Are containership operators entering uncharted waters? With a heavy orderbook, new regulatory and environmental regimes and carriers looking to expand on the traditional business model, the future may not be business as usual.
Top Heavy.
It doesn’t take a logistician to see that the containership business is top heavy. [See Top 50 Container Carriers Chart sourced from Alphaliner’s Top 100 data] If a containership was built with the same proportions as the industry, it would turn turtle and sink. And the containership business is even more concentrated when the ocean carrier alliances are taken into consideration — there are really only three that count: the 2M (Mediterranean Shipping Co. and Maersk), THE Alliance (Hapag Lloyd, Ocean Network Express, Hyundai Merchant Marine and Yang Ming Marine) and the Ocean Alliance (CMA CGM, COSCO and Evergreen). Between the three carrier alliances they operate over 3,000 ships amounting to nearly 22 million TEUs. The membership of the ocean carrier alliances accounts for nine out of the top ten ocean carriers (and that comes with somewhat of an asterisk, as number 10, Zim Integrated Shipping Services, although independent, has had a relationship with the 2M alliance).
For an ocean shipper, this means there is an excellent chance that your freight is carried by one of the top 10 carriers and operating within one of the three ocean carrier alliances. It is worth mentioning that these ocean carrier alliances are not rate making groups, as anti-trust regulatory regimes on a global basis forbids such a collaboration. Ocean carrier alliances are about vessel scheduling and backroom functions. At a base level, alliances are a function of ships and slot utilization — a collaboration to improve operating efficiencies, in an industry that up until the post-COVID cargo surge and the accompanying record freight rates, rarely posted a decent return on investment.
2M Breakup: Minor or Momentous?
Perhaps the most talked about industry event of 2023 — aside from the plummeting freight rates — was the joint January announcement by MSC and Maersk to terminate their 2M alliance in January of 2025. In a joint statement, CEO Vincent Clerc of A. P. Moller - Maersk, and CEO Soren Toft of MSC say:
“MSC and Maersk recognize that much has changed since the two companies signed the 10-year agreement in 2015. Discontinuing the 2M alliance paves the way for both companies to continue to pursue their individual strategies…”
This isn’t about two insignificant operators at the bottom of the industry – MSC is number one with 736 ships with over 4.7 million TEUs, while number two Maersk, which had been number one for years, operates 695 ships with over 4.1 million TEUs. Collectively, they are almost an industry unto themselves.
After a collective hold-your-breath pause from shippers, other containership operators, ports, terminal operators, waterfront labor and industry analysts, business simply went on as it always had.
So, is the 2M breakup a minor or momentous event for the containership business?
Allen Clifford, Executive VP of MSC USA, and the carrier’s first employee, offered his views of the breakup in a luncheon address at the Coalition of New England Companies for Trade (CONECT) annual Northeast Transportation and Trade Conference in Newport Rhode Island [April 11-13, 2023]. Clifford noted how normal it is for alliance partners to separate: “So you know that it was announced that MSC and Maersk would go their separate ways and we would seek our own lives. And it was a very natural thing. And I’m always surprised when people say, by the way what’s going to happen? The collapse of maritime, it’s the end of the world…which is interesting because alliances have always started and broken up.”
Clifford is right and rational in his explanation but there is still a lingering question of why the two largest companies in the industry, who by all accounts (although privately MSC doesn’t need to show them) have had a very successful — possibly the most successful partnership in the history of containerized shipping — see themselves going into different business directions? After all, the basic industry model is pretty simple: go to a port, load a box and sail to another and drop it off…repeat and repeat.
And if there is more in the shift in business direction involved in the breakup of the two largest carriers, then indeed the 2M breakup could be a momentous event for containerized shipping.
A New Order or Just a lot of Orders
Perhaps the best known analyst of the container industry is Lars Jensen, CEO and Partner at Vespucci Maritime. When asked by AJOT about the divergent business goals of MSC and Maersk, Jensen wrote, “Maersk is clearly pursuing their integrator strategy and have also on multiple occasions confirmed that they do not necessarily want to grow ocean volume - they are more focused on the end-to-end profitability of the cargo.” For the MSC side of the equation, Jensen offered, “MSC has the largest orderbook and based on this clearly aims to grow the volumes further in the coming years. This creates a problem in a vessel sharing agreement (VSA) when there is not alignment on when/whether/to which degree new services should be launched and/or individual sailings cancelled.”
In a copycat business like shipping, the obvious question for the other carriers is “if the two biggest players are splitting up maybe we should consider doing the same?”
Jensen in an AJOT article by Stas Margaronis (See AJOT.com Mar 8, 2023, Are MSC & COSCO Poised To Be Ocean Carrier Growth Leaders?) suggested that there would be changes to the existing alliance structure down the road. So, when asked what he expected with the Ocean Alliance, Jensen explained: “In relation to Ocean Alliance, COSCO has lost significant market share during Covid and I would expect them to ramp up their efforts to regain this as well as grow further - they have the 2nd largest orderbook after MSC. This would lead to commercial pressure on the business partners.”
Of course, none of this is happening in isolation. There has been, as Jensen alluded to, a massive amount of container ordering done largely by the top ten container ship operators (excluding Yang Ming which at the moment is showing no new ship orders). MSC, as expected has the most with 42 ships of nearly 1.75 million TEUs. CMA-CGM and COSCO have over 91 ships and 45 ships respectively, on order, both with over 800,000 TEUs. And ONE has 451 ships of over 570,000 TEUs on order and Evergreen has 49 ships of over 463,000 TEUs. The orderbook is around 7.1 million TEUs at the moment, although delivery delays and outright cancellations are possible. Many of the new ships are over 23,000 TEUs — a testament to the suggestive powers of “economies of scale.” Currently there are roughly 6,000 containerships active of around 26.7 million TEUs. So, the question is why would carriers add so much tonnage while freight rates are scraping the seafloor? A partial answer is ordering often runs counter-cyclical and there is always a competitive element in keeping up with the other carriers — and often to have similar ships to use in VSA rotations. And owners are also trying to keep ahead of the tighter environmental regulatory regimes.
Which brings the real question to the fore. Are containership operators nearing an inflection point? With new environmental requirements impacting ship design (a wide variety of new fuels such as LNG, methanol and ammonia requiring new power plants), is the alliance structure potentially ready to shift and new business models emerging — Maersk the first ocean integrator? — the answer might be Yes.
