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By CBN Contributing Editor William DiBenedetto
The P3 Alliance is dead—but wait: long live the 2M!
Or something like that. Just when shippers thought it was safe to breathe a sigh of relief at the demise of the P3, the sigh was rudely interrupted when the world’s two largest container ship operators, Maersk and Mediterranean Shipping Company (MSC), joined forces in a new alliance.
It’s sort of a "P3 light," but the new alliance could quickly change the land and seascape on its own terms. And early handicapping says that it will pass muster this time with China, which scuttled the original P3 alliance between the three largest container operators going, Maersk, MSC and CMA CGM.
The P3/2M alliance story is the biggest development in a year of big developments with ripples that could affect other stories related to rates, the peak season, strikes and even the Panama Canal.
In short, there’s a lot happening in 2014 that will have ramifications well into next year and beyond.
Alliances take center stage
There’s nothing new about the urge to join forces in the shipping industry. It’s a story and a strategy as old as the industry itself: carriers aligning to "discuss" rates (and avoid rate wars), rationalize services and, in short, leverage their market power and control of transport equipment in the most efficient and lucrative ways possible. Ideally, rate alliances should provide rate and operational stability for the carriers and better service efficiencies for shippers.
The 10-year P3 alliance formed last year was basically Maersk’s answer to other major groupings, including the G6 and CKYHE alliances. The P3 collaboration would have placed a combined 255 ships and 2.6 million TEUs on 29 loops, controlled by a separate vessel operating entity headquartered in London. Lars Mikael Jensen of Maersk Line was appointed CEO of the world’s biggest, most comprehensive container alliance. After approval by regulatory bodies in the United States and Europe, it was widely predicted that the Chinese Ministry of Commerce would also green-light it.
Not so fast—MOFCOM could not swallow the huge P3 pie, saying it was "essentially different" from other container alliances. The agency stunned the industry, ruling P3 was a de facto merger between Maersk, MSC and CMA CGM that would "restrict competition ... based on market share, market access and industry characteristics, the concentration will enable [P3] operators to become a close-knit alliance, commanding 47 per cent market share in the Asia-Europe liner service." MOFCOM added that the P3 would also have enhanced the carriers’ bargaining power with ports. "In order to vie for calls, ports may be forced to accept lower handling charges, which will cast adverse impact on the development of ports." China is home to seven of the world’s 10 top container ports. In addition, U.S. West Coast ports will no longer have to worry that a single operational entity might have a huge amount of influence in negotiations over port calls and terminal charges.
Longtime industry analyst and consultant Barry Horowitz of CMS Consulting Services said P3 "was potentially dangerous because it concentrated too much capacity in too few hands." The new 2M alignment looks to be a better play for Maersk, but he found the whole episode odd, with respect to China’s reaction and because Maersk and MSC are "two odd bedfellows…the whole thing is strange."
Maersk admitted China’s decision was a surprise because the partners had "worked hard to address all the regulators’ concerns," said Group CEO Nils S. Andersen. "The P3 alliance would have enabled Maersk Line to make further reductions in cost and CO2 emissions and, not least, improve its services to its customers with a more efficient vessel network." He was confident that Maersk would "accomplish those improvements anyway," he said.
And so it goes. Less than a month later, on July 10, Maersk rebounded. The line announced a 10-year Vessel Sharing Agreement (VSA) – 2M – with MSC on the Asia-Europe, trans-Atlantic and trans-Pacific trades. The new VSA replaces all existing VSAs and slot purchase agreements that Maersk Line has in these trades.
2M is designed to address China’s objections to P3 in two ways: obviously the market share involved is smaller, and as Maersk noted, "The cooperation is a pure VSA; there will be no jointly owned independent entity with executional powers."
It will include 185 vessels with an estimated capacity of 2.1 million TEU, deployed on 21 strings. "The overall purpose of the cooperation is to share (network) infrastructure. Maersk Line and MSC will be able to provide their customers with more stable and frequent services, cover more ports with direct services. The VSA will improve the efficiency of the Maersk Line and MSC networks through better utilization of vessel capacity and economies of scale," Maersk said.
"We have to be innovative and take out cost, while keeping a product that is best in class for our customers in terms of coverage, frequency and reliability, said Søren Skou, Maersk Line CEO. "Our agreement with MSC is a step towards achieving all of these objectives in the East-West trades."
The line added 2M would further enhance its customer offering while also reducing costs and CO2 emissions.
The 2M breakdown:
• The VSA will improve network efficiency and
allow for lower slot costs through improved
utilization of vessel capacity and economies of
scale.
• The VSA will provide more sailings and direct
port pairs than the parties offer today
individually.
• The VSA’s 21 strings cover the Asia – Europe,
Transatlantic (Europe – U.S. East Coast) and
Transpacific (Asia – U.S. East and West Coast)
trades. The 21 strings are split as follows:
Asia/North Europe: 6, Asia/Mediterranean: 4,
Asia/U.S. West Coast: 4, Asia/U.S. East Coast:
2, North Europe/U.S.: 3, Mediterranean/U.S.: 2.
• Maersk will contribute about 110 vessels with a
nominal capacity of approximately 1.2 million
TEU (55 percent of the VSA’s total capacity).
MSC will contribute approximately 75 vessels
with a nominal capacity of about. 0.9 million
TEU (45 percent of the total capacity).
• Vessels deployed in the VSA will continue to be
owned (or chartered) and operated by the two
individual lines.
• The VSA does not include joint marine
operations. Each party will thus execute its own
operations, including stowage, voyage planning
and port operations.
• The VSA does not include any commercial
tasks or responsibilities. Each party will
continue to have fully independent sales,
pricing, marketing, and customer service
functions.
• A joint coordination committee will monitor the
network on a daily basis.
The VSA is expected to begin in early 2015, conditioned upon the information filing and whatever approvals by relevant authorities are needed.
MSC vice president Diego Aponte said, "With sustainability a key area of focus for MSC, we’re delighted that this vessel-sharing agreement will mean major cuts in emissions while simultaneously enhancing our service to customers."
The new VSA "is in line with the expectations following the rejection of P3," said Lars Jensen, chief executive of Copenhagen-based SeaIntel Maritime Analysis, quoted in a Wall Street Journal report. "In a broader industry perspective, we expect [vessel-sharing agreements] to be the main vehicle for new cross-carrier collaboration in the main east-west trades for the near-term future, as carriers will strive to avoid another rejection by competition authorities."
Initial reaction from shipper organizations was cautious. The Singapore National Shippers’ Council said shippers "are agreeable to vessel-sharing agreements and joint services amongst carriers as long as they remain vehicles to improve efficiency, increase reliability, enhance port coverage and reduce costs." SNSC said regulators should watch that M2 does not expand. "We have seen this in the G6 and CKYHE," it said. "We should be guarded against the possibility of 2M morphing into ‘2M++.’ We also know how easily market shares can change, especially when the M2 companies are the top two players in container liner shipping." SNSC also warned that VSAs can "easily serve as back doors for shipping lines to collaborate to fix freight rates."
The European Shippers’ Council (ESC) also expressed concerns about the new alliance, calling on the European Union to monitor its effect on pricing, capacity changes and service quality. ESC said the new arrangement is "less worrying" than the predecessor alliance, but "even with ‘only’ Maersk and MSC, the carriers reach around 35 percent of market share between Asia and Europe, which is still very important and can cause some [concern]."
And what about CMA CGM, the odd carrier out? There was speculation that it had flirted with its two partners on the Asia-Europe trade – UASC and
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China Shipping – either prior to or during the negotiations with the other P3 lines, so it’s possible that it could align with them.
And a merger, too
While alliances proliferate, there was a related, significant development coming together at the issue’s press time, as U.S. regulators sanctioned the merger of Germany’s Hapag-Lloyd and Chile’s Compania Sud Americana de Vapores, which will form the world’s fourth-largest container carrier by capacity, according to a Hapag-Lloyd spokesman.
"The Department of Justice and the Federal Trade Commission have approved the merger," said Rainer Horn, Hapag-Lloyd's director of public relations, to The Wall Street Journal. "We are still awaiting approvals from a number of other regulatory bodies."
Insiders expect European Commission and Chinese regulators to approve the merger in the coming months.
The two companies, which signed a contract in April, have said they expect the merger to be completed by November.
Hapag-Lloyd operates about 150 ships, competing with Maersk and MSC on the Asia-Europe, trans-Atlantic, and trans-Pacific trades. CSAV operates about 50 vessels. Industry officials say the merger would give Hapag-Lloyd more exposure in intra-South American and South America-U.S. markets.
CSAV said the combined company would have a capacity of one million TEUs.
Can rates rally?
Mega-alliances and mergers are not the only watchwords, as they are joined by weakness and volatility, with regard to freight rates.
Drewry recently forecast that once again, average freight rates would be lower in 2014 than in the previous year. Drewry estimated that on the headhaul trans-Pacific trade alone, carriers have given away in the region of $1.25 billion in annual revenue via the lower annual contracts they signed with shippers in May. They also signed new annual contracts on the Asia-Europe trade earlier in the year at levels of around $150-$200 per FEU container lower than in 2013. "On the positive side, they may have secured base cargoes to fill their ships at a low price. But this puts more pressure on carriers to try and recover revenue from the spot market," Drewry said. Volatility in the spot market will remain high this year, it continued.
"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." Industry unit costs per TEU are forecast to decline by 2.5 percent this year, Drewry continued, and "strategies such as slow steaming, re-designing 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."
Neil Dekker, Drewry’s director of container research, added: "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," he continued, "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 aim of matching supply and demand."
Or as Horowitz succinctly put it, "things for the shipper have improved, and the carriers have done better, but if carriers aren’t making money they have no one to blame but themselves."
Shippers benchmark
More shippers are beginning to benchmark their container shipping costs to ensure that they secure the most favorable freight rates possible, through Drewry’s recently launched Benchmarking Club.
The Club provides members the opportunity to benchmark their shipping costs against their peers, thus aiding their freight procurement processes. Member organizations provide their contract rates confidentially to Drewry and, in exchange, these are aggregated with other members' rates to provide benchmark contract rates based on an average of the submitted rates.
"Drewry’s Benchmarking Club enables us to ensure that we secure competitive freight rates with carriers and identify lanes where we could possibly further lower our costs," said Scott Larson, vice president of global logistics and customs at U.S. retailer The Bon-Ton Stores, Inc.
Contract rate information held by Drewry’s Benchmarking Club is confidential and only available to members, who are limited to importers and exporters and exclude freight forwarders or NVOCCs.
Drewry will publish an index of contract rates across multiple trades on a quarterly basis to improve visibility of trends (but not actual rates) in the contract market.
Trans-Pac carriers seek more revenue
On July 15, the Trans-Pacific Stabilization Agreement lines were to have implemented a previously announced "second-stage" $200 per-FEU general rate increase (GRI) and peak season surcharge (PSS) for cargo moving to Pacific southwest ports in California. The proposed increase followed a similar rate hike introduced on July 1.
While the revenue increase to the West Coast was split into two stages, TSA shipping lines applied for a full $400 per-FEU increase in July for cargo moving to the Pacific Northwest, U.S. East and Gulf coasts, and via intermodal to inland U.S. points. In addition, given the current unsustainable freight rate levels overall and the likelihood of continued strong demand through August, TSA is recommending a further GRI on August 1, TSA said.
"With the overall uncertainty already seen in the eastbound freight market, the central issue for shippers and carriers alike is maintaining service and schedule reliability," said Brian Conrad, TSA executive administrator.
"All partners in the supply chain need to be able to respond quickly and cover contingencies in the event of cargo surges or bottlenecks. And they need to know that their costs are covered in the process."
Conrad noted that both sides in the West Coast longshore labor negotiations are committed to avoiding cargo disruptions in the wake of the July 1 contract renewal deadline passing. "We respect the need for confidentiality in the negotiations, but it makes the kind of reassurances we have received all the more important to maintaining confidence in the market," he said.
TSA members are APL, "K" Line, CSCL, Maersk, CMA-CGM, MSC, Cosco, NYK, Evergreen, OOCL, Hanjin, Yang Ming, Hapag-Lloyd, Zim and Hyundai.
Carriers are looking to take advantage of the traditional peak season on the Asia-Europe trade as the planned general rate increase comes into effect.
The Shanghai Containerized Freight Index showed that rates jumped $310 to $1,416 following the GRI, representing the largest weekly rise for 15 weeks. Will they stick? Freight Investor Services broker Richard Ward warned, "Despite the gains, feedback from the market suggests that rates have already begun to fall, with levels in the market for July between $2,450 and $3,000 per-FEU."
Drewry’s Hong Kong-Los Angeles container freight rate benchmark, after remaining fairly stable, rose 12 percent to $1,850 per-FEU after the peak season surcharge requested by TSA carriers came into effect on July 1.
But Drewry expected these gains to erode and the next round of PSS implementation in mid-July to have little effect in lifting rates unless there is a favorable outcome for the Los Angeles dockworkers from the ILWU contract negotiations.
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