General

In the global container shipping crisis of the past year, one thing is often overlooked: the pricing power of global container freight has always been in the hands of a few shipping giants. The wave of mergers and acquisitions in the global shipping industry in the past five years has in fact, to a large extent, exacerbated the current supply chain dilemma under the new crown epidemic and further delayed the transoceanic transportation of goods.

Many cargo owners and freight forwarders said that in the past few years, a small number of large shipping companies controlled most of the world’s container transportation through giant ships. This has made the world’s routes become fewer and small ships have become more scarce, which has disrupted the epidemic. Ports that can maintain the smooth flow of goods during shipping operations are also rarer.

As of September 14, 2021, according to Alphaliner's latest capacity data, the top ten of the top 100 global liner companies are: Maersk Line, Mediterranean Shipping, CMA CGM, COSCO Shipping Group, Hapag-Lloyd, ONE, Evergreen, HMM, Yangming Shipping and Wanhai Shipping.

According to data from maritime data provider Alphaliner, the top six container operators control more than 70% of the world's container capacity. Many industry executives said that as companies tried to replenish inventory after the new crown epidemic was lifted, the cost they paid for transporting products had increased by at least four times compared with last year, and they were facing longer and longer delivery delays. Shipping giants form a monopoly

"A few years ago, we were able to receive competitive freight quotations from multiple shipping companies within a few hours," said Mark Murray, owner of DeSales Trading Co., a North Carolina rubber thread and elastic band importer. "Now, it often takes several days to receive the quotations from those big companies, and you have to pay ‘crazy’ shipping costs, and the goods have to wait for several months to ship. We can’t do anything about it."

The source of all these crises may be traced back to five years ago. The global shipping industry carried out large-scale integration between 2016 and 2018. At that time, a series of mergers and acquisitions worth about 14 billion U.S. dollars led to global container ship operations. The number of quotients is almost "cut in half." These transactions are part of the shipowners' efforts to deal with the difficult situation after the 2008 financial crisis. At that time, freight could barely cover the cost of fuel, and ship operations suffered serious losses.

Other factors driving integration include the surge in the scale of manufacturing in Asia and the need for cargo owners to control transportation costs. Large container liner companies have therefore formed three global alliances (2M, Ocean Aliance, THE Alliance) to share ships, cargo and ports. Some smaller operators have also joined in, making these groups ultimately control most of the available capacity in the market.

The result is a major "slim" in the global shipping system, which can indeed bring a series of obvious benefits: fewer but larger ships call at specific ports in Asia, and then sail to Europe or the United States, and the cargo will be loaded directly. Enter the shelf or production line. The new model also reduces the waste of the system, limits the unused space of ships, and reduces the storage costs of importers.

However, the new crown epidemic that has erupted so far last year has highlighted the fragility of this new supply chain model in times of high pressure. This summer, large export centers in Asia faced port closures under the epidemic, causing many ships to drift on the sea for a few weeks, waiting for the reopening of the docks. After setting sail with a full load of cargo, they were once again trapped in a congested western port, where a mountain of container cargo could not be handled in time due to a shortage of manpower.

Before the era of shipping mergers and acquisitions, shippers can turn to a series of small and medium-sized operators to help them cope with the disruption of transportation. But now, they can only be anxious with both hands, and have to choose between a long wait and high costs.

Murray of DeSales said that the company's shipment from Malaysia on June 26 was postponed to July 7. Then, due to the outbreak of the epidemic, the date was delayed and dragged back to early September. The final arrival date is expected to be in early October.

Murray said that DeSales paid US$9,500 to book this container, which is several times more than the US$3,000 before the epidemic. This is the price it obtained after repeated bargaining with some freight forwarders. These freight forwarders initially asked for about $19,000.

According to data from the Marine Exchange of Southern California, in recent weeks, as many as 40 full-loaded container ships have berthed off the coast of Los Angeles every day. Before the epidemic, it is often a rare event to have one ship. Insufficient capacity has caused some shippers to hire ships themselves.

Wal-Mart, the world’s largest retailer, said in August that it had chartered its own cargo ships to transport imported goods from Asia, after Home Depot had taken a similar move in June.

Can "freezing prices" bring a cooling-off period?

For manufacturers and traders around the world, last week the shipping industry finally heard good news that made them happy: a number of shipping companies have announced that they will "freeze" freight rates to prevent further increases in shipping prices.

The first to take the lead was CMA CGM, the world's third largest shipping company. The company unexpectedly issued a statement last Thursday stating that it would freeze the freight rate of the futures cabinet until February 1, 2022. The statement pointed out that although market-driven freight rates are expected to continue to rise in the next few months, the group has decided to suspend further price increases for all services under its brand. CMA CGM emphasized that when faced with an unprecedented situation in the shipping industry, the company puts its long-term relationship with its customers in a more important position.

Immediately after CMA CGM, Maersk, the world's largest shipping company, and Hapag-Lloyd, the world's fifth largest shipping company, also stated that they "no longer increase freight rates." Up to now, more than half of the world's top 10 shipping companies have followed up with the policy of "no increase in freight rates". (Has Maersk made it clear? Who else is half of them?)

Regarding the decision to "freeze prices", Hapag-Lloyd said, "We believe that the spot freight has already peaked, and we do not pursue further increases in freight rates. We hope that the current overheated shipping market will slowly begin to calm down."

In this regard, many people in the industry pointed out that the relationship between global economy and trade and shipping is moving at the same frequency and resonating at the same frequency. Shipping companies may also be keenly aware that if the market freight rates continue to rise unreasonably, it is not ruled out that governments of various countries may also take some coordinated measures to intervene in freight prices. Therefore, the "freezing prices" can also be regarded as One of their proactive attacks.

It is reported that the Ministry of Communications of China, the US Maritime Commission and the European Union have recently held a "Global Shipping Regulatory Summit". How to deal with the sky-high ocean freight has become one of the main topics of discussion at the summit.

In fact, even if the "frozen price" is at the current high level, the shipping giants can make a lot of money. According to Sea lntelligence's analysis, in the first half of 2021, the operating profit of the entire shipping industry exceeded US$42 billion. Even the smaller shipping companies that suffered losses in the years before the epidemic and were unable to generate economies of scale have joined the ranks of larger shipping companies and achieved profitability.

Sea lntelligence's report shows that in the second quarter of this year, all shipping companies reported double-digit growth in freight volumes, accompanied by a substantial increase in profit margins per container. Among them, the total pre-interest and tax profits of the top 13 shipping companies reached US$24.5 billion, far exceeding the US$17.6 billion in the first quarter. and

From 2012 to 2020, the total operating profit of this industry is only 6.9 billion US dollars. Sea-lntelligence pointed out that “shipping companies are currently making ridiculous amounts of money. A similar situation has never been seen before.

Therefore, some freight forwarders and shippers are not buying it right now. In their view, the shipping company has pushed the freight rate to a high level. The suspension of the price increase can already guarantee their profits. This behavior is actually more like a kind of " Marketing strategy".

The freezing of freight obviously does not mean that the shipping crisis has passed safely. In the short term, the increase in shipping capacity cannot be achieved overnight. How to effectively increase the capacity is the key to the shipping industry.

Vicky Zervou, the sales manager of Aritrans SA, a freight forwarding company in Athens, said, “At present, half of the shipping companies we can contact have no space in the past few weeks, and the other half have to squeeze their heads to get a space. We often have to spend money. It will take several weeks to order a container."