Singapore Cluster Report: Shipping out the ‘Blues’

It has been a real hard slog. Ten years ago when the global financial crisis hit, it took global shipping to one of its deepest troughs. Ships in inventories were not the only things that were lost. So were scores of jobs and livelihoods and the once turfed out vessels are almost certain never to return, Jaya Prakash reports from Singapore.   

More than a year has passed since the collapse of Hanjin Shipping, one of Korea’s behemoths in the global shipping chain. When Hanjin fell, ports began rejecting goods from the liner fearing they may not get paid and sailors were left stranded without ever knowing what would happen to them.

In no time news reached global capital markets of the Hanjin debacle under the weight of a $5billion debt and that it may not enjoy a rescue lifeline like how it always had been in past cases with major Korean companies.

The collapse of Hanjin was historic and catastrophic. The Korean government which has been used to playing Galahad with its state enterprises in dire times, dithered this time. The refusal of the Korean government in not willing to be drawn into the Hanjin debacle must surely have been cathartic. With Government out of the way, the markets can finally rule again without any much of a prancing ventriloquist orchestrating every one of those stage-managed economic moves as had been the instance in many Asian shipping-owning companies.

Yet there is no denying what the Hanjin lesson was all about. Its collapse was symptomatic of everything that could go wrong: too many ships chasing too few goods, freefalling freight rates and shipping inventories that kept on rising ad infinitum. That in turn compelled companies to slash freight rates and in the process to, metaphorically slit the throats of competitors just so they can stay afloat.

Those were the blues shipping weathered over the last decade or as some would say the darkest chapters in its history.

The lessons of history have now come one full circle in 2017. Shipping no longer has the dubious distinction of being labelled a tawdry, basket case industry. It is now joyous, plain sailing after what must have seemed to have been a colossal ‘correction’ of colossal proportions in contemporary history.

The close to $600billion industry is now undergoing what was once touted as a commercial inevitability; which in the times before the 2008 crisis was to snag craft from smaller loss-making companies, turn them around and have them grouped under a single banner and flag-state.

There was, however, plenty of horse sense in that. For one, it would mean getting more of another’s clients. Secondly, it prevents a duplication of trade routes and maybe importantly as how the experience of COSCO showed when it acquired OOCL, of not engaging in the kind of practices afflicting human sensibilities such as in the export of endangered animal species or of using battery power for its attempts to reduce ship emissions.

Still nothing beats the longing for consolidation than what it confers. Peter Sands, a BIMCO analyst said: “The shipping industry is in love with economies of scale. Consolidation is happening all over the place”.

“NOL is very strong in trans-Pacific routes but, also strong in intra-Asia trades, which complements our services,” CMA-CGM’s chairman Randolphe Saad was reported to have told the Wall Street Journal not parsing for a moment that having NOL in its bag would stave off just the kind of competition that led to the Hanjin collapse.

As a matter of fact, the French shipping giant feels that leveraging the complementary strengths of the two entities (meaning the new NOL acquisition) will mean access to an enlarged and well-balanced shipping coverage across the strategic trades of global commerce and to an extended range of products and services.

The acquisition will now enable it to reinforce its position as a leader in the container shipping industry with a capacity of approximately 2.35 million teus, a market share of approximately 11.7%, a fleet of approximately 540 vessel and a combined annual turnover of approximately $21billion.

Snagging NOL has certainly remade CMA-CGM. It now only ranks behind Maersk and MSC in market share of box volume.

It may just be a tad too soon to predict that this maybe the trend that needs watching but it, certainly is helping keep freight rates up, inventories down – though yards still are churning out newbuildings ordered over the last eight years.

Of the home truths, owners would have apprised themselves that reckless expansion without keenly understanding market fundamentals can cost them dearly? If the future of shipping is all about being leaner and yet bigger; that just seems to have underpinned the ‘alliance’ between COSCO Shipping Holdings and OOIL, that it would ‘deliver a stronger competitive advantage’, OOIL told SMI.

The combined COSCO SHIPPING Lines, a subsidiary of COSCO SHIPPING Holdings, and OOCL will operate more than 400 vessels over a much expanded yet well-structured network, with capacity exceeding 2.9 million TEUs including orderbook. The combination will enhance the industry leading position of both companies as a whole. By leveraging the strengths of each company and achieving synergies, the businesses will enhance their operating efficiencies and competitive positions to achieve sustainable growth in the long term.

All in all, the five major shipping container lines command some 60% or more of the world’s box traffic, according to Alphaliner. With fewer players and more mega ships coursing around, the future may just be that much inviting. Yet for whatever intents and purposes shipping of the future may look less fragmented than it now is and hew closer to look like the airline industry.

That is just a welcome outcome because it becomes that much easier to implement changes in emissions fouling, ship design specifications and other shipping-centric initiatives like having shipping registries streamline their work.

But the single most important upshot over the past year is the cessation of freight rate warfare. Barring anything of an Organisation of Petroleum Exporting Countries (OPEC) kind of a cartel, the era of consolidation and mega ships points to what may just be an increase in bargaining and pricing power, said Corrine Png in an interview with Bloomberg.

Even as competition may have lessened for the alpha males in the industry, the jury, as they say, is still out because the any real recovery in rates and diminution in competition really hinges on how the industry weathers trade wars, along with dealing with the remaining ‘supply overhang’ – meaning ships that were ordered in the recent past.

If anything, more capacity will be added in 2018 but with increasing populations and greater demand for consumer goods and services, it may -if nothing is exacted- herald a brand new beginning for shipping.

Maersk’s CEO, Soren Skou, predicts consolidation to proceed apace, when speaking to the Financial Times, a view also shared by Esben Poulsson, Chairman of ENSEL who added that ‘consolidation will continue until we get fewer players’.

“A decade from now we would be more in the five to six range”, Mr Skou foretold.

The future as it now appears becomes a far easier to grasp than the dynamics that forced the colossal change in consolidation.