The move towards larger alliances in the container shipping market appeared to hit a brick wall in June when the Chinese vetoed the formation of the P3 alliance. But that is not the end of the story, says Malory Davies.
For a shipping line, bigger is nearly always better. Bigger ships are more economical than smaller ones. And bigger organisations are more efficient than their smaller rivals. Not only have the major container shipping lines got bigger over the years, they have sought out ways to cooperate to use their ships more efficiently through conferences or vessel sharing agreements.
However, customers have been less convinced of the benefits of such arrangements, complaining that they are effectively cartels whose aim is to maintain rates at unrealistically high levels.
The saga of P3 highlights all these issues. P3 was proposed a year ago as a long term vessel sharing agreement between Maersk, CMA CGM and the Mediterranean Shipping Company, on the East-West trades. It was widely seen as an agreement that would fundamentally change the structure of the container shipping market.
The three lines proposing the alliance argued that customers would benefit from more weekly sailings.
The P3 Network would based on existing capacities of each member, initially operate a capacity of 2.6 million TEU (255 vessels).
Maersk would contribute some 42 per cent of the capacity (including the new Triple-E ships), of about 1.1 million TEU. Maersk would continue to offer the Daily Maersk product to those customers requesting it.
MSC would contribute some 34 per cent of the capacity, of about 0.9 million TEU of capacity.
CMA CGM would contribute some 24 per cent of the capacity equalling 0.6 million TEU.
While the P3 Network vessels would be operated independently by a joint vessel operating centre, the three lines would continue to have fully independent sales, marketing and customer service functions.
Chris Welsh, secretary general of the Global Shippers Forum, said at the time: “The P3 Network Vessel Sharing Agreement is unprecedented in its scale and scope, many of the provisions of which are open-ended according to the agreement filed with the US Federal Maritime Commission.”
After a period of delicate negotiations, both the Federal Maritime Commission and the European Union accepted the plan on the basis that it would boost the number of sailings on Asia-Europe, trans-Pacific and transatlantic routes by pooling 250 ships.
However, the agreement came unstuck in June 2014 after being vetoed by the Chinese Ministry of Commerce (MofCom). In a statement, the ministry said it supported companies to sharpen their competitive edge, but when firms try to improve market share through a “concentration of undertakings”, it should be carefully studied.
This was met with some surprise by the shipping lines. Nils S Andersen, group CEO of AP Moller – Maersk, said: “The decision does come as a surprise to us, of course, as the partners have worked hard to address all the regulators’ concerns. The P3 alliance would have enabled Maersk Line to make further reductions in cost and CO2 emissions and not least improve its services to its customers with a more efficient vessel network.
“Nevertheless, I’m quite confident Maersk Line will accomplish those improvements anyway. It has delivered on those improvements over the last five quarters in the absence of P3 and I’m confident it will continue to do so.”
And Diego Aponte, vice president of MSC said: “We are disappointed by the decision of the MofCom but will continue our efforts to operate more efficiently and provide our clients with a comprehensive and excellent service.
“We could have achieved these efficiencies much faster through P3 but with our investment in more fuel efficient vessels, further economies of scale will still be achieved over a period of time.”
Welsh said: “The P3 appears to have failed the legal hurdles under Chinese competition law which we always recognised was likely to be both an unknown factor and problematic.”
However, if anyone thought that would be the end of the matter, they had not reckoned on the resilience of the shipping lines. Just a couple of weeks after the Chinese veto, MSC and Maersk announced a new vessel sharing agreement, 2M.
Vessel Sharing Agreement
2M is a ten year VSA on the Asia-Europe, Transatlantic and Transpacific trades. The VSA will be referred to as 2M.
The VSA, which is due to start early next year, will include 185 vessels with an estimated capacity of 2.1 million TEU, deployed on 21 strings.
MSC’s Aponte said: “The 2M Vessel Sharing Agreement will enable us to achieve significant reductions in fuel consumption, driving down the carbon footprint of our shipping operations. With sustainability a key area of focus for MSC, we’re delighted that this vessel sharing agreement will mean major cuts in emissions while simultaneously enhancing our service to customers.”
And Søren Skou, Maersk Line CEO, said: “I am very pleased with our agreement with MSC. We share the same ambition to have as efficient and effective operations as possible. We will continue to provide our customers with competitive and reliable container shipping in the East-West trades at attractive prices. To do so we have to be innovative and take out cost, while keeping a product that is best in class for our customers in terms of coverage, frequency and reliability. Our agreement with MSC is a step towards achieving all of these objectives in the East-West trades,.”
The two companies believe that 2M will not suffer the same fate at P3 because it differs in two important ways: first, the combined market share is much smaller. Secondly the cooperation is a pure VSA. There will be no jointly owned independent entity with executional powers.
The 21 strings are split as follows: Asia/North Europe: 6, Asia/Mediterranean: 4, Asia/US West Coast: 4, Asia/US East Coast: 2, North Europe/USA: 3, Mediterranean/USA: 2.
Maersk Line will contribute with some 110 vessels with a nominal capacity of about 1.2 million TEU (55 per cent of the total capacity). MSC will contribute with approximately 75 vessels with a nominal capacity of about 0.9 million TEU (45 per cent of the total capacity).
However, there are still concerns that the Chinese government could veto 2M – for many of the same reasons that it rejected P3.
Assuming it gets the go-ahead, 2M will compete with other alliances on the Far East – Europe route – notably the G6 Alliance and the CKYHE Alliance.
G6 was a merger of the New World Alliance and the Grand Alliance at the beginning of 2012. The members of G6 are: APL, Hyundai Merchant Marine, Mitsui OSK, Hapag Lloyd, NYK and OOCL.
The CKYHE Alliance was formed earlier this year and brings together Cosco, K Line, Yangming, Hanjin and Evergreen.
CKYHE started with six joint services operating between Asia and Northern Europe and four loops dedicated to the Asia-Mediterranean route.
And CMA CGM is reported to be looking for new partners in the wake of the failure of the P3 venture.
ECONOMICS: Profit potential
Maersk Line, the biggest container line in the world, reported a net operating profit of $1.5 billion in 2013 while sales were $26.2bn. But in 2011, it produced a loss of $553 million on sales of $25bn.
Such figures underline the risks associated with running container ships. It is difficult to respond quickly to changes in the market, so factors such as a fall in demand or an increase in capacity in the market can quickly wipe out a line’s profits before it can respond.
The quest to be masters of their own destinies has encouraged lines to form alliances, which allow for more efficient use of resources.
Slow steaming has been another response. This has the twin benefits of reducing emissions and fuel costs. In 2011, Maersk introduced “super-slow” steaming on some of its backhaul trades.
The impact of slow steaming is not simply on the inter-continental schedules. All the vessels the feeder into and out of these routes have had to be rescheduled. And the impact has also be felt on ship design.
Maersk points out that when it came to commission its new generation Triple E ships, which can carry 18,000 teus, the lower top speed has a significant impact on the hull shape – allowing larger capacity below deck.
There has also been an impact on customers to be taken into account. The typical voyage from Hong Kong to Rotterdam has gone from 21 days to 23 days. However, Maersk argues that the reliability of the service has increased. It has also produced some research to show that total door to door time from China to Europe can be anything from 70-80 days so an additional two days at sea makes little difference.
Originally printed in Logistics Manager 08/2014