container shipping outlook: how shippers see 2017€¦ · and the hanjin bankruptcy are now...

CONTAINER SHIPPING OUTLOOK:

How Shippers See 2017

FEBRUARY 2017

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CONTAINER SHIPPING OUTLOOK: How Shippers See 2017

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WHITEPAPER, NOVEMBER 2016

TABLE OF CONTENTS

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . 1

II. EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . 2

III. MARKET CONDITIONS . . . . . . . . . . . . . . . . . . 3

IV. INVENTORIES . . . . . . . . . . . . . . . . . . . . . . . 7

V. TRANS-PACIFIC MARKET CONDITIONS . . . . . . . . . 8

VI. VESSEL CAPACITY . . . . . . . . . . . . . . . . . . . .12

VII. CONSOLIDATION . . . . . . . . . . . . . . . . . . . .14

VIII. PROTECTIONISM . . . . . . . . . . . . . . . . . . . .18

About IHS Markit . . . . . . . . . . . . . . . . . . . . . .20

About The JOC . . . . . . . . . . . . . . . . . . . . . . . .20

TOP TAKEAWAYSl Carriers expect rates to climb more rapidly than BCOs do

l Most shippers expect at least some disruption from new alliances

l The market is ripe for more rapid growth in volumes

l Trump’s trade policy is a major wildcard

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TABLE OF FIGURES

EXHIBIT I: WHO WE SURVEYED ...........................................................................2

EXHIBIT II THE IMPORTS FORECAST ....................................................................5

EXHIBIT III: VOLUMES AND INVENTORIES ............................................................7

EXHIBIT IV: PRICING EXPECTATIONS ..................................................................8

EXHIBIT V: SPOT RATES ...................................................................................12

EXHIBIT VI: CAPACITY ......................................................................................12

EXHIBIT VII: CONSOLIDATION AND ALLIANCES .................................................14


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I. INTRODUCTIONA growing dichotomy between the expectations of shippers and carriers on the outlook for ocean freight rates this year may set the stage for difficult contract negotiations for the 2017-2018 shipping season. Shippers think they can nail down contracts with little or no rate increases over last year, according to a new survey by The Journal of Commerce, while container lines are more bullish about getting much higher rates this year than they have been in years.

At the same time, shippers are approaching this year’s ocean contract negotiations with more wariness than usual because the outlook for shipping to and from the US is being impacted by far more than the usual governing factors of consumer demand, freight rates, and vessel capacity supply and demand. They don’t know yet how these new factors will play out.

The wild card is that the global container industry is in the midst of a massive wave of consolidation that will eliminate seven of the top 20 container lines. The consolidation was touched off by record losses that forced some carriers to merge in order to survive and led to the collapse of one major line, South Korea’s Hanjin Shipping. On top of that, carriers are playing a game of musical chairs that is realigning existing alliances and creating new ones, which may cause some disruption of service and erode supply chain reliability when they launch on April 1. All of this is making beneficial cargo owners increasingly picky about which carriers are the most reliable partners to meet their transportation needs.

Adding to that confusing picture are BCOs’ concerns that President Trump’s protectionist policies on trade with Mexico and China could disrupt their global supply chains and force manufacturers to bring more production back to the US.

Carriers are playing a game of musical chairs that is realigning existing alliances and creating new ones.


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WHITEPAPER, FEBRUARY 2017


It’s difficult to predict how the container shipping market will evolve this year, so this white paper can only reflect what is on the minds of shippers who are getting ready for contract negotiations. In preparation for this year’s TPM Conference in Long Beach, The Journal of Commerce conducted a survey of shippers’ expectations after many of them had already touched base with their carriers about the upcoming contracts before they had started negotiations. Almost 100 manufacturers, retailers, and agricultural shippers responded to a range of questions about their expectations for global freight rates, volumes, deployed vessel capacity, service levels, alliances and further carrier consolidation.

The Journal of Commerce also interviewed a number of importers and exporters to get their firsthand accounts of their own expectations and what they are hearing from their carriers. Their views are scattered throughout this white paper. If they are not quoted by name, they asked not to be identified.

II. EXECUTIVE SUMMARYEXHIBIT I: WHO WE SURVEYED 65 importers and 35 exporters responded to the survey between Jan. 16-31. Here’s how they break down by revenue and cargo volumes.


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More than half of the survey respondents expect to ship more container volumes this year.

To get a sense of shipper expectations for the coming contract negotiations, The Journal of Commerce sent 15 questions to an array of shippers. Almost half of the companies that responded were manufacturers and a quarter were retailers. The remainder of respondents was agricultural shippers or non-manufacturers. More than 70 percent were importers, and almost 40 percent were exporters. Some were both.

The answers to the Shipper Survey reveal that importers expect to ship slightly more container volumes this year, but that deployed vessel capacity won’t increase. Although they expect slightly higher trans-Pacific rates, they think levels on the trans-Atlantic and Asia-Europe lanes will stay about the same. But even with ocean rates relatively stable, they expect their overall transportation expenditures to rise. Their biggest concern is the state of carrier service, because more than half of the shippers who responded expect to see some disruption when the new global alliances launch in April. On top of that, shippers expect to see more mergers and acquisitions among carriers this year.

More than half of the survey respondents expect to ship more container volumes this year, with 22 percent expecting increases of more than 10 percent, while another 22 percent are looking for increases of less than 5 percent.

Seventy percent of the respondents have annual revenues of more than $100 million, but that doesn’t mean a majority of them are large shippers. Almost half of the respondents said they ship between 1,000 and 5,000 20-foot-equivalent container units annually. Twenty percent said they ship 10,000-50,000 annually, and 10 percent said they ship 50,000-100,000 TEUs.

By contrast, Wal-Mart, the world’s largest retailer, shipped 796,000 TEUs in imports alone to the US in 2015, according to the JOC’s Top 100 Importers ranking, and DuPont, the No. 100 importer on the list shipped 16,500 TEUs.

III. MARKET CONDITIONSGlobal container shipping lines collectively lost an estimated $13 billion in 2016 because of a rate war in the first half of the year that drove freight rates on all the major trade lanes to record lows. Rates began to firm up toward the end of the year following Hanjin’s August bankruptcy, which tightened capacity as Hanjin ships were removed from the market.

Although shippers expect rates to stay about the same as last year on most trade lanes except the trans-Pacific, container lines are growing increasingly optimistic about boosting rates. For example, Maersk Line, the world’s largest carrier as measured by vessel capacity, expects rising global freight rates will enable it to record a $1 billion swing in underlying profits into the black this year compared to a 2016 loss of $376 million.

“We believe the industry is at an inflection point, and we see encouraging signs for 2017, and that is why we feel comfortable with improving Maersk Line profits by $1 billion over 2016,” said Soren Skou, CEO of Maersk Group and Maersk Line when 2016 earnings were released on Feb. 8. Skou said another reason he is confident in achieving the high profit turnaround is


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Growth was especially strong in the first and fourth quarters of the year.

because the carrier’s Asia-Europe contracts had closed and they were “significantly higher” than in 2016. Skou said he also expected trans-Pacific contracts to close much higher than last year when they are signed this spring.

Mediterranean Shipping Co. is also optimistic about the outlook for the market. “Enough is enough, and now it is about time that our industry recovers a bit what we lost in the last years and I think we are on the right track,” CEO Diego Aponte told The Journal of Commerce in early February. He said Hanjin’s collapse was “positive for the industry because at least it opened the eyes of some of our customers to understand how shipping is important within their supply chain.”

These carriers’ bullish expectations come after a fourth quarter when several carriers, including Maersk, OOCL, and the three Japanese carriers, all reported strengthening demand. Maersk said demand growth was low in the first three months of 2016 but improved in the second half, especially in the last three months.

Although this partly reflected the contrast to weak demand in late 2015, Maersk said it also was an indication of improvements in the global economic environment. Container demand on the east-west trades was decent in 2016, driven by higher US imports supported by the US economic expansion and the strong dollar. European imports developed more softly and in line with GDP growth in the region.

Growth was especially strong in the first and fourth quarters of the year — 7.6 and 8.7 percent, respectively — bookending lackluster demand midyear, according to Mario Moreno, senior economist in the Maritime & Trade Division of IHS Markit, parent company of The


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Moreno is forecasting 6.1 percent growth in containerized imports in 2017.

Journal of Commerce. But the reasons for that strength were vastly different. The first quarter of the year was measured against the first quarter of 2015, when the International Longshore and Warehouse Union and the Pacific Maritime Association were at the height of a contract dispute that stranded imports outside terminals. The fourth quarter, however, represents a rebuilding of inventories and increased consumer confidence that could serve as a springboard to 2017. Moreno is forecasting 6.1 percent growth in containerized imports in 2017, to 21.8 million TEUs, compared with 4.3 percent growth last year, barring trade disputes that might arise out of the new Trump administration’s policies.

EXHIBIT II THE IMPORTS FORECASTUS CONTAINERIZED IMPORTS: Year-over-year percentage change, by quarter

US CONTAINERIZED IMPORTS: Year-over-year percentage change

Imports at the major US retail container ports are expected to increase 4.6 percent during the first half of 2017 over the same period last year as the nation’s economy improves and retail


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“Factors such as the higher price of fuel, the previously unsustainable level of rates, and the Hanjin bankruptcy are now weighing heavily on pricing.”

sales grow, according to the February Global Port Tracker produced by the National Retail Federation and consulting firm Hackett Associates. Fueling the significant year-over-year improvement is robust consumer demand.

The import forecast for the first six months of the year is about three times as large as the 1.6 percent increase in the same period last year. The Port Tracker forecasts a healthy rate of year-over-year growth in cargo volumes at the start of 2017, rising 2.3 percent in January, 7.8 percent in March, and 8.2 percent in April, when last year’s annual contracts expire. The forecast of rising import demand likely will buttress carriers’ rate negotiations in the next two months.

Asia-Europe cargo volumes edged higher in 2016, despite another dull peak season, reversing the previous year’s slump. The upward movement in spot freight rates has strengthened carriers’ hand in annual contract negotiations with big-ticket shippers. Hardly robust, traffic from Asia to North Europe increased just 1 percent in the first 10 months of 2016, but it was a strong signal that the market had bottomed out following 2015’s unprecedented decline in traffic.

Philip Damas, director of London-based Drewry Supply Chain Advisors, expects Asia-Europe freight rates to increase despite the overcapacity that would continue to exist in the market through 2017 and beyond.

“Factors such as the higher price of fuel, the previously unsustainable level of rates, and the Hanjin bankruptcy are now weighing heavily on pricing,” he said. “We expect that ocean contract negotiations in the next few months — including the trans-Pacific ones in March-April — will be tougher for shippers and also more complex.”

Shippers that have already selected their 2017 carriers have reported increases in Asia-Europe contract rates of around 25 percent. The supply chain manager for a European retailer based in Asia said the increase was expected and he was reasonably satisfied with the levels. “As our contracts start in the fourth quarter 2016, we have accepted a moderate increase and provided the space forecast to carriers,” he said. “Compared to the year before, they started pretty high but came down in the end to a more sensible level.”

The trans-Atlantic lane continues to slip in the container route volume rankings, and it’s unlikely the new US administration will give it the boost it needs, Drewry said.

It forecast that traffic on the headhaul westbound leg likely will post an increase of a little more than 2 percent for 2016, even after a “recovery of sorts” in the second half of the year. Total two-way trans-Atlantic volume will top 5 million TEUs in 2016, but in the coming 12 months the route is likely to be overtaken by the Asia-South Asia market as the fourth-largest deep-sea container trade lane after the trans-Pacific, Asia-North Europe, and Asia-Mediterranean. Shipments from Europe to North America grew 2.5 percent in the first 11 months of 2016 to 2.9 million TEUs, a sharp drop from growth of 8.4 percent and 6.4 percent in 2014 and 2015, respectively, that is symptomatic of plateauing consumer demand in the US.


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IV. INVENTORIES

EXHIBIT III: VOLUMES AND INVENTORIESWhat do you expect in the way of year-over-year change in your 2017 containerized volumes?

What are your current inventories compared to January 2016?

How would you assess the state of your inventories in 2017?


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“When retailers import more merchandise, that’s a pretty good indicator of what they are expecting to happen with sales.”

The level of importers’ inventories at the start of contract negotiations can have an impact on contract negotiations because the higher the level, the smaller the volume of containers that importers may need. In the last year, retail importers have brought their inventory levels down from the higher levels they sought to build a year earlier. Then, imports were delayed by slowdowns at West Coast ports during nine contentious months of contract negotiations between the International Longshore and Warehouse Workers Union and the Pacific Maritime Association that finally consummated in February 2015.

More than half (52 percent) of the shippers who responded to the JOC survey said their inventories were “pretty balanced” this winter. A fifth (21 percent) said they needed to draw inventories down, and a smaller number (14 percent) said they needed to build them up.

“Retailers try to balance inventories very carefully with demand, so when retailers import more merchandise, that’s a pretty good indicator of what they are expecting to happen with sales,” Jonathan Gold, the NRF’s vice president for supply chain and customs policy, said in the February Global Port Tracker.

Importers and exporters may be reluctant to reduce their inventories further this winter until they see how carrier reliability will be affected by the launch of two new alliances in April and the ongoing mergers of a number of carriers. “It’s hard to draw down our inventory and still satisfy demands from our new customers,” said Steven Hughes, vice president of supplier development, government affairs and logistics for Centric Parts, a manufacturer of after-market auto parts. “Our industry traditionally has tried to pull inventories down and increase the number of turns. It’s hard to do that and properly service all of your customers.”

V. TRANS-PACIFIC MARKET CONDITIONS

EXHIBIT IV: PRICING EXPECTATIONS What year--over-year percentage change do you expect in your trans-Pacific rates?


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What year-over-year percentage change do you expect in your trans-Atlantic rates?

What year-over-year percentage change do you expect in your Asia-Europe rates?

The trans-Pacific is the only trade lane on which a significant number of survey respondents expect to see an increase in contract rates. More than 40 percent expect some increases, with 22 percent looking for hikes of more than 10 percent and another 20 percent looking for increases of less than 5 percent. Eighteen percent expect no change in rates, while 17 percent look for decreases in rates.

Since early December, even as shippers started gearing up for new annual contract negotiations, vessel capacity tightened in anticipation of the Chinese New Year and spot rates on the trans-Pacific climbed more than 50 percent. This has led industry observers to predict that carriers will try to keep capacity tighter in order to negotiate higher freight rates than last year, when some trans-Pacific contract rates settled out at $750 per 40-foot-equivalent unit to the US West Coast and $1,400 per FEU to the East Coast. Rates from Shanghai to the US West Coast last year were down 15 percent from 2015, and down 33 percent to the East Coast, based on a recent BIMCO analysis of the Shanghai Containerized Freight Index. Overall rates on routes tracked by the SCFI were down 7 percent.

With higher spot rates so far this year and tighter capacity this winter, container lines are seeking new contract rates of twice that level, of at least $1,500 per FEU from Asia to the US West Coast and $2,800 per FEU to the East Coast.


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Some shippers interviewed for this white paper are sympathetic with the plight of carriers, which they view as important partners in their supply chains.

Shippers, however, aren’t biting. They are taking a wait-and-see attitude, because, even after all the pending mergers and alliance realignments, the same amount of vessel capacity will still be out there unless carriers increase scrapping. That’s why shippers don’t think rates will increase anywhere near what carriers are seeking, so they are spurning early carrier offers for trans-Pacific contracts, even though some of them are far lower than the benchmark of $1,500 per FEU. One large US importer of finished goods from Asia and exporter of raw materials for those products told the JOC that in preliminary talks this year, two of its carriers had told it they are expecting to negotiate most of their trans-Pacific contracts with rates of $1,200 per FEU for port-to-port rates to the West Coast.

Some shippers interviewed for this white paper are sympathetic with the plight of carriers, which they view as important partners in their supply chains. They don’t want to see them go into bankruptcy, as Hanjin did last year, leaving many shippers’ containers stranded at container terminals that refused to release them until Hanjin’s fees were paid. They are willing to pay an increase in rates, as long as those levels aren’t out of line with the averages for their competitors.

“We all know the current rates are unsustainable,” Hughes told The Journal of Commerce in December. “It’s really ridiculous, but it’s hard to walk away from them as a supply chain VP to say, ‘Well, they’ve offered a rate that’s $200 or $500 — whatever the number is — below a sustainable rate. We shouldn’t take this.’ If I took that back to my board or the owners, they’d be saying, ‘Why not? Take advantage of it while you can.’

“So we’re in this situation where I’d like to actually see the rates go up to sustainable levels, because we’ve got to support the carriers. We’re going to have more of these Hanjin situations if we don’t. Having said that, given the excess capacity, I don’t see the carriers having more pricing power,” he said.

“I worry that rates will go too low,” said the logistics director of an importer of finished consumer products. “A big part of my job is internal communications with my stakeholders, who don’t understand the dynamics of the shipping industry or why I may want to pay a higher rate. I have to explain to them that If rates go too low at, for example, a small secondary river port in China, a carrier might be unwilling to reposition empties there, we might have to wait until next week, while if rates were higher, our carrier might be willing to reposition empties there.”

Carriers withdrew more capacity from the east-west trades than they did in the last few years in anticipation of the extended Chinese New Year holiday, which began on Jan. 29. They weren’t able to load all the export containers that stacked up at Chinese ports in time for the holiday, so demand remained high. Carriers continued to withhold capacity after the holiday in an effort to get higher contract rates so capacity remained tight and spot rates stayed up. Once capacity is withdrawn from the market, rates tend increase disproportionately, and they can go down just as quickly when capacity is restored.

“The challenge for beneficial cargo owners, is that if they sign service contracts with higher rates in the next few weeks and the carriers then put more capacity in after the contract season ends, and the spot rates start tanking, that puts BCOs like myself in a very awkward position like we were a year-and-a-half ago with high BCO rates and low spot rates,” the importer said.


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“The data’s been out there for quite a while that the oversupply will stretch beyond 2017.”

A manufacturer of household furnishings questioned whether US import demand will pick up much after the Chinese New Year. “Especially given the current US political climate, how many companies are actively wanting to go and source product overseas or across the border?” he said. “Most companies do it for financial reasons, but unless there are overwhelming financial reasons to source overseas, I don’t know how many companies will be willing to push forward with outsourcing strategies until some of these political questions get answered.”

Some shippers already have signed trans-Pacific contracts with slight rate increases.

Samsung’s 2017 contract rate, which started in January, is just slightly up on last year, and the company doesn’t expect a rapid rate rise any time soon, Diane Kim, vice president with Samsung SDS, told The Journal of Commerce in January at the company’s headquarters in Seoul. “It is not easy to predict, but the rate is stable at the moment, and we do not anticipate a rapid increase any time soon,” she said.

Samsung’s one-year contract rate will be reviewed again with container lines in July, just three months after the launch of the new vessel-sharing agreements. Although the contract rate is currently stable, Kim expects to see a gradual increase in rates from the all-time lows of 2016 over the course of this year. “We see this happening already in the spot market, where rates are up by 30 percent or 40 percent, but there is still overcapacity in the market, and it is going to take some time before there is real balance in supply and demand.”

Shippers think the existing overcapacity will continue this year and perhaps through next year before demand and scrapping rise enough to absorb it. “The data’s been out there for quite a while that the oversupply will stretch beyond 2017,” Michael Symonanis, director of North American Logistics for Louis Dreyfus Commodities, a major US cotton exporter, told The Journal of Commerce in December. “Whether it’s reconstituted in different alliances, networks or affiliations, the fundamental fact is that the vessels are still out there.”

For now, there is no way to predict the likely impact of the new alliances on rate levels. “From a pricing perspective, it’s too early to say the alliances are going to give us more or less negotiating power,” Hughes said.

With all the uncertainty hanging over the market and rates, many shippers plan to turn to the spot market more this year than last. Almost half of the shippers responding to the JOC survey said they would make greater use of the spot market this year. A smaller number (28 percent) said they would use it less.

Other shippers interviewed by the JOC for this white paper said they intend to wait for meetings with their carriers during TPM to get the lay of the land. “We all get together in the Hyatt Regency bar,” one importer said. “That’s when we get a better feeling of what’s going to happen.” If spot rates stay at current levels and an improving economy fuels higher demand, he expects carriers to increase capacity, which would in turn undermine spot rates. Another importer said TPM serves as a “barometer, where you get an idea of where the market is going talking with other shippers and in meetings with carriers.”


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EXHIBIT V: SPOT RATES How do you expect to use the spot market this year?

VI. VESSEL CAPACITYEXHIBIT VI: CAPACITY Over the next year, do you expect ocean shipping capacity to:

Excess capacity has depressed freight rates on all trade lanes for the last two years. Capacity only started to tighten following Hanjin’s collapse. Almost half (49 percent) of the shippers responding to a survey question on the outlook for deployed capacity expect it to remain about the same this year. Twenty-four percent of respondents expect carriers to tighten capacity moderately, while another 18 percent think capacity will actually increase this year.

In its latest earnings report, Maersk said deliveries of new container vessels in the last part of 2015 and early part of 2016 continued to hurt the container industry. The carrier said this added to the existing overcapacity of vessel space as global container demand remained subdued during the year. These supply-demand developments led to significant downward pressure on freight rates and industry revenues, especially in the first half of the year, the carrier said.


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The average scrapping age continued to decline and was 19 years in 2016.

Record scrapping of container ships was reported by the end of 2016, and Maersk early this year is scrapping eight Panamax vessels — totaling about 1 percent of the carrier’s overall capacity — that it said were at the end of their economic lives.

A total of 934,000 TEUs (136 vessels) was delivered and 665,000 TEUs (201 vessels) was scrapped during 2016, according to industry analyst Alphaliner. Deliveries were dominated by the 10,000-plus-TEU vessel segments, and mainly smaller and midsize vessels were scrapped. The average scrapping age continued to decline and was 19 years in 2016, which compares with an average of 30 years in 2008 when the scrapping age was at its highest.

The analyst said new orders amounted to 292,000 TEUs (82 vessels), leading to a drop in the order book to 16 percent of the fleet at the end of 2016. Global container fleet capacity grew 4 percent in 2016, but with lower growth toward the end of the year. At the end of 2016, the fleet stood at 20.3 million TEUs, of which 6.9 percent was idle.

Some shippers blame carriers for the glut of capacity that plunged the liner shipping industry into the red for the fifth straight year in 2016. “They went on a buying binge several years ago, and it’s hard to have sympathy with an industry that creates the problems of overcapacity and the debt load they took on in their rush to get bigger, bigger, bigger, thinking that the golden goose would keep laying those eggs,” the logistics director for a manufacturer of household furnishings said. “They made their beds, and they’ll have to sleep in them for a while even though it may be very uncomfortable.”


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“Until recently, we’ve had almost daily conversations on cargo being held up for one reason or another.”

Some shippers fear the industry could face a rerun of 2010, when carriers laid up so much capacity following the shrinking of world trade volumes the prior year that containers were being rolled — or pushed to later sailings — at Asian ports even for shippers with contracts with carriers that guaranteed them cargo space. As a result, spot rates soared, and shippers had to scramble for vessel space that would maintain the reliability of their supply chains. The shortage of deployed capacity provoked outbursts of rage from shippers and carriers.

“We see a lot of game playing by the carriers,” Hughes said in December. “Although we’ve got fixed contracts and we have fixed volumes per week with a given carrier, we’ve seen a lot of rolling. Until recently, we’ve had almost daily conversations on cargo being held up for one reason or another. We’ve had the carriers come to us and say, ‘We’d like some more money. If you give us a higher rate, we’ll make sure you get your cargo on the ship,’ which is basically a soft blackmail, if you will. We consistently remind them that we have a contract, but their contracts seem to be very much one-way. I don’t see a lot of consistency in honoring contracts these days with the carriers.”

“We’ve seen a lot of less-than-favorable actions by carriers, and a lot of demands for more money,” another importer said. “It’s not uncommon at all, from what I’m hearing. It’s particularly off-putting when you consider we really didn’t negotiate the contracts this year. And our comment to our carriers has always been: You live with us during the good times and the bad. Don’t try to turn the tables against us during the bad times, because the good times will return.”

Another shipper said that if carriers breach contracts, he might stop doing business with them. “We’ve seen some voidings of sailings, and I have a gut feeling that carriers are going to do something drastic to take a lot of capacity out of the system, and it’s not going to be something that the shipper community is going to be happy with,” he said. “If and when that happens, then all bets are off. Shippers like me will either quit doing business with them or say, ‘I don’t like this whole sourcing from overseas thing so I’ll figure out a way to do it here.’ ”

VII. CONSOLIDATIONEXHIBIT VII: CONSOLIDATION AND ALLIANCES What scale of service improvement or disruption do you expect when new global alliances launch in April?


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Analysts say problems are inevitable any time the normal routine is disrupted at a marine terminal.

Do you expect major container line consolidation in 2017?:

In the face of ongoing carrier losses last year, the liner shipping industry experienced an unprecedented wave of mergers and acquisitions that is resulting in the absorption of seven of the top 20 carriers and the resulting reconfiguration of vessel-sharing alliances (see box). As the carriers combined, they created three east-west alliances out of the four that existed. Two new alliances will launch services on April 1, and the existing 2M Alliance between Maersk and MSC will cooperate with Hyundai Merchant Marine. The 2M Alliance stands to expand further after Maersk completes its acquisition of Hamburg Süd.

Two existing alliances, the G6 Alliance (APL, Hapag-Lloyd, Hyundai, MOL, NYK Line and OOCL) and the CKYHE Alliance (Cosco, “K” Line, Yang Ming, Hanjin, and Evergreen) dissolved because many of their members are involved in mergers or acquisitions by other carriers and because Hanjin collapsed. A third, the Ocean Three Alliance among CMA CGM, China Shipping, and United Arab Shipping Co., reformed as the Ocean Alliance with the addition of Cosco, Evergreen and OOCL, which were previously members of the two dissolved alliances.

A majority of shippers (62 percent) who responded to the JOC survey expect some disruption of their carriers’ services when the two new alliances launch services on April 1. A smaller number (19 percent) expect no change, and the rest (16 percent) are looking for service improvements. A majority (55 percent) also expects to see further consolidation of container lines in 2017. Any further consolidation is likely to involve smaller carriers, as most of the larger lines have already been part of mergers of acquisitions.

Analysts say problems are inevitable any time the normal routine is disrupted at a marine terminal. It could be that larger ships begin to call on different days of the week, or volumes suddenly spike, or, simply, organizations begin to interact with those they had never worked with before. That’s what BCOs will face in a little more than a month, particularly at ports with multiple terminals, such as Los Angeles and Long Beach. A variety of changes to the normal routine will occur virtually overnight. Recent port data suggests that at least some BCOs who anticipate problems are diverting cargo to ports that are unlikely to experience disruption.


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“If anybody thinks these alliances aren’t going to be a little disruptive, they’re kidding themselves.”

“What we’re going to see in April is unprecedented,” David Arsenault, the former CEO of Hyundai Merchant Marine Americas and now an independent consultant, said at the Georgia Foreign Trade Conference in February. “We’ve seen alliances get reshuffled in the past, but never have we seen all of those alliances kick off with a shotgun start at one time. I think it is going to be a huge test, and brings in a level of uncertainty among BCOs right now. There are BCOs who are absolutely looking at how to mitigate risk from the reshuffling of these alliances. They need the reliability of gateways that they feel might be better able to sustain their volumes with minimal disruption.”

“If anybody thinks these alliances aren’t going to be a little disruptive, they’re kidding themselves,” said Pat Moffett, vice president for international logistics and customs compliance at Voxx International. “A transition of this magnitude is going to take time to straighten out, but it will get done, and the industry will be better for it.”

As long as the carriers VOXX uses maintain their customer service, the company’s ocean shipments would be “fine,” Moffett said. He’s more concerned about the effect of mergers. VOXX, which had annual contracts with CMA CGM and APL last year, used up the minimum container volumes under its contract with APL and then stopped using it when the French carrier acquired it. Moffett plans to give small contracts to APL this year in addition to its parent company to see how it performs.

Other shippers worry that consolidation will undermine the reliability of their supply chains. “I find the consolidation very worrying for risk mitigation,” Hughes said. “All of a sudden because of the alliance changes, I am going to have four of my primary carriers under one alliance.” Two of Centric’s carriers were members of the CKYHE Alliance, one was in the Ocean Three, and other was part of the G6. We’re now going to have one less alliance to spread our cargo onto. The consequences of that mean we’re going to have a higher concentration of cargo on any given ship. And we’re all going to have to review our blanket


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“It is difficult to measure exactly what the impact will be on overall trade lane capacity, and hence freight rates.”

marine insurance policies and increase our policy limits. Even so, if the unthinkable were to happen and, God forbid, a ship went down or had a problem, the losses — and not just associated with what was on board, but also with sales and profits because you would have no goods to sell — would put us at great risk.”

Lars Jensen, partner in SeaIntelligence Consulting, said the alliances are rather balanced, so there will be few if any competitive differences among the three. Still, it’s too early to measure the exact impact the new alliances structure will have on ports and port competitiveness in North America. Because the alliances have yet to publish their vessel sizes and transit times in the trans-Pacific, “it is difficult to measure exactly what the impact will be on overall trade lane capacity, and hence freight rates,” Jensen told The Journal of Commerce in December.

MERGERS AND ACQUISITIONS

Maersk Line will acquire Hamburg Süd by the end of 2017.

CMA CGM acquired NOL and its APL container line in September 2016.

NYK Line, MOL and “K” Line will merge their container shipping business by July 1, 2017, and launch joint services by April 1, 2018.

Cosco and China Shipping Lines merged in February 2016 into China Cosco Shipping Corp.

Hapag-Loyd is completing its merger with United Arab Shipping Co. this year.

ALLIANCES

Here are the memberships of each alliance, and their projected shares of the trans-Pacific trade volume, based on the existing market shares of the carriers:

• OCEAN ALLIANCE: CMA CGM (includes the acquisition of APL), Cosco Shipping, Evergreen Line, and OOCL. The Ocean Alliance will have the largest share of the trans-Pacific trade at 40 percent.

• THE ALLIANCE: MOL, NYK Line, and “K” Line, which will be merged into one liner operation in 2018; Hapag-Lloyd, which includes the 2016 merger with UASC; and Yang Ming, with a 27 percent share in the trans-Pacific.

• 2M ALLIANCE: Maersk Line (which is acquiring Hamburg Süd) and MSC, and a slot-sharing agreement with Hyundai that was announced in December, with a 20 percent market share in the Pacific.


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“Contrary to what was said during the campaign, TPP would have been a very positive move for our country and job creation.”

VIII. PROTECTIONISMPerhaps the biggest unknown for BCOs is how President Trump’s protectionist threats to impose tariffs on imports from countries with which the US has unfavorable balances of trade will play out this year and next. BCOs are by definition dependent on international trade to import or export their products, and their operations are part and parcel of the trend toward globalization that the president blames for loss of factory jobs in the US. In different pre-election speeches and tweets, Trump has proposed ripping up NAFTA and/or imposing tariffs as high as 35 percent on imports from Mexico, China and even on BMWs from Germany. He and Congress already have driven a stake into the heart of the Trans-Pacific Partnership, a free trade pact among 12 Asia and Western Hemisphere countries that was championed by the Obama administration. “I’m worried about the anti-trade rhetoric we’re hearing, the threats about renegotiating NAFTA, the loss of the Trans-Pacific Partnership,” Hughes said. “Contrary to what was said during the campaign, TPP would have been a very positive move for our country and job creation.”

Further protectionist moves would disrupt the intricate supply chains BCOs have woven to move products to markets around the world. “Take it or leave it, we’re fully involved in a global economy, and it’s always been a net-sum gain to our economy. So, I think it would be a big mistake for our country to pull back from this and become an isolationist economy,” Hughes said.

BCO concerns about protectionism are largely focused on their trade with Mexico, because it’s been the target of the Trump administration’s initial protectionist positions, including talk about a 20 percent tax on Mexican imports to fund a wall between the two countries.


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“We really don’t want to open the door to Brazil and other producing countries in the hemisphere due to NAFTA changes.”

VOXX, for example, which imports high-end audio components for its various brands, imports leather from Mexico for headrests into which it installs speakers in Florida for sale to automakers such as Ford. “It may just be a rattling of sabers, but if I have to pay an extra 20 percent for leather imports from Mexico, Ford sure isn’t going to pay me an extra 20 percent, so what am I supposed to do?” Moffett said. “That 20 percent tax makes no sense to me.”

Other shippers worry that any large-scale alterations to NAFTA could lessen their competitive export advantages in Mexico. “What goes on with NAFTA specific to Mexico is going to be very important for US merchants and farmers,” Symonanis said. Any changes in our existing trade regimes will have an impact. The relationship with Mexico is extremely important. Cotton goes down there. Louis Dreyfus has dairy exports as well. And it’s not the case that cotton displaced from Mexico is going to just naturally find a home domestically. It’ll go to some other export market, because US consumption is maybe a quarter of the total crop in a given year. So the ability to export to Mexico as we do today is important. The proximity of Texas, the largest producing state, to Mexico creates an advantage for that crop going there. We really don’t want to open the door to Brazil and other producing countries in the hemisphere due to NAFTA changes.”

Two large companies already have altered their plans because of Trump’s protectionist stance against any moves by US manufacturers to shift production to Mexico: Carrier abandoned plans to shift 1,100 jobs to a plant in Mexico that were actually saved by $7 million in incentives offered by the state of Indiana. Ford canceled plans to build a $1.6 billion plant in Mexico in the face of criticism by Trump and opted instead to invest $700 million to expand a factory in Flat Rock, Michigan, where it will make new electric, hybrid and autonomous vehicles.

Other US automakers also face the possibility that a border tax could disrupt their long-established supply chains with Mexico. Ford makes most of its very profitable pickup trucks for the US market in its domestic plants, but GM and Fiat Chrysler, which manufacture a large percentage of their pickup trucks for the US market in Mexico, could see their US market share shrink if a new border tax forces them to raise domestic prices.

Ironically, Trump’s protectionist stance and the likelihood that the Federal Reserve will increase interest rates further this year already has enhanced the advantages of manufacturing in Mexico for the US market because of the continuing erosion of the value of the Mexican peso against the US dollar. The peso, which was worth about 15 to the US dollar last winter, has since fallen to more than 20 to the dollar, a devaluation of about a third, making Mexican products less expensive to import into the US.


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