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The short-term health of the containership market rests with the liner companies which stayed on the sidelines of the 2014-15 orderbook binge. These lines must decide between surrendering significant market share, placing their own orders and whether to revise current alliance structures.

In our (MSI’s) first-quarter 2015 report, we expressed the hope that the industry would finally step off the hamster wheel of over-ordering by seeking economies of scale through new alliances and planning new vessel orders in concert, thereby drastically improving the supply/demand situation.

Now, at the end of this year, this hope looks shot to pieces; we have had to almost double our 2015 contracting forecast from 1.1m teu in the first quarter to 2.1m teu today. The industry has only broken the 2m teu barrier once before, in 2007 when liner companies could at least point to demand growth of nigh-on 11%.

In 2016, much will depend on the strategy of those lines which have exerted some ordering restraint. Outside of the larger, better-capitalised liner companies, operators with global ambitions will need to rethink their strategies.

This also feeds into our analysis of recent developments in the liner industry. Even though the consensus seems to be that the absorption of CSCL into Cosco’s liner business implies that the merged company would remain within the CKYHE alliance. In the longer run, we believe it would be a more natural fit for the expansion-minded O3.

Regardless of how permutations and combinations play out – and it is MSI’s expectation that the G6 and CKYHE will be reconfigured to group the stronger liner companies together once the G6 agreement expires in 2017 – it is clear the current system is disadvantaging liner companies without access to the largest tonnage.

Evergreen and OOCL have already made their intentions clear, with orders of 18-21,000 teu vessels clearly designed to stake their place at the top table. Hapag-Lloyd should, in theory, have the scale to prosper even in a consolidated industry, but it remains handicapped by unwilling shareholders – Tui looking for an exit rather than supporting major investments.

This then leaves a grab-bag of Asian liner companies, and it is their decisions which will play a major role in dictating the development of the whole industry over the medium term. Predicting liner company behaviour is notoriously difficult, but, given its centrality to our market forecasts, it is necessary to lay out the situation as we see it.

Yang Ming enjoys an implicit guarantee from the Taiwanese government, and as such is spared significant concerns in terms of its ability to raise financing, but nonetheless it sits uncomfortably as a relatively small operator in an era of consolidation.

The two Korean liner companies face similar issues, with the logical solution being a merger, accompanied by restructuring and refinancing. That this represents the logical path was emphasised by the recent reports of a proposed combination of HMM and Hanjin.

Although the rumour was eventually denied by all parties, it should be clear that the network of financiers and cross-shareholdings lack the capacity to stomach either the investment to turn both liner companies into global players or the associated losses from failing to do so. This squeeze is heightened by the red ink spilling through the Korean financial community, stemming from the woes of the country’s shipbuilders, and leads us to believe that within the next 24 months some sort of combination will take place.

The final pieces of the jigsaw are the Japanese lines, all of which sit as part of large, diversified shipping conglomerates catering to domestic industry. Unlike the Koreans, the Japanese are probably sufficiently well-capitalised to weather the current downturn, and also benefit from a larger network of financiers and shareholders who have not been as badly hit as the Koreans. Therefore, we see the Japanese as less likely to be forced to consolidate, but we still suspect moves towards closer co-operation.

All of this will destabilise the G6 and CKYHE alliances – along with the O3, should the merged Cosco-CSCL entity remain in the CKYHE alliance – which will likely result in a second round of alliance rearrangements. Our supposition is that this will lead to liner companies ensuring their liner partners share a similar level of ambition, and thus facilitate joint orders.

The alternative is a situation in which liner companies pursue individual orders for whole strings of large vessels (as OOCL has this year).

If there is no further consolidation in the industry, to allow current members of the G6 and CKYHE alliances to co-ordinate ordering, then we believe that a sustained recovery in either freight rates or vessel earnings within the forecast horizon is unrealistic.

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  • Reed Waid

    December 29, 2015 at 1:37 am

    The alternative of liner companies pursuing individual orders for whole strings of larger vessels (as OOCL did this year)?

    MOL ordered same amount of tonnage in the same year (also in the G6 alliance) so couldnt this support the articles same theory of facilitating joint orders? If that is what MOL and OOCL did.

  • John Roberts

    January 05, 2016 at 4:47 pm

    This is a really interesting situation for the lines to be in. Those with the bigger ships should normally benefit from economies of scale – assuming there is enough volume to fill vessels. However, nothing really points to there being any increases in volume this coming year and the rate situation in 2016 looks like being a repeat of 2015 so this could end up being a bigger problem for those with the biggest vessels.
    I wonder whether container shipping can continue as it is doing. Does it really make sense for the large vessels to call at several ports on a voyage of nearly a month, dropping containers off along the way and picking up new cargo. Maybe the future is large vessels going non-stop between major base ports then cargo being shipped by feeders to ports nearby, like a hub and spoke operation. This would improve transit times whilst allowing for slower steaming to a certain extent plus other efficiencies as ships wouldn’t spend so long in ports and would cover less distance. A typical voyage to Europe for example involves the main vessel spending about a week going to various European ports which aren’t actually too far away from each other and, depending on the loop, thousands of containers actually sail past where they need to be, only to be dropped off there later. In this current climate, does it really make sense to be moving thousands of tonnes of cargo further than it needs to go. And wouldn’t it be nice to see some innovation in the shipping industry like quicker transit times but not a premium.