Hard to break Maersk dominance but COSCO (1919:HK) may soon become world’s 2nd largest

13 July 2017, Global – Ironically, although Asia is the dominant factory of the world, the Asian container shipping companies’ individual market shares of the global trade have historically been small and shrank further following CMA CGM’s takeover of Neptune Orient Lines in September 2016 and the bankruptcy of Hanjin Shipping in February 2017.

Plus Ça Change, Plus C’est La Même Chose?

WHAT HASN’T CHANGED? – EUROPEAN CARRIERS WILL CONTINUE TO DOMINATE NEARLY HALF OF THE GLOBAL CONTAINER SHIPPING MARKET

In 2011, the European carriers had a combined share of 44% of the global container shipping market (based on the market share data of the top 25 carriers in the world). Today, their combined global market share has actually risen to 47%. Fast forward to 2019 based on the industry’s existing newbuild vessels on order and assuming that the number of chartered-in vessels remains the same for all the carriers, the European carriers’ global market share would slip slightly to 46% due to the more aggressive vessel orders placed by the Asian container shipping companies, still higher than their market share a decade ago.   

Chart: Top 25 carriers combined global market share based on their region of ownership

Chart: Top 25 carriers combined global market share based on their region of ownership

Considering that Europe accounts for only 16% of the global container throughput, the European carriers continue to have a disproportionately large share of the global container shipping trade, helped by their legacy head-start and leadership, the liberalization of trade and shipping links and efficient operations and competitive cost structure of the stronger players such as Maersk (MAERSKA:DC).

In contrast, although Asia Pacific constitutes 60% of the global container throughput, the Asian container shipping companies’ global market share (based on the market share data of the top 25 carriers in the world) was only 36% in 2011 and has fallen to 34% currently and is expected to rebound to 37% by 2019.

Chart: Distribution of global container throughput (2016)

Chart: Distribution of global container throughput (2016)

WHAT WILL CHANGE? – INDUSTRY MARKET CONCENTRATION WILL CONTINUE TO INCREASE

Following the slew of M&A activities in recent years and the exit of some of the weaker players, the global container shipping industry’s market concentration will continue to increase.

In 2011, the top 10 carriers had a global market share of 62%. This has risen to 80% currently and will rise further to 83% by 2019 following COSCO SHIPPING Holdings’ (1919:HK) acquisition of Orient Overseas International (316:HK) and based on the industry’s existing newbuild vessel orderbook assuming that the number of chartered-in vessels remains unchanged.

Rising industry market concentration is favourable for the global container shipping sector as it will help increase the carriers’ pricing power versus their customers (shippers) or at least bring about a more stable and sustainable freight rate environment. The carriers’ bargaining position versus the ports, logistics service providers and shipbuilders will also strengthen in the longer term.

Chart: Top 10 carriers global container shipping market share

Chart: Top 10 carriers global container shipping market share

WHAT WILL CHANGE? – SHARP RISE IN CHINESE CARRIER DOMINANCE, FOLLOWED BY TAIWANESE WHILE HONG KONG, KOREA & SINGAPORE-CONTROLLED CONTAINER SHIPPING CAPACITY DIMINISH

Once its OOIL acquisition is completed, COSCO SHIPPING will emerge as the third largest container shipping company in the world, with a market share of 12%, only 3ppts and 7ppts shy of MSC’s and Maersk’s second and first place positions globally, becoming a tougher competitor to deal with on the major trade lanes.

COSCO SHIPPING will become the largest carrier on the Transpacific trade lane and third largest carrier on the Asia-Europe trade lane. In addition, COSCO SHIPPING will gain significant revenue exposure to the Intra-Asia/Australia trade lane as well as OOIL’s lucrative reefer shipping business which would have taken much longer to build organically with a lower probability of success. See our previous report for more details:

Sweeter deal for acquirers COSCO (1919:HK) & SIPG than for target OOIL (316:HK)

Chart: Global container shipping companies market share ranking (2017)

Chart: Global container shipping companies market share ranking (2017)

In fact, compared to a decade ago, we expect Chinese carrier dominance to double in terms of global market share from 7% in 2011 to 14% by 2019 based on the industry’s existing newbuild vessel orderbook.

The Taiwanese carriers’ global market share is also expected to increase gradually from 8% in 2011 to 10% by 2019, driven by Evergreen Marine and Yang Ming’s sizeable vessel orders that amount to 29% and 14% of their existing fleet capacity.

In contrast, Hong Kong, Korea, Latin America and Singapore-controlled shipping capacity will diminish by half or more while Japan and Middle East-controlled shipping capacity will remain relatively stable based on the existing newbuild vessel orderbook.

Chart: Top 25 carriers combined global market shares based on their country of ownership 

Chart: Top 25 carriers combined global market shares based on their country of ownership 

WORLD NUMBER TWO POSITION IS WELL WITHIN REACH FOR COSCO SHIPPING

As COSCO SHIPPING (including OOIL) has a larger orderbook-to-existing fleet ratio of 26% than 10% for the world’s largest carrier Maersk-Hamburg Sud and 6% for the world’s second largest carrier MSC, we expect its market share to rise to 13% (from 8% currently prior to the completion of its OOIL takeover) by the end of 2019 based on the existing newbuild vessel orderbook assuming the number of chartered-in vessels remains unchanged.

In order to overtake MSC as the world’s second largest container shipping company, COSCO SHIPPING only needs to increase its capacity by 6%-7% or 0.2m TEUs. This can be achieved by ordering newbuild vessels, buying more second-hand vessels or chartering in more vessels or even an acquisition of a small/mid-sized carrier. All COSCO SHIPPING needs is to acquire twenty 10,000 TEU vessels and it will become the second largest carrier in the world.

However, it would be much more challenging to overtake Maersk to become the largest container shipping company in the world given Maersk’s huge lead. COSCO SHIPPING will need to increase its capacity by nearly 50% or 1.4m TEUs which is unlikely to be achievable organically in the next 3 years.

Chart: Global container shipping fleet capacity (2019 versus 2017)

Chart: Global container shipping fleet capacity (2019 versus 2017)

Chart: Global container shipping companies’ market share (2019 versus 2017)

Chart: Global container shipping companies' market share (2019 versus 2017)

As such, we will not rule out the possibility that COSCO SHIPPING could consider acquiring at least one more large liner or a number of the small/mid-sized carriers in the longer term, if it aims to become the largest container shipping company in the world given its relatively easy access to financing.

POTENTIAL ACQUISITION TARGETS

CMA CGM and Hapag Lloyd (HLAG:GR) could be potential large liner targets for COSCO SHIPPING but will be more challenging to integrate given their size and significant cultural differences compared to OOIL.

Evergreen Marine (2603:TT), like CMA CGM, is in the same OCEAN Alliance as COSCO SHIPPING but it could be politically sensitive and challenging for state-owned COSCO SHIPPING to acquire a major Taiwanese shipping company.

Among the small/mid-sized carriers, COSCO SHIPPING could potentially consider acquiring Pacific International Lines (PIL), SITC (1308:HK) and/or Zim. while a takeover of Wan Hai (2615:TT), like Evergreen Marine, could be more politically sensitive to execute.

Other permutations are possible too and we could potentially end up with only 1 major European, 1 Chinese, 1 Japanese, 1 Korean, 1 Taiwanese container shipping company in 5 years’ time.

As the global container shipping industry is on the mend from this year, the liners’ profitability will improve which could potentially ease the pressure to consolidate further or exit the sector near term. Moreover, most of the major carriers are in the midst of integrating with another carrier(s) or are focused on growing organically. Brand new and resale vessel prices are at trough levels and could present a more straightforward and swifter way to grow although this last option would risk adding too much capacity to the market and would somewhat defeat the purpose of industry consolidation.

Related Reports:

Sweeter deal for acquirers COSCO (1919:HK) & SIPG than for target OOIL (316:HK)

Global container shipping outlook: Capacity discipline is needed to lift freight rates; increased industry concentration helps

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