There’s always an element of uncertainty in the international shipping industry.
There are always factors that make freight rates volatile, but the 2M, Ocean 3, G6, and CKYHE carrier alliances add a whole ‘nother level of drama to 2015 international shipping.
Happy New Year!
Peter T. Leach presented the equation 2+2=95 in yesterday’s (Jan. 7, 2015) Journal of Commerce (JOC) article to point out how these four carrier alliances—2M, Ocean 3, G6, and CKYHE—will control 95 percent of the cargo volumes moving in the major east-west trades.
Here’s a quick look at how the carriers or container lines form together to make these alliances:
- Mediterranean Shipping Co.
- CMA CGM
- United Arab Shipping Co.
- China Shipping
- “K” Line
- Yang Ming
- Evergreen (Evergreen has finally fully joined the alliance with which it has often worked.)
- Hyundai Merchant Marine
- NYK Line
Of course, I can’t resist pulling the old Carrier Craziness Bracket back out and updating it with a couple more scribbles. It may even be helpful for you visual learners out there.
The two new alliances, the 2M and Ocean 3, launch this month while the existing G6 and CKYHE alliances expand.
What does this mean for international shipping in 2015? That depends on who you ask.
Mr. Leach’s JOC article highlighted several points of view on the impact of these major alliances. Many views are directly oppositional to each other.
Higher Freight Rates?
It’s illegal for carriers to coordinate freight rates with each other, but investigations and charges of it happening are not uncommon.
Many are of the opinion that these alliances will make it easier for carriers to collude on freight rates and shippers will be stuck paying more.
Here are some such opinions the JOC article mentioned above point out:
“As you get larger and larger alliances, you are making collusion easier, whether it’s legitimate or illegitimate,” said the logistics manager for one major U.S.-based importer and exporter. “They are not doing anything nefarious, but alliances make coordination of (vessel) supply easier.” If the new alliances result in a tightening of capacity, this would tend to put a floor under freight rates.
…the logistics manager said carriers heed signals from their alliance partners or other large carriers in other alliances, so when one carrier cuts capacity or rates, others tend to follow the leader. The logistics manager foresees more of this pattern. “It can lead to less competition by more signaling,” he said. “There will be fewer decision-makers needed to allocate or supply capacity, and fewer opportunities for rogue carriers to upset the balance.”
Lower Freight Rates?
While many are under the opinion that freight rates will increase due to coordination and a decrease in competition, there are others who think freight rates will actually decrease due to increased vessel size and the alliances ramping up competition for market share.
Check out these quotes from that same JOC article:
“We’re going to see a constant increase in vessel size, which means a constant lowering of unit costs, so in the long term, we should expect rates to continue to decline,” said Lars Jensen, co-founder and CEO of Copenhagen-based SeaIntel Maritime Analysis.
He thinks members of the Ocean Three Alliance may be tempted to cut rates, even at the expense of profitability. “If these guys want to grow market shares, then you are looking at a very volatile environment,” he said. “China Shipping is not going to run out of money because the Chinese government is not going to let them go bankrupt. United Arab Shipping is owned by the gulf states, which can certainly supply furnish more capital if they need to.”
CMA CGM, which is majority owned by the Saade family, also might decide to cut rates to maintain market share because minority owner Robert Yildirim, is pushing for an initial public offering of stock so he can get his money out of the French line. “It has to come out looking like a success,” Jensen said.
Increased Port Congestion
I’m not putting a question mark after this one. We’ve already seen increased port congestion with larger container vessels calling on ports.
With more megaships due to hit the water in 2015, expect port congestion to continue being a problem as the ports get a handle on how to handle these larger quantities of cargo and shipping containers at once.
Increased port congestion does add support to the people who think the alliances will increase freight rates. Port congestion costs the carriers money and you can expect that cost to be pushed off on shippers with fees and general rate increases.
On top of the risk of increasing freight rates for shippers, congestion causes extra fees in trucking and lost time in getting shipments of goods.
Carriers have said these alliances will allow them to provide better service to shippers, but many shippers have the opposite outlook on the alliances.
Here’s another view put forth by the JOC article:
Elton Poisler, international logistics manager for ocean transport at DuPont, worries that the growth of alliances will mean deteriorating service. “We’re seeing more and more consolidations, but we’re not seeing crisis planning across the board with ocean carriers,” he said at the NIT League Conference last fall. “We’ve got the 2M now, the G6. What’s the deciding factor in selecting an ocean carrier at this point? It’s the ability to get goods onto and off ships and meet that service commitment.”
Carrier reliability and performance are declining, which is why more shippers are turning to logistics providers and non-vessel-operating common carriers so they can get visibility into their oceanborne cargo, Poisler said.
I suppose that last bit from Poisler could be considered good news for freight forwarders like Universal Cargo Management. We do help shippers have a clear view of what’s happening with their imports and exports.
As stated above, carriers certainly claim alliances will help them improve service.
It should be noted that carrier alliances should allow for improved management of capacity by carriers. This should help carriers to avoid voyage cancellations that might disrupt the importing or exporting of cargo for shippers.
It certainly seems the potential is there for better service. Here’s a quote that sums it up nicely from the JOC article:
“If you are an alliance that offers five, six or seven weekly sailings, blanking one of those won’t be disruptive because the carriers can move the cargo onto one of the other weekly services,” [Lars] Jensen said. “So from a shipper’s perspective, it is beneficial to have a broad portfolio available, and the only way a carrier can do that is through alliances.”
More Questions Than Answers
It seems there are more questions than answers on how things will look in 2015 with the rise of the carrier alliances.
Our next blog will continue looking at this issue and see how the different alliances are likely to behave. It looks quite likely they will be pushing and pulling in opposite directions, creating some serious international shipping drama… But you’ll have to wait until next week for that.
Tell us what you think about the carrier alliances in the comments section below.