1,061 to US$1,091.
Several carriers have announced more rate increases for April.
WCI director Richard Heath says that while in the short term the GRI is likely to succeed, the big question is whether it will boost rates in the long term. “The question is: how sustainable are they? In November 2012, the GRI rates went up for just a single week. On 1 November we saw rates rise by US$800, then the week after they fell by US$50, then by US$100 and then by US$100 after that. So while there is no doubt in my mind that GRIs are successful, they need to be sustained so that we do not see massive spikes on a weekly basis.”
There is some reason to be optimistic, however, as Mr Heath says that the Asia-Europe trade is expected to be more normal in terms of freight rates in 2013 than last year. He explains: “The general consensus among the people we talk to is that in 2013 the trade might return to being more normal in terms of rate patterns. We might see rate increases in the first half of this year, backed by a relatively healthy peak season, followed by a slight erosion towards the end of the year.”
But he warns that to achieve this it is crucial that carriers manage capacity wisely. “Pricing discipline is extremely important and capacity management remains the most important factor for achieving healthy rate levels. If we see any moves to try and redress the balance of market share, this will impact directly on rates. Given that the market is generally oversubscribed, this could demolish the healthy picture that people hope for.”
Meanwhile GFI Group business development manager of container derivatives Cherry Wang says that some carriers have started going out to shippers and freight forwarders quite aggressively in order to obtain longer term volumes and more favourable rates. But she expects the market to remain volatile and concludes: “Uncertainty is the new certainty in the market this year.” CST
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