Giant shipping firms ride consolidation wave to dominate sector

The hulking container ships that transport sneakers and bananas around the world keep getting bigger. So are the firms that own them.

Survivors of the massive consolidation in the industry now enjoy big economies of scale and increased demand, one year after excess capacity caused the sector's worst crisis - the bankruptcy of South Korea's Hanjin Shipping.

Asia's largest container line, China's Cosco Shipping, last month said it would pay more than US$6 billion (S$8.19 billion) for rival Orient Overseas International, owner of the world's biggest vessel - a carrier longer than the Empire State Building.

Denmark's AP Moller-Maersk is in the process of buying a German competitor and boasts its own fleet of mega ships, including one that can carry about 180 million iPads.

These giant shipping firms wield much more pricing power over manufacturers and retailers like Walmart and Target. The five biggest container lines control about 60 per cent of the global market, says data provider Alphaliner.

Shipping rates are climbing, and an index tracking cargo rates on major routes from Asia is about 22 per cent higher than it was a year earlier. "Container shipping is now a game only for big boys with deep pockets," said Ms Corrine Png, chief executive officer at research firm Crucial Perspective. The rising market concentration will "give the liners greater pricing and bargaining power", she predicts.

Hanjin's collapse in August last year upended the US$500 billion global industry in much the same way that the bankruptcy of Lehman Brothers roiled the financial sector during the 2008 crisis.

One of the world's largest shipping firms at the time, Hanjin faced a cash crunch as supply outstripped demand, weakening pricing power and profits for carriers. It is now in the process of being liquidated after a South Korean court declared it bankrupt in February.

"Since the demise of Hanjin, flight to quality has become more noticeable in the container shipping business," said Shinyoung Securities analyst Um Kyung-a in Seoul. "That's why the market is becoming more and more dominated by top players," she added.

By her estimates, there are now 58 of these huge carriers worldwide that can transport more than 18,000 containers, and the number is expected to double in two years. About half the new vessels will be added by the biggest firms.

The excess supply that derailed growth last year has not completely disappeared as new entrants expand and as older vessels still remain. Capacity in the container shipping industry is expected to grow 3.4 per cent this year and 3.6 per cent next year, according to Crucial Perspective.

"We forecast global demand growth to outpace supply growth in 2017-2019," Hong Kong-based analyst Andrew Lee at Jefferies Group said in a note last month.

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A version of this article appeared in the print edition of The Straits Times on August 17, 2017, with the headline 'Giant shipping firms ride consolidation wave to dominate sector'. Print Edition | Subscribe