Hanjin’s bankruptcy leaves the proposed carrier grouping THE Alliance at a size disadvantage to both its future rivals. Might a replacement be called up?
The container shipping industry is in a state of flux at the moment and nobody can honestly say they know for certain what the landscape will look like in six months from now. Even before Hanjin Shipping filed for bankruptcy protection the industry was preparing itself for big changes to the make-up of the major shipping alliances, which from April next year are scheduled to downsize from four to three. However, Hanjin’s impending demise and uncertainty surrounding new membership agreements and regulatory approval have clouded the picture.
Hanjin was one of six carriers along with Hapag-Lloyd, K Line, MOL, NYK and Yang Ming that in May of this year announced they would form THE Alliance to serve the East-West container trades from the second-quarter 2017. The South Korean carrier was the second largest of the group with 460,000 teu in nominal ship capacity in the East-West routes before it exited the stage in August.
See Figure 1
Nominal East-West ship capacity shares of three mega-alliances, August 2016
(Note: Based on deployed capacity in August 2016 and after assigning respective carriers to future alliances as currently understood; Shares can be affected by void sailings in any given month; East-West trades are Asia-North America, Asia-North Europe, Asia-Med, North Europe-North America and Med-North America; assumes regulatory approval will be granted.
Source: Drewry Maritime Research (www.drewry.co.uk)
To some extent Hanjin has already been replaced. Hapag-Lloyd’s merger with United Arab Shipping Co. (UASC) will add 315,000 teu in East-West capacity so it bridges some, but not the entire gap. Merger talks between Hapag-Lloyd and UASC were well underway at the time of the announcement and the latter was always expected to become the seventh member. Expectations that there would be an eighth partner were confounded when it emerged that the financially troubled Hyundai Merchant Marine (HMM) was in talks to join the world’s two largest carriers Maersk Line and MSC in the 2M alliance.
Based on the East-West vessel deployment in August, excluding Hanjin but including UASC, THE Alliance market share was around 24%, well below that of the 2M +HMM (31%) and OCEAN Alliance (34%).
Calculating potential market shares for the three proposed mega-alliances is complicated by the fact that HMM’s deal with the 2M lines is yet to be concluded and that no one knows who will pick up Hanjin’s capacity, which was approximately 5% of East-West ships in August. Compatriot HMM, which shares the same main creditor in the Korea Development Bank, is a likely buyer of some of the more attractive younger and bigger units in Hanjin’s portfolio of owned ships. The destination of Hanjin’s chartered fleet is even harder to second-guess.
Figure 2
Hanjin Shipping containership fleet by size range and owner type, August 2016 (000 teu)
HMM would very much be the junior partner in the 2M /H2M alliance but even so the addition of too much Hanjin capacity could pose competition issues as the existing lines are already at the upper limits of what is acceptable to regulators.
In the US, the Federal Maritime Commission (FMC) has requested more information to consider the proposal of the OCEAN Alliance members CMA CGM, Cosco, Evergreen and OOCL, although there is no suggestion that the move will cancel or even push back the scheduled April start.
While acknowledging that making perfectly accurate market share projections is impossible at this stage, we can safely say that THE Alliance will be far smaller than its two rivals. It’s potential to upsize by using ships currently outside of the alliance East-West network parameters and with new ships is also far smaller than the other two groups (see Figure 3).
Figure 3
Potential ship capacity of three major container alliances (‘000 teu)
(Note: Not all ships will be used in alliance services. Current relates to active fleet as of September 2016. Orders relate to ships scheduled for delivery until end 2019.
Source: Drewry Maritime Research (www.drewry.co.uk))
This begs the question of whether they can swell their numbers with the addition of one or more other carriers.
When Drewry asked the major carrier in THE Alliance, Hapag-Lloyd, how they planned to handle the loss of Hanjin there was no indication in its reply that they are looking to bring in anyone else: “THE Alliance is creating its future product at the moment and it will be a very competitive product in all East-West trade lanes with attractive port coverage, comprehensive port-to-port connections and competitive transit times,” Hapag-Lloyd told Drewry.
Surprisingly, in the current era of competitive-cooperation between lines there are still a few non-alliance affiliated carriers that might be targets. The Hamburg Süd Group would bring the most capacity but as a North-South specialist it might want the alliance to broaden its scope before agreeing to join. Zim has thus far been happy to piggy-back on the East-West services of other alliances and has given no indication that it wants to become part of any group. The other Top 20 candidates, PIL and Wan Hai, have only limited exposure to the East-West markets so again might not feel the need to become formal partners.
Figure 4
Waiting on the sidelines: major non-alliance affiliated carriers’ fleets and orderbooks (‘000 teu)
The uncertainty over what the industry will look like is less than ideal as shippers prepare tenders for shipping contracts. None want a repeat of the Hanjin situation with billions of dollars’ worth of cargo stranded outside ports and they will want to know in advance which carriers will be sharing ships to avoid those that they consider to be financially risky.
We advise shippers to pay more attention to the financial risks when selecting carriers and to that end Drewry Financial Research Services has released a bespoke report, Container Shipping – A Financial Health Check – Macros and Micros that gives an independent view on the financial health of the industry and major companies. For more information please contact Rahul Kapoor, Director – DFRS at [email protected].
Our view
With so much uncertainty shippers will probably look to hedge their bets with the alliances at the beginning and see which one works best for them in the long-term.
