In 2021 containership operators rode a historic wave to record profits. It was like the 100-year wave, - a once in a generation event generated by a concentration of ships and slots in few hands and pent-up consumer demand. But persistent problems in the supply chain have sparked new OSRA legislation and in the shipping industry what goes up usually comes down.
Slot machine.
In the modern history of mercantile shipping never has so much tonnage, so many slots, and so much carrying power, resided in so few ocean carrier companies. Simply put, the ownership of the container carrier fleet is heavily tilted towards the top.
In the AJOT’s Top 50 Containership Ocean Carriers derived from Alphaliner figures, the Top Ten containership operators dominate the entire industry. Just how dominant are the top ten? The entire cellular fleet contains just over 25 million TEU and the Top Ten carriers account for 21.5 million of that total, or around 86% of the slot capacity. And the industry dominance isn’t likely to end soon as the orderbook for containerships is also weighted heavily at the top with 368 ships of over 4.5 million TEU on order.
More importantly is the collaborative advantage at the top. Nine of the top ten carriers are in one of the three “alliances.” (See Alliance story) And Zim, which holds the tenth slot on the list, has an agreement with the 2M Alliance.
In looking at the top liner shipping companies, the ascendancy of Mediterranean Shipping Corp (MSC) to the number one position (in terms of capacity) over fellow 2M Alliance partner Maersk, isn’t really that much of a surprise. MSC has been steadily growing over the last decade and the two carriers have been jockeying for the top spot for a few years now. What is interesting about the flip flop at the top is the number of ships that MSC has on order. Privately held, the Geneva-based MSC largely has grown organically whereas most of the top carriers experienced significant growth through the M&A splurge that immediately followed the Hanjin bankruptcy in 2017.
MSC has 77 boxships on order of almost 1.2 million TEU capacity, easily the largest orderbook of any carrier. The company also has a chartered total of 339 ships of 2.63 million TEU capacity, the largest of any carrier. Undoubtedly, some of the chartered tonnage will be converted to “owned” column with the addition of some of the newbuildings and dropping of some charter hires. But with a healthy number of ships coming down the slipways, MSC stands to cement its position as the world’s largest containership operator in the upcoming years.
Another carrier carrying a big orderbook is Evergreen Marine. Taiwan-based Evergreen in the 7 slot, has 63 ships on order with a capacity of 623,228 TEU – trailing only MSC’s 1.1 million TEU orderbook capacity. Evergreen is likely to overtake Japan’s ONE in the near term as the 6th largest carrier. COSCO, China’s premier box carrier, at number 4 in the world, also has a hefty orderbook of 34 ships of 586,672 TEU. Along with the number 3 carrier the French CMA CGM Group, the carriers could well exceed 3.5 million TEU in size in a couple of years. In fact, the concentration of TEU into the top 10 stands to increase rather than decrease over the next 4-5 years, meaning the gap between the carriers at the very top of the chart and those below, is likely to widen.
Money, Money, Money
Despite the disruptions in the supply chain, bans, port congestion, unhappy shippers and even a war, times have rarely been better for ocean carriers. In the current environment of high demand and equally high freight rates, it is hard to remember that just a short time ago the entire industry feared drowning under a tide of red ink. Back in 2016 the ocean carriers, according to Lloyds List, industry wide lost $3.5 billion. Part of the problem was the low rates on freight service contracts signed during the May 1, 2016-April 1, 2017, contract period. Part of this was the structure of the industry itself – a lot of ocean carriers chasing the same freight in a race to the bottom.
But change came fast. In the aftermath of the 2017 bankruptcy of Hanjin, the industry engaged in a wild period of consolidation. The result is what we see today, a top heavy but far more disciplined industry that is making money.
And with the demand “rebound” from the Covid-19 pandemic lockdowns, the industry reportedly made $150 billion in 2021. To put that number into context, in most years the industry made between $700 million to $1 billion. Unsurprisingly, the majority of this bonanza was made by the Top 10 carriers, accounting for $115 billion - $120 billion of the total. In an industry built on riding the economic waves, the 2021 result was a rogue wave of historical magnitude – a once in a century event.
COVID Impact on Freight Rates
Last year freight rates soared and are still very high. For example, Freightos in their April 5th update reported that freight rates on the Asia-U.S. West Coast tradelanes were $15,817 per FEU (Forty Foot Equivalent Unit), up 168% over the same time in 2021. And freight rates to the Asia-U.S. East Coast were $17,148 per FEU, up 192% for a similar time last year.
Obviously, the stuttering COVID pandemic lockdowns have raised havoc with the supply chain. Lars Jensen, CEO of Vespucci Maritime (formerly Sea-Intelligence) recently wrote in an April 7th column for the Baltic Exchange on the impact of the current COVID-19 lockdowns in Shanghai, “However, once we see a re-opening, the expectation should be a surge of cargo coming out of Shanghai. This will be a mix of cargo which has not loaded during the lockdown as well as factories playing “catch-up” with lost production whilst under lockdown. This will lead to a sharp upwards pressure on freight rates.”
This is the Yin and Yang of the COVID impact on ocean shipping – wild swings in supply and demand caused by closures followed by massive attempts at cargo catch-up. A catch-up that often ends with ships sitting at anchor and awaiting a berth in ports like Los Angeles and Long Beach.
And the port congestion effectively takes ships and slots out of the vessel rotations further squeezing supply (ships) and pushing freight rates up even higher. Alphaliner in their March newsletter made a telling comment illustrating the impacts of port congestion on vessel capacity: “Container traffic at the twin ports of Los Angeles (10.70 million TEU) and Long Beach (9.38 million TEU) increased by a more modest 13% and 15.7% respectively last year. Rather, the capacity increase was needed to compensate the huge efficiency loss as many ships faced long waiting times at anchorages.” {Editor’s Italics]
From the shippers’ perspective increased demand is understandable. But for shippers’ demurrage and detention bills adds insult to injury when they believe root cause for the delays lies with the ocean carriers. After all, global schedule reliability in February was 34.4% (although this is up 4% points over January). Further, when expediting the repositioning of the now empty containers back to Asia is a carrier’s priority over U.S. export freight, shippers feel the basic tenet of “common carriage” has been undercut. These and other shippers’ complaints were the groundswell moving the OSRA (Ocean Shipping Reform Act) legislation.
OSRA and Ocean Carriers
In the March testimony before the Senate’s Committee on Commerce, Science and Transportation, Federal Maritime Commissioner Rebecca F. Dye, in discussing the relationship between ocean carriers remarked, “For some time, I have been concerned that many service contracts for carriage of cargo entered into between shippers and ocean carriers lack mutual commitment. This ambiguity about mutual enforceability in these so-called “contracts” may cause severe consequences to shippers during times of high demand for cargo space because they are not protected with binding contracts.”
Commissioner Dye’s testimony was a prelude to the U.S. Senate unanimously passing their version of the OSRA on March 31st. With the House having already passed their version of OSRA, the two bills now will have to be reconciled and then presented to the President Joe Biden for signing.
The salient points of the Senate’s version of OSRA address many of the complaints that shippers’ have voiced in respect to carrier performance and bolsters the FMC’s oversight. The Senate legislation does stay clear of some of the regulatory statues that carriers feared after the House version passed.
Rebalancing the Relationship
The obvious intention of the Senate’s OSRA bill is to rebalance the relationship between carriers and shippers. Detention and Demurrage fees were high on the to do list as was the issue of repositioning containers at the expense of exporters – particularly agricultural exporters.
The detention and demurrage issue were critical to importers and as Peter Friedmann, the Coalition of New England Companies For Trade (CONECT) counsel, recently wrote of the Senate legislation, “OSRA will provide the FMC with the tools to enforce the Commission’s 3-year old Interpretive Rule on Detention and Demurrage Charges, setting forth the criteria as to what constitutes a ‘reasonable’ charge, and what does not. It could lead to increased number of containers and bookings available to US exporters. It will create a less intimidating means for importers and exporters to seek FMC review of disputed charges.”
The larger question is will a new OSRA 2022 really resolve the knots in the supply chain?
The oceans carriers think not and are particularly leery of provisions in the House OSRA bill which was passed last year. John Butler, President and CEO of the World Shipping Council (WSC), said of the legislation, “The deeply flawed bill passed by the House at the end of last year would place government officials in the role of second-guessing commercially negotiated service contracts and dictating how carriers operate ship networks – an approach that would make the existing congestion worse and stifle innovation.”
Butler and the WSC were not much happier about the Senate version. But recognize, as Peter Friedmann said, who besides CONECT also represents the Agriculture Transportation Coalition (AgTC) and the Coalition of New England Companies For Trade (CONECT) and so accurately framed the ocean carriers’ dilemma, “You don’t want to be on the wrong side of history,” especially after such a historic year.
