New Carriers, Alliances, and Ships, Oh My!: Market Effects Caused by a Turbulent Container Industry

Diana MaureGeneral, Imports, Ocean Freight, Shipping From ChinaLeave a Comment

In 2017 there will be a lot of uncertainty in the shipping industry. Some of the key changes include the use of strategic alliances in order to offset individual corporate weaknesses. These new carriers and services may end up crowding the market. The introduction of the SM line will act as a barometer of where the industry is at, particularly in the early stages of 2017. Nevertheless, the shipping industry will find a way to survive and prosper. The addition of new carriers is a good place to begin analyzing the future of the industry.

Advent of New Carriers

It is expected that new carriers will come on board with lots of imaginative services that are designed to secure their place in the industry. A case in point is the recent release of information about the trans-Pacific carrier line. Under the current agreement, Hanjin Xiamen will be one of the five flagship carriers that will work with the SM line. It is a remarkable comeback for a shipper that faced bankruptcy in 2016 but nevertheless; the fact that it is reconfigured means that the battle scars of that fateful year are not completely cured.

The SM Line is, in reality, an amalgamation of five ships which were inherited from Hanjin. Its expected capacity is in the region of 6500 units, each measuring twenty feet. The ships will connect China, South Korea and Long Beach in the USA starting in April 2017. Moreover, there are other additive services that are meant to bolster the industry such as an in-house network for sister companies. The new service is expected to pass Shanghai and Ningbo in China; as well as Busan in South Korea. Up to 11 vessels will be deployed with a range of 1000-2500 TEUs covering up to eight intra-Asia routes. The additional locations include Japan, Thailand, India, Pakistan, Vietnam and Indonesia.

It is anticipated that the SM line will rely on non-vessel-operating common carriers in order to handle the expected volume of shipments. This is a direct consequence of the industry practice of neglecting new entrants. It is notable that SM Lines are operating outside an alliance framework, a significant divergence from the industry model as it stands today. Indeed; other players are focusing on new alliances such as 2M + Hyundai Merchant Marine and the Ocean Alliance. Having said that; the SM Line deserves more analysis as it may turn out to be the ideal model for the industry in the future.

SM Line

One of the critical predictions for 2017 is that the SM Group will operate the Hanjin business separately from Korea Line. This may be an insulating factor or one that is designed to fit in with the operational quirks of the company. The Samra Midas Group will therefore create an entirely new company in the form of the SM Line, with primary responsibility for linking the USA to the Far East. Consideration was given to taking over Hanjin’s Trans-pacific liner business but the board rejected the proposal based on the fact that the SM Group does not have sufficient experience in the shipping business. In any case, the evident slump within the industry was bound to lead to some cash flow problems down the line.

All those misgivings will not stop the SM Line from becoming one of the newest and most exciting container carriers on the globe. An elaborate ceremony involving some 200 employees celebrated the launch of the SM Line in Seoul on the 6th of January. Currently, there is a ship acquisition project that focuses on those vessels with a TEU range of 4000-6500. The target for the first sailing will be in March 2017. Some have speculated that the SM Line may develop links with the Hyundai Merchant Marine as well as a host of feeder lines such as Heung-a Shipping and Sinokor Merchant. The presumed purpose of these alliances would be to improve vessel-sharing and the consequent operational efficiency.

So far the target seems to be that the SM Line will get as much as 110,000 TEU going. The costs will be offset by focusing on discounted new builds. If that target was achieved, then the SM Line would join the list of the top 20 global carriers by fleet/capacity. The main problem is the risk of engaging in over-capacity and making losses like Hanjin did in 2016. Another question that ought to be considered is the fate of the smaller carriers.

Smaller Carriers and a Crowded Market

The trans-Pacific routes are proving to be a magnet for the smaller carriers such as Zim Integrated. It is part of a much wider battle for the Asia-to-North American trade. At the top of the pile are the SM Line, Wan Hai and Zim Integrated. The bigger allied groups include the Ocean Alliance and THE Alliance which are due to start operations in April. On the other side are the two giants in the guise of the 2M Alliance and Hyundai Merchant Marine. The rationale for the move is that US containerized imports are expected to increase 4-5%. At their peak, these imports may require 21.4 million twenty-foot units. The background to this is a stronger US economy with GDP forecasts of about +2.3%, a significant improvement on the growth rate of 1.6% in 2017.

Some of the specific developments include a complete revamp of the two strings that were operated by PIL and Wan Hai. In the new configuration, Cosco is expected to play an important role. One string is expected to focus on the Northern and Central Chinese boarding points. This will require six vessels of 6500 TEUs. The other string will focus on South Chinese boarding posts with six ships of 7500 TEUs. It is notable that these strings are operated outside the Ocean Alliance network, another clear indicator of the presence of smaller providers. That then raises questions about the continuing role of megaship deliveries.

Megaship deliveries

The fact that there are still megaship deliveries indicates that the days of overcapacity are not yet over. A case in point is the gigantic MSC Maya with 19000 TEUs. The North-South liner trades will be the ones bearing the brunt of the slump.  It is expected that about 78% of all new ship deliveries in 2017 will have more than 10000 TEUs. Around 78 percent of the 1.69 million twenty-foot-equivalent units of new ships slated for delivery in 2017 will be above 10,000 TEUs, according to Alphaliner. Consequently, Alphaliner is predicting that up to 750,000 TEUs are bound to be scrapped during 2017. This translates into low freight rates and significant losses.

New Alliances and US Port Costs

One way of achieving profitability is to grow scale and engage in strategic consolidation. However, alliances are not always the best option. The expected alliances are bound to threaten US port costs, particularly around Long Beach, Los Angeles and the Foreground. These are unprecedented levels of port operational expansions. Shipping costs could spiral out of control if there is comprehensive and collaborative plan to manage the new activity and the size of the vessels that are coming in. Of particular concern will be the logistical organization in terms of hours, schedules and closures. Timely and accurate information will be of the essence.

Shippers must constantly seek opportunities even in times of stress. 2017 is the year of recovery. Those who are not already in an alliance must find ways of establishing niches that can compete with the big boys. The alliances must control their capacity in such a way as to avoid the problems of overcapacity that caused so many crises in 2016. As for the ports; they need to reorganize their operations in preparation for the significant changes that are happening in the industry.

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Diana Maure
Recently promoted to Sales Manager, Diana started in 2004 as the Foreign to Foreign Manager for ShipLilly. Her unique background has allowed her to help improve the supply chain of many international clients and provide customized logistical solutions throughout the years.

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