Shipping lines respond to overcapacity

Overcapacity has changed the face of the global shipping industry, with new international alliances being formed by shipping companies. But the Middle East looks set to continue on a different path. Published in MEED, 22 April 2014

Over the course of March and April, the Federal Maritime Commission (FMC), which regulates the shipping industry in the US, approved two sets of alliances among companies that are looking to operate to and from American ports. In the process, it has helped to cement an ongoing trend in the market for greater cooperation between major carriers as they struggle to cope with overcapacity on the main intercontinental routes.

The alliances include trade via several large Middle East ports, but whether the trend will have much impact on the region remains open to question.

The first of the alliances to gain approval from the US authorities was the deal that brings together Denmark’s Maersk Line with Switzerland’s MSC Mediterranean Shipping Company and France’s CMA CGM. Known as the P3 Network Vessel Sharing Agreement, it was approved by the FMC on 20 March.

The alliance covers trade between Europe, the US and Asia, and includes services via ports in Egypt, Israel, Morocco, Oman and Saudi Arabia among others. The three European shipping lines will coordinate their activity on routes between these ports and others around the world to ensure there is no overcapacity.

There are a few more hurdles for the alliance to clear before it becomes a reality, however, including the approval of regulators in Europe and Asia. Most observers say they expect that to happen by the middle of the year. Once that is secured, the three shipping companies plan to offer 2.6 million 20-foot equivalent units (TEUs) of capacity on 255 vessels, with 42 per cent of that coming from Maersk Line, 34 per cent from MSC and the remaining 24 per cent from CMA CGM.

According to Maersk Line, although the Middle East is not a significant factor in the creation of the alliance, there may still be some fringe benefits for the region from the tie-up.

“The Middle East is not the driver for the P3 alliance,” says Soren Castbak, head of west central Asia trades at Maersk Line. “It’s the Trans-Atlantic trade, the Trans-Pacific trade and the Europe-Far East trade that are the key drivers. But there is no doubt the P3 comes with some benefits for the Middle East. It will call at some of the key ports, at hubs such as Salalah in Oman and Jebel Ali in the UAE, and some of the P3 services will stop by places such as Colombo in Sri Lanka, which could offer some extra coverage for the Middle East. So, from a Middle East perspective, the P3 is a little like the icing on the cake for our customers.”

A separate deal, known as the G6 Alliance, has been agreed by a wider range of companies including Singapore’s APL, Germany’s Hapag Lloyd, South Korea’s Hyundai Merchant Marine, Japan’s Mitsui OSK Lines and Nippon Yusen Kaisha, and Hong Kong’s Orient Overseas Container Line. It gained approval from the FMC on 2 April and operates in a similar way to the P3, allowing the member shipping lines to coordinate their services to improve efficiency and save costs. The G6 covers trade between ports in Asia, the Middle East, Europe, the Caribbean and North America, including ports in Egypt, Saudi Arabia and the UAE.

Although the US approval is new, the alliances themselves have been in formation for a while. The P3 tie-up, for example, was first announced in June 2013 and the G6 alliance has already been operating between Europe and Asia for the past two years. In both cases, the initiatives are reminiscent of what has been going on for far longer in the airline industry, where major carriers have been grouping together in arrangements that usually fall short of full mergers or takeovers.

Proven advantage

“Alliances in the global transportation industry have been well-established in the air transport segment and have proven to be beneficial for the overall industry,” says Srinath Manda, programme manager for the Middle East and North Africa transportation and logistics practice at US consultancy Frost & Sullivan. “Similar benefits can be expected from alliances within the shipping industry. G6 alliance members have been the leading shipping lines in the corridors to and from Asia-Pacific and the Middle East, so shippers in these corridors are likely to gain from this alliance.”

The impact on customers remains to be seen, but explaining its decision, the FMC said that in its view the alliances were unlikely to produce unreasonable increases in transportation costs or any unreasonable reductions in services. What they may do, however, is change the amount of capacity on some key routes, although this is not something that will happen straight away, according to analysts.

“At the outset, the P3 and G6 will not materially change supply compared with what we see today,” says Lars Jensen, CEO of Copenhagen-based SeaIntel Maritime Analysis. “We may end up seeing a more stable capacity rather than the many cancellations of sailings the carriers presently use to manage the overcapacity. [The alliances] should not have much direct impact on pricing. Legally, [shipping lines] are prohibited from coordinating pricing in any way, shape or form historically, carriers have not been very good at pricing discipline anyhow.”

Alongside the P3 and G6, there are other industry groups that are expanding to include more carriers. For example, in February, the CKYH alliance of China Ocean Shipping Company, Japan’s K Line, Taiwan’s Yang Ming and South Korea’s Hanjin Shipping added another Taiwanese operator, Evergreen Line, to its list of members. The group, now renamed the CKYHE alliance, coordinates its members’ operations on several services between Asia and Europe.

All these firms are grappling with the problem of oversupply in the global shipping sector. As the operators in the P3 alliance said when announcing their plans in June 2013, “declining volume growth and overcapacity in recent years have underlined the need to improve operations and efficiency in the industry”.

Such issues have been a feature of the Middle East shipping market in the past, particularly in terms of dry bulk and container ships. “Transportation always tends towards overcapacity,” says one banker in the region, who specialises in the sector.

High growth

However, according to some in the industry, the growth seen in Gulf economies in particular over recent years (in terms of both exports and imports) means capacity is less of an issue in the Middle East than it is in other parts of the world. As a result, there is little appetite for replicating the international alliances within the region.

“There has been a lot of growth in the Middle East,” says Castbak. “The [expansion of the] petrochemicals industry, for instance, has led to a lot of exports in containers, which has stepped up demand for capacity. And because of the impressive growth of the local economies, a lot of goods are also being imported for consumers.

“So we don’t see overcapacity as an issue for the region and we don’t see a shortage of capacity either. So far, we have been able to keep up with customer demand to and from the region and the rest of the world. In the Middle East, in the short term at least, there is very little to gain for us or our customers by teaming up with somebody else. There has to be a synergy in an alliance. Right now, we prefer to be as independent as possible.”

Maersk’s position is one other carriers are likely to follow, given the strength of the regional market. “The prospects for the shipping industry have been bright, owing to the region’s steadily rising outflow of oil and gas cargo, and its consistently expanding role as a global trading and trans-shipment hub,” says Manda. “The industry’s prospects in this region are relatively better than elsewhere in the world, because in most other regions the prospects are highly dependent on just the imports and exports of manufactured goods by nations in that specific region and they may not be consistently bright across all the countries.”

Governments around the Middle East are trying to tap into that demand with a string of port developments that should further improve the options for those wanting to use the Middle East as a trans-shipment hub. According to regional projects tracker MEED Projects, the largest port projects planned or under way are in the Gulf. They include the port being developed for the Khalifa Industrial Zone in Abu Dhabi and the Grand Faw Port in Iraq. However, there are also large schemes in some North African countries, including Tunisia and Morocco.

The longer-term pressures on the global industry mean more formal consolidation may be needed in the future if the market is to stabilise. As with airline mergers, that could prompt political opposition and competition concerns in some markets. If it does happen, though, the Middle East will inevitably feel it. For the immediate future, however, the industry in the region appears to be on a different trajectory.

“The Middle East will not be much affected [by the alliances],” says Jensen. “They will be a stopover point at major hubs, but that is already the case today and both the P3 and G6 are purely east-west carriers. Cargo and services linking Middle East hubs to Africa and the Indian subcontinent are operated outside the P3 and G6, sometimes alone and sometimes in other carrier constellations. Overall, the prospects, particularly for containerised raw material exports, are positive.”