Financially vulnerable carriers could be pushed into M&A by the extra costs associated with the new low-sulphur fuel law. If that happens, how might competition on key trades be affected?

Most of the major carriers have now reported full-year 2018 financial results and thanks to a 4Q18 rising trend in demand and freight rates, boosted by the sugar-rush of the threatened US tariffs, the industry was able to return a small profit in the region of $1.5 billion, as reported in Drewry’s newly published Container Forecaster report.

Welcome as that second-half revival was, attention is now focused on the prospects for this year and beyond that what impact the new IMO low-sulphur fuel regulation will have on profitability in 2020.

The industry still hasn’t fully recovered from the global financial crash and the devastating losses incurred thereafter. The Table 1 of carriers’ most recent financial stability Altman Z-score shows that many are still reside in the so-called “distress zone”.

As the deadline for the IMO 2020 mandate draws nearer carriers are inevitably getting jittery about its overall impact. Are they in a position to deal with myriad of extra associated costs such as unrecoverable BAFs, capex costs to install scrubbers and extra funding requirement for bunker credit, among others?

Without wanting to be too alarmist, there is the potential for IMO 2020 to inspire another major carrier bankruptcy and/or trigger more defensive M&A. It could turn out that the IMO will inadvertently push industry consolidation along, closer to where it needs to be in order to achieve sustainable profitability.

The last round of M&A that started with the merger of Chinese carriers Cosco and CSCL in 2016 and concluded with the integration of the Japanese carriers NYK, MOL and K Line into the Ocean Network Express (ONE) in 1Q18, made some headway in the consolidation process to the extent that the leading seven carriers now control approximately three-quarters of the world’s containership fleet.

However, while previous M&A has handed near-full control of the global market to a handful of lines, there is still varying degrees of competition at a trade-route level. Significantly, that is the case in some of main large-volume and revenue generating East-West routes.

Using the Herfindahl-Hirschman Index (HHI) method (see footnotes in Figure 1 for more details) only one trade in our sample, the relatively small Europe-East Coast South America southbound trade resides in the “highly concentrated” bandwidth. Most of the key East-West trades fall into the “competitive” description.