Industry Trend: Global Shipping Industry brings restructured into four major Alliances to secure Competitive Price.
Global shipping market enters into the endless competition in earnest.
Sunder side has been accelerated through strategic alliances around the global top shipping company to lower the unit cost through securing large container ships. As China’s economic growth, which is responsible for the biggest volume of the world container shipment slowed, global shipping companies focused on cost leadership to ensure competitive pricing.
Global Shipping Alliances
Recently global shipping market restructured into four Alliances, 2M, O3, G6, CKYHE. Before then, traditionally, ‘CKYHE’, ‘G6′ were the world’s major shipping Alliances but Maersk and MSC(Mediterranean Shipping Co), first and second biggest container shipping companies in the world, developed partnership into the alliance ‘2M’. After a while CMA CGM, China shipping, and UASC, three shipping companies forms the ‘O3′ so the market was reorganized with big four.
Enlargement of Ships
These four Alliances focus on greater concentration of volume by ordering major ship building contracts one after another; that is because larger vessels can load more number of containers and newly built ships certainly have better fuel efficiency plus more cost reduction.
Last year the world’s leading container liner Maersk unveiled plans of $ 15 billion order for the next five years. This has been only four years that industry was shocked by the announcement of investment to build 30 new container ships of Triple E class 18,000 TEU in 2010. This time it is only bigger than 2010. Simply stated, $ 15 billion is the amount of up to 150 of 10,000 TEU container vessels.
Mask have positioned as such company that makes steady revenue in this recession while many shipping companies have faced down. Maersk Container ship division marked at about $ 7.8 million of operating profit for the third quarter of 2014, which is increased by 23%($ 740 million) from last year.
As afore mentioned French container carrier CMA CGM is partnering with China Shipping Container Lines Co. and United Arab Shipping Co. to form the new Ocean Three alliance, also called O3 alliance. It is said that 150 vessels will be deployed by this alliance. The alliance singed the Vessel Sharing Agreement (VSA) which would be applied to trades involving a combination of vessel-sharing, slot exchange and slot charter, covering the Asia-Europe, Asia-Mediterranean, trans-Pacific and Asia-US East Coast. It is said that seven of the world’s top 10 business container ports are in China, although Chinese shipping carriers accounted for less than one-third of the market share. As such China Shipping Container Lines Co. teaming with other container liners positive signals that Chinese shipping carriers are also starting to expand their market share through vessel-sharing.
Old and New Partners
Previously, CMA CGM proposed to partner with Maersk Line and Mediterranean Shipping Co. to form the P3 Network, but this scheme failed. Recently, CMA CGM’s two proposed partners announced a new alliance call 2M alliance. The proposed 2M alliance is a 10-year vessel sharing agreement between Maersk Line and MSC on the Asia-Europe, transatlantic and transpacific container trade lanes. The 2M alliance will encompass 185 vessels with a capacity of 2.1 million TEUs deployed on 21 strings. Currently, the 2M alliance is approved by the U.S. regulators, while the O3 is still pending approval from the U.S. regulators.
New era of Container Shipping Alliance
Definitely we are moving into a brand new era of strategic alliance in container shipping line with some of big players being regrouped with the others in order to increase their market share. For the time being, with the wave of formation of such alliances, four large scale carriers from the top 20 carriers in the world will take control of more than 90% of the global market share. Apart from the 2M and O3 alliances, the other two are the G6 and CKYHE alliances. The G6 carriers are American President Lines, Hapag Lloyd, Hyundai Merchant Marine, Mitsui, Nippon and OOCL. CKYHE carriers are COSCO, K-line, Yang Ming Line, HANJIN and Evergreen.
As container shipping liners show bigger ship fever, it also has for each route to have larger vessels.
According to Drewry, the British research and advisory organization for the maritime, North American routes and European routes have each 6,289 TEU, 10,203 TEU in average for second quarter of 2014, which keeps increasing from 2013. If the super-large ships of four Alliances get into the water this year, also the average size of a shipr are believed to expand west side of North America route by 7,472 TEU, east side of North America by 6,346 TEU, and European by 12,944 TEU.
Despite the increase in container traffic due to the global economic recovery, it brings more competition to the shipping industry so freight rates are expected to have limited raise. West side of North America will has 1.3% increase this year, while in east side North America has 1.8%, European is expected to rise a mere 1.0%.
Drewry reported that starting from four major Alliances, every container liners will have cost leadership as top priority occurring unlimited competition to secure the future of firms. In that context, independence liners or shipping firms who have lack of large vessels will fall behind.
Future of Shipping Alliance
As a result of the formation of strategic alliances, the pursuit of big ships is entering into a new period as well. Strategic alliances and big ships play a significant role in better allocation of resources, further reduction of operational costs, expansion of service coverage, optimization of ports of call and realization of the economies of scale. With regards to the vessel size, O3 has a more advantageous investment in the fleet capacity building compared with the G6 and CKYHE alliances. It is said that members of the O3 alliance own 20 vessels with capacity from 16,000 to 19,000 TEUs. Hence, forming strategic alliance is the key to making greatest use of those big vessels and benefiting from the economies of scale. Only through this can the carrying capacity of the whole industry be further integrated.
It is hard to predict how long it will take to complete the process of integration. What is surely happening is that the era of strategic alliance is arriving. At the same time, more collaboration between shipping lines will surely follow and with it some degree of rationalization of port and terminal choices.