Consolidation of Cargo Carriers Puts Ocean Freight Industry at ‘Crossroads’

By Don Wade, Memphis Daily News
January 28, 2017

Memphis-based Dunavant Global Logistics Group and Mallory Alexander International Logistics are prime players in the ocean freight business as non-vessel operating common carriers, otherwise known as NVOCCs. And each, according to a consultant who used to work as an executive for one of larger ocean freight lines in the industry, has a strong reputation.

“They’re both very well thought of,” said consultant Ed Zaninelli, who was an executive with Orient Overseas Container Line Co. (OOCL), one of the 10 largest liners in the world.

But there is nothing either Memphis company can do to calm the waters of the shipping industry. According to Drewry, a maritime analyst service based in London, container carriers lost about $1 billion in the third quarter of 2016 alone. Drewry is projecting losses upward of $5 billion for the whole year, which would make it one of the worst in the industry’s history.

“Ocean carriers have been hemorrhaging money for the last three or four years and it’s just unsustainable,” said Don Lake, senior vice president of logistics operations at Dunavant. “The biggest carriers have been licking their chops.”

And buying up and merging with their smaller competitors.

“It’s the culmination of what everyone said would happen,” Zaninelli said, adding that there used to be about two dozen significant ocean freight lines and today there aren’t even any U.S. flag carriers.

Recently, however, that anticipated consolidation has started to look almost like cannibalization.

Just two years ago, Lake says, there were 18 major carriers moving freight between China and Memphis. Now there are 10 and OOCL may be taken over by Chinese conglomerate Cosco Group. The Wall Street Journal reported that state-owned Cosco was preparing a bid valued at more than $4 billion.

But problems go deeper than just reducing the number of major carriers. Zaninelli said the bottom three or four of the remaining top 10 carriers are about one-fifth the size of the largest carrier, Danish company A.P. Moller-Maersk.

From last summer through September 2016, says Zaninelli, spot market rates from China to the port of Long Beach, California, jumped from around $800 to $2,200. The recent bankruptcy of Hanjin Shipping also has put pressure on rates and perhaps served as a warning when big-box companies such as Wal-Mart and Home Depot negotiate new fixed-rate contracts in the spring.

“When Wal-Mart talks to a carrier, before they take a rate, they’re gonna say, ‘Show me your balance sheet,’” Zaninelli said. “When Hanjin went bankrupt, a lot of cargo got stranded.”

But for all the volatility in the industry now, Neely Mallory, president of The Mallory Group, reminds that consolidation goes back a long time; Maersk acquired the largest U.S. carrier in the late 1990s. Nor does he believe that the rise in rates can be attributed only to mergers.

Mallory also notes that while spot rates have risen dramatically on the China to Long Beach lane in recent months, they are not much different from where they were in 2013. He says demand is high going both ways on trans-Pacific routes.

And a major furniture importer recently told the Journal of Commerce: “I don’t put a lot of stock in liners’ early proposals (for contracted rates). This is the game they play. They will get more realistic about rates after TPM (a shipping conference held in late February in Long Beach).”

In addition to consolidation, Mallory says, “The carriers got themselves in a predicament jumping on the hype that bigger ships are better and might have left some variables out of the equation. When they got these mega-ships to terminals, especially on the West Coast, a bunch of extra costs arose and it just kind of snowballed.

“Ocean carriers had placed all these orders for bigger ships and they were half under construction when they realized there were hiccups.”

The liners wanted bigger vessels, Zaninelli says, because they were chasing market share.

“You’re rushing toward a cliff,” Zaninelli said. “The difference in the shipping industry is they jumped off the cliff.”

None of it has made life easier for NVOCCs like Dunavant and Mallory Alexander.

“We need more players in the market. That’s what gives us leverage,” Lake said.

“Consolidation scares me in that competition is good,” Mallory said. “Vessels are full now. If you book cargo outbound from the U.S., you may wait three or four weeks. Twenty-four months ago, you could book today and be on a ship next week.”

If all of this sounds a little familiar, there’s good reason.

“What you’re seeing in the ocean industry is mimicking what happened in the airline industry 10 years ago,” Lake said.

Woodson Dunavant, Dunavant Global Logistics Group’s vice president for marketing and development, said, “The bigger just keep getting bigger and keep buying smaller carriers.”

Dunavant also believes the next phase will see companies such as Amazon purchase their own ships and planes for doing business in an effort to dodge the volatility.

The remaining ocean freight carriers also have various alliances that allow them to share space and ports – further reducing true competition in the market. Zaninelli believes some small companies may lease ships to try and undercut the spot market, but doesn’t believe it will have significant impact and that using that option will be deemed too risky for most importers and exporters.

“Based on the consolidation of the last two years and rumors for 2017 and beyond,” Lake said, “it’s definitely putting the ocean freight industry at a crossroads.”