Carriers questionable logic

Overkill: CMA CGM has defied common sense with its ultra larger container ship order. Credit: GrahamAndDairne Overkill: CMA CGM has defied common sense with its ultra larger container ship order. Credit: GrahamAndDairne
Industry Database

COMMENT: Liner shipping seems to function on the basis of a merry-go-round logic when it comes to economic rationale, writes Ben Hackett.

One gets the sense of déjà vu reading about the optimistic financial results spewing out from the industry in the face of excess capacity that continues to plague the carriers. Is it that we have a new generation of management that has failed to look back over the past 20 years? Perhaps they are too caught up with the Internet of Things and fail to see the Reality of Things.

Three super alliances are focused at managing their overall capacity in order to find a solution to uneconomic sea freight rates. The timing of the start of the new alliances was fortunate in that they started as the peak shopping and shipping season also began.  With the help of cascading ships out of the big trades and a few accidents and fires, capacity utilisation has improved but for how long?

A whirlwind of ultra large container ship arrivals coinciding with relatively slow growth demand has, in the past, always resulted in the shift to market share strategy. 2017 will be no different and as we move into the second half of the year we shall see more of this. And there goes profitability.

And what are the largest carriers doing? Placing letters of intent with shipyards for ever-bigger ships. CMA CGM is reported to have signed a letter of intent for nine 22,000 teu ships from Chinese yards and MSC is reported to have quickly upped the ante with interest in eleven similar ships. COSCO/OOCL have 22 ultra large ships on order and Maersk has nine. This leaves The Alliance members looking pale by comparison - they will have to order if they wish to remain in the game. Did anyone think that a 24,000 teu ship was not possible?

With all this capacity coming on stream it is hard to see how freight rates can recover as the carriers struggle to fill the ships. As management pushes for market share we truly get a sense of déjà vu with that merry-go-round in full swing. The result will be further consolidation and perhaps a bankruptcy or two.

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