State of Ocean Cargo: Carriers cope with regulatory restrictions

The ocean carrier industry was handed another setback by a major regulatory agency last month as the U.S. Federal Maritime Commission (FMC) rejected the proposed merger of three Japanese liners.

The unanimous decision to nix the Tripartite Agreement, comprising Kawasaki Kisen Kaisha, Ltd. (K Line), Mitsui O.S.K. Lines Ltd. (MOL) and Nippon Yusen Kaisha (NYK) represents a fresh challenge to the “3-J” alliance for the time being. Furthermore, delays in Japanese antitrust approval mean that the carrier’s contract deadline for next month will be missed.

Much of what the Tripartite parties were asking for, says FMC commissioner William Doyle, revolved around pre-merger or pre-consolidation “coordination.” For example, the parties were seeking authority to share information and conduct joint negotiations with third party businesses in the United States for as much as a year in advance of any potential merger.

“These provisions would violate ‘gun jumping’ laws that forbid the sharing of competitively sensitive information or the premature combining of the parties,” adds Doyle. “In order to receive the benefits of a merger, one needs to first merge.”

Chris Rogers, an analyst with the global trade consultancy Panjiva, is not particularly alarmed by FMC’s decision, which he describes as “technical in nature.” More of a worry, however, is the ongoing Department of Justice (DoJ) investigation of the container liner industry and what Rogers describes as “Congressional concerns” about alliances more broadly.

In an advisory letter written by DoJ assistant district attorney general Renata Hesse, the FMC was called upon to forbid the creation of the OCEAN Alliance, or to at least have the carriers rewrite the agreement to ensure competition. “The DoJ has long taken the position that the general antitrust exemption for international ocean shipping carrier agreements is no longer justified,” she says.

For the time being, however, both the Ocean Alliance and THE Alliance still control 45% of the global business by sharing vessels and operating joint services.

Stable forecast

Meanwhile, global credit research analysts for Moody’s Investor Service maintain that the outlook for the global shipping industry is stable, given that—after excluding mergers and acquisitions and spinoffs—the aggregate earnings before interest, taxes and amortization (EBITA) of rated shipping companies will remain at similar levels in 2017 when compared to last year.

But unlike 2016, when the industry saw double-digit EBITA declines, the operating environment has bottomed and earnings will remain on an even keel, although at a low level during 2017. “However, a material level of industry-wide earnings growth will be beyond our 12-month horizon,” says Stephanie Leavitt, a Moody’s analyst.

Moody’s further notes that the continued scrapping of Panamax-class vessels, driven by the expansion of the Panama Canal, and of older ships, driven by tightening environmental regulations, are likely to continue, partly offsetting global capacity expansion.

“Market conditions are still weak,” says Leavitt, “but are unlikely to worsen from the levels seen for both segments in 2016. We expect that supply growth will exceed demand growth by less than 2%, or within our parameter for a stable view.”

Freight rates in these two segments will also gradually increase, she adds. For the shipping industry generally, Moody’s would consider changing the outlook back to negative if analysts see signs that shipping supply growth will exceed demand growth by more than 2%.

“Conversely, we would consider a positive outlook if the oversupply of vessels declines materially and aggregate year-over-year EBITA growth appears likely to exceed 10%,” concludes Leavitt.

Overcapacity woes

However, despite growing confidence in a container market recovery over the past six months, other leading shipping analysts are forecasting the return of freight rate volatility to the world’s major trade lanes as the specter of overcapacity comes back to haunt the industry.

Tan Hua-Joo, executive consultant at the Paris-based consultancy Alphaliner, says that although 2016 was “the most balanced year” in terms of supply and demand since 2009, he remains skeptical about a rate rebound. “Hopes on the part of carriers for greater stability are still some time away,” he says, “even though the global fleet growth was constrained to just 1.6% last year.”

New vessel delivery deferrals, in combination with an unprecedented number of vessels sent to scrap yards and an unnaturally large idle fleet propelled by the collapse of Hanjin last year, complicate the matter, adds Tan. “As we move into this year, the rate of growth in the global fleet is going to increase as there’s very little room for the industry to keep the growth of fleet down.”

Alphaliner is forecasting total fleet delivery of 1.32 million twenty-foot equivalent units (TEU), most of which will be new “Mega” vessels, and although it’s also forecasting another year of record scrapping levels—up to 700,000 TEU—there will still be a net increase in the global fleet of 620,000 TEU, which would represent a 3.1% increase.

Altogether, 1.6 million TEU of the world’s fleet found itself idled last year, although some 500,000 TEU of this was Hanjin tonnage. Tan notes that a lot of the Hanjin vessels have been brought back into operation, and Panamax vessels have seen something of a spike in demand due to the new alliances’ demand for capacity—leading to charter rates going back up to around $10,000 per day.

“The idled Hanjin tonnage is now down to about 200,000 TEU, and we expect this be reintroduced to by June,” says Tan. “So, as long as the shipping lines take back this idle capacity, there’s no sign of a recovery in the market as carriers continue to bid for market share and significant freight rate stability will continue.”

In fact, Alphaliner analysts say that they don’t see a “genuine recovery” in the freight markets for another 18 months when demand ramps up to fill ships on a reliable basis.

Robbert van Trooijen, head of Maersk Line for Asia-Pacific, takes issue with this forecast however, stating that 2017 will be the year “in which all of us would find that balance.” First indications of this trend will be seen on the trans-Pacific, Asia-U.S. East Coast and Asia-North Europe trades, he says.

“On the Asia-U.S. East Coast trade lane, 148,000 TEU were deployed at the height of capacity last year, and although it’s been growing since Hanjin’s bankruptcy, it’s now at 144,000 TEU per week,” says van Trooijen.

The trans-Pacific trade is showing a similar pattern when compared to last year, van Trooijen adds, with deployments of 240,000 TEU per week now compared to 237,700 TEUs last year. “In view of all this, I think we should be confident that the capacity injected in the east-west trades is more balanced than it was,” he concludes.