Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Here's some good news for the hard-pressed shipping industry: Of the top 15 container lines that were in operation nine months ago, four have gone out of business or are in the process of doing so.

Here's some not-so-good news: The global container fleet is still getting bigger.

The world's seventh-largest container line, Korea's Hanjin Shipping, filed for receivership last week. APL, operated by Singapore's Neptune Orient, was gobbled up by CMA CGM earlier this year in the industry's biggest takeover since 2005. Hapag-Lloyd is in the process of a merger with United Arab Shipping and China's two biggest state-owned container fleets have been combined to create Cosco Container.

Unfortunately, all that dealmaking on its own does little more than change the owner's or charterer's name on a ship register. What the industry needs is either more trade, or fewer ships.

David-shipping-090616

Container shipping is certainly getting more concentrated than it was. Assuming the Hapag-Lloyd-UASC merger goes through and Hyundai Merchant picks up Hanjin's fleet, as Korea's financial regulator has suggested, then the top six shipping lines will have gone from controlling about 53 percent of the global fleet to 63 percent, according to Alphaliner, a shipping data service.

That shift to a less competitive market ought to provide some help in lifting container rates -- especially as all of the top 10 fleets with the exception of Hamburg-Sued are now members of one of three shipping alliances, which together encompass about 80 percent of global vessels.

Shipping alliance_090616


The problem for lines is that reduced competition hasn't been enough to juice container rates back into positive territory. Even after rebounding from their low of $666 per 40-foot box earlier this year, the benchmark rate for shipping a container on major routes remains stubbornly below costs that even market leader Maersk struggles to get below $2,000.

Boxed In
Benchmark container rates have improved, but they're still in unprofitable territory
Source: World Container Index, Drewry, Bloomberg
Note: FFE=Forty-foot equivalent shipping container. Rate shows cost of transporting a single 40ft box on a "typical" east-west route.

There's simply not enough trade going on to fill all the ships on the ocean. The value of global goods exports touched its lowest level in six years in February and has been running at subdued levels all year, according to the International Monetary Fund. Container volumes can be assumed to be going in roughly the same direction:

Trade Down
The value of global goods exports touched its lowest level since 2010 this year
Source: IMF, Bloomberg

As a result, about a fifth of the global container fleet is sitting at anchor, up from less than 8 percent in trade's heyday ahead of the 2008 financial crisis. Hanjin's entire fleet is currently marooned offshore, as ports won't accept its ships at dock for fear that the company will be unable to pay shore fees or will have its assets seized by creditors, Bloomberg's Sohee Kim and Kyunghee Park reported Wednesday.

Adrift
About a fifth of the global container fleet is sitting at anchor
Source: Bloomberg
Note: Based on anchored ships as a proportion of fleet at anchor and underway. Anchored ships could be loading or unloading as well as idle.

Shipping lines have two main options to survive this hurricane. They can sit tight, hope their debts don't overwhelm them in the way that Hanjin's and Hyundai Merchant's have done, and trust that trade will eventually recover and start filling their holds again. But that's a high-stakes bet, given the rise in protectionist measures in major economies, the U.K.'s vote this year to leave the EU, and a U.S. presidential campaign in which both candidates have voiced opposition to some trade deals.

The shorter route back to profitability will be to reduce the size of the fleet by turning some of those excess ships into scrap metal -- but that will take a while. Low scrap prices make demolition a less attractive option these days, and in the meantime new vessels ordered before the current crisis are still being delivered, adding to the glut. 

Demolition Derby
Monthly scrapping of container ships is running at its highest levels since 2014
Source: Clarksons Research
Note: TEU = Twenty-foot equivalent unit, comparable to a single 20ft shipping container.

While the volume of container ships being broken up has risen sharply this year, the total fleet still managed to rise above 20 million 20-foot equivalent units for the first time in history in July, according to Clarksons Research.

Turning round a big box ship is a slow process. Turning round the global container fleet will take even longer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Alphaliner's data show only the top 100 container lines, so the 19.4 million TEU figure for the global fleet is smaller than the Clarksons Research estimate of more than 20 million TEUs below, which incorporates all container lines.

  2. There's some uncertainty about the final shape of the combinations as Hyundai Merchant and Hanjin Shipping are members of rival alliances. Any combination of the two fleets would be likely to end up with one alliance or other.

To contact the authors of this story:
David Fickling in Sydney at dfickling@bloomberg.net
Rani Molla in New York at rmolla2@bloomberg.net