Future Vessel Sharing to Lag P3 Scope
Container lines will continue to look to vessel sharing agreements (VSA) to reduce their operational costs, but new alliances will likely be less ambitious following the Chinese rejection of the P3 Network. Although Maersk Line, Mediterranean Shipping Co., and CMA CGM will likely come back with major VSA plans as it has already, those will be pared down; the risk of spending a year planning an alliance only to see regulators deny it is too high, SeaIntel maritime Analysis CEO Lars Jensen told the JOC, Chinese regulators shocked the shipping industry. The largest proposed VSA in terms of capacity, saving the alliance would be anti-competitive. The demise of the P3 “postpones consolidation,” Jensen said. “It was not full consolidation, but it was a stop down the right path.” With massive overcapacity and demand moderate at best, consolidation is the only way the container industry can put an end to years of losing billions of dollars, he said. The industry has been slow to consolidate, largely because liners are controlled by a conglomerate. Those financial losses often lead to cancellations of sailings, jeopardizing shipper supply chains. P3 proponents saw alliance as a way to stem or even reverse the decline in container shipping reliability. The next wave of major VSAs won’t be able to bring the same stability the P3 promised, Jensen said. Not only would such a major vessel sharing agreement likely be far less ambitious in terms of scale than the P3, it would be more fragile and not offer the service consistency that the alliance involving the world’s top three container lines would have had, he said.
Shippers concern of New 2M Alliance
The European Shippers’ Council (ESC) has expressed concerns about the new 2M alliance between Maersk and MSC, announced, calling on the European Union’s competition watchdog to monitor its’ effect on pricing, capacity changes and service quality. The ESC, which claims to represent the freight transport interests of business in Europe, said this type of vessel sharing agreement was “less worrying for shippers than the planned P3” alliance between Maersk, MSC and CMA CGM, which had been a “more integrated cooperation with huge market share on all concerned trades. However, even with ‘only’ Maersk and MSC, the carriers reach around 35% of market share between Asia and Europe, which is still very important and can cause some wonderings,” the ESC observed. “As far as European Shippers Council is concerned, this threshold is enough to require some railing from competitive authorities.” The ESC said the monitoring proposed by the US Federal Maritime Commission (FMC) for the P3 alliance “would be sufficient to reassure shippers in some aspects”. It said the focus on a monitoring regime should clearly be put on the monitoring capacity modification and its’ impact on rates. “Furthermore, a centralised notification system should be created to ensure that shippers get service modification notification including transit time and port called – long enough in advance to be able to take these modifications into consideration in their transport plan,” the ESC said. “Additionally, shippers will be very careful on the development of such an alliance and its’ impact on rates, ports called and quality of service. We continue to advocate a deeper involvement of ‘EU competition watchdog’,” the ESC said.
Will China Block 2M to Protect COSCO
In an article in Lloyd’s List, secretary-general of the European Maritime Law Organization August Braakman said the scale of the 2M alliance was still substantial and China’s decision was likely to be based on national industrial policy issues and the protection of Cosco, rather than necessarily just concerns about its potential to limit competition and choice for customers.
Mr Braakman, whose paper last year on the implications of the P3 Network is thought to have influenced Chinese regulators in their decision to prohibit the alliance, said the main consideration for that decision was that the alliance was not compliant with ‘social public interest’ and did not ‘promote a healthy development of the socialist market economy’ in China. He also observed that in the decision-making process around P3, the task of achieving those two objectives of Chinese competition law was not only entrusted to MofCom; the Ministry of Transport had also played an important role.
“Seen from this perspective, it is clear that the application of Chinese competition law is a tool for conducting the country’s industrial policy,” he said. “When reaching a decision, this highlights the importance of considerations either indirectly or not at all relating to the realization of a fair and undistorted competition that aims at the creation of a level playing field for all competitors.”
He said Maersk and MSC appeared quite confident that the regulatory authorities would give their approval to the 2M alliance. With regard to China, this optimism apparently stems from the fact that MofCom had been unhappy with the market share of the P3 alliance and issues over the independence of pricing and marketing of capacity.
Carriers Lose Billions on Contract Rates
In its’ second quarter report, Drewry estimated that in 2014 transpacific carriers have given away USD 1.3bn in annual revenues on contracts signed with beneficial cargo owners for the head-haul trade along. On the Asia-Europe trade lane, annual contract rates are around USD 150-200 lower per 40 ft than in the prior year. Drewry said the shipping lines had signed the contracts at lower levels to fill their ships, but warned it would put pressure on carriers to recover revenue from the spot market, which is expected to remain volatile. The analyst said the lower freight rates would also widen the gap between the financial results of carriers that have focused on cutting costs and the rest of the top 20 lines. “While supply and demand remain key drivers of freight rates across all trades, those carriers cutting their costs are also better equipped to offer lower rates and in real terms they are in fact passing back these benefits to their customers,” it said. “Industry unit costs per TEU are forecast to decline by 2.5% this year and strategies such as slow steaming, redesigning networks and buying bunkers in Russia are crucial to this, but carriers will struggle to make a profit since we are also forecasting unit revenues to decline by a similar amount.” Drewry Director of container Research Neil Dekker said: “it could be that the huge task of adequately matching supply and demand at the global level and on a consistent basis which ultimately helps to drive freight rates is simply beyond the industry and we do not mean this as a condescending remark. “This is an industry where accurate volumes on many trade lanes are unknown simply because there is no unified and agreed system of accounting. This is an industry where relatively few shippers can provide accurate volume forecasts. This is an industry where the constant desire to launch bigger ships in order to reduce unit costs can only ever logically be at odds with the aid of matching supply and demand.” Drewry added that the blocking of the P3 alliance by the Chinese authorities was “disappointing for the industry since it was an excellent opportunity to help stabilise the main trades, in terms of capacity management and efficient use of assets”.
CMA CGM’s 1st Port Investment in India
The 50:50 JV partnership with Adani Ports and Special Economic Zone (APSEZ), India’s largest port developer and part of the Adani Group, covers the fourth Container Terminal in Mundra, which will be a 650 metre terminal along with 27 hectares of back area capable of handling 1.3 million TEU annually. The construction phase will be initiated immediately and completion will be in 24 months, CMA CGM said. The project includes the design and construction of a terminal with 650 metres of jetty with a water depth of 16.5 metres. This terminal will initially have four units of 65 tonne capacity of rail-mounted quay cranes capable of handling 18,000 TEU vessels and Super Post and Ultra Large container vessels. CMA CGM said the cranes would be “by far the largest and first of its’ kind in India.” The yard equipment will include twelve 41 tonne lift rubber-tyred container gantry cranes, which will accommodate seven rows of containers and one operational lane. For CMA CGM, Mundra Container Terminal is the group’s first port investment in India and demonstrates its’ ambition to further increase its’ presence in this strategic and fast developing country. CMA CGM has been present in India since 1984, with the container line currently calling at nine ports in India. This new investment adds to the 27 container terminals that CMA CGM Group has today in its’ portfolio and is a key step in its’ strategy to further expand its’ position in port operations. Farid Salem, Chief Executive Officer of CMA CGM Group said: “we believe in the development of India and of its’ economy. With this investment, CMA CGM and Adani Ports will develop a state-of-the-are infrastructure that will play a key role for the development of the country’s industry. “CMA CGM has strong ambitions in India. We are convinced our partnership with Adani Ports will significantly reinforce this strategy.” As per the agreement, the transaction is subject to approvals from the regulators, including the competition commission of India. According to Drewry, volumes at Mundra increased by 28% in 2013 to more than 2 million TEU making it the country’s second largest container port. It has an estimated deepwater capacity of 3.6 million TEU per annum. The country’s largest container gateway, the congested Jawaharlal Nehru Port (JNP), is currently running close to its’ current 4.1 million TEU capacity, although the easing of tariff regulation in India’s major ports since last year is already attracting new investment and should help address the chronic capacity shortage, Drewry notes. Plans for JNP now include the expansion of capacity by 800,000 TEU by DP World, with rapid completion targeted for 2015 and the approval of PSA as winning bidder for the development of a huge new terminal at the port, with an ultimate capacity of 4.8 million TEU per annum more than double the ports’s present capacity.
The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).