100bn euro container business braced for new round of consolidation

Date: 17/05/01

By Bruce Barnard

The industry has moved on since the Commission hit a group of European and Asian carriers with record fines running into hundreds of millions of euro for running a cartel on the North Atlantic in the 1990s.

But until competition chief Mario Monti provides a regulatory framework for the European trades, first promised back in 1998, carriers will be trapped in a legal limbo inhibiting strategic planning at a time of rising costs and increasing competition.

Gunther Casjens, chief executive of Hapag-Lloyd, Germany's largest carrier, led a recent delegation to meet Monti and expressed optimism Brussels will soon publish a rule book. But others fear more foot-dragging.

For the moment, the 100 billion €-a-year industry is basking in a bull market triggered by a record performance in 2000, when most carriers made record profits thanks to rising freight rates and surging trade volumes. Margins are thinning in 2001, but the feared US recession hasn't materialised.

Traffic on the Transpacific, the world's busiest route, and between Europe and Asia, remains strong - allowing carriers to raise, and hold, rates.

The industry is also bracing for a new round of consolidation and a rash of initial public offerings as carriers cash in on the good times.

Companies are getting bigger and bigger through organic growth and take-overs which have produced a clutch of super carriers, but the industry remains extremely fragmented.

The leading player, Denmark's MaerskSeaLand, accounts for only around 13% of global container traffic.

The announcement in February that Canadian Pacific will be broken up and its CP Ships unit floated off as a stand-alone company on the stock market put the industry on take-over alert.

Most industry watchers are betting that Maersk, whose acquisitions of Sea-Land of the US and South Africa's Safmarine in 1999, made it almost twice the size of its nearest rival, Taiwan's Evergreen, will make the first moves.

The flotation of CP Ships, which broke into the world's top 10 rankings after buying small to medium-sized niche carriers, is likely to be followed by other IPOs later this year, including the Anglo-Dutch P&O-Nedlloyd and France's CMACGM.

This will give the industry a higher public profile but also ratchet up pressure to improve on its meagre average margins of 3%-6%.

Carriers will be forced to consolidate to confront a deteriorating market as the world container fleet is set to expand by around 12.5% a year, outpacing demand by 50%, and squeezing freight rates by between 3% and 5%, according to Drewry Shipping Consultants in London.

The market will probably worsen in 2002, increasing pressure on lines to further cut costs and rationalise.

The lines can boost demand by attracting products and commodities that currently are transported by conventional cargo ships, many of which are nearing the end of their trading lives and are unlikely to be replaced.

But colonising these cargoes will take time, something the lines don't have as they brace for the next inevitable cyclical downswing.

European shippers, meanwhile, continue to press Brussels to end the rate-setting conferences that the lines claim are vital to ensure stability.

That's why the industry wants Monti to rush out the rulebook.

Article forms part of a survey on European transport issues. Feature examines challenge facing the container shipping industry.