Comparing container logistic providers with container carriers

Some markets are not exactly rocket science. A surplus of supply let prices fall. That’s being taught in first semester at university already. Too much cash cheaply available through banks – who are in agony to scale investments and perfectly supplemented with evenly desperate equity providers – fuels the supply: in the case of container carriers well beyond actual demand. But that’s admittedly said in hindsight. The order book stands today at roughly 17% of the existing fleet whereas the majority of tonnage is supplied in the higher vessel size categories beyond what was imaginable 10-15 years ago: 10.000 TEU+. On top of things, the fleet is relatively young and resistance to scrap high as second hand prices are at historical low: there is just good value for money available.

But who has imagined that a whole industry is in the fly catch of another industry?

It’s a miracle that in times of the internet the container carriers today cannot switch off the 3PL who are actually “only” the logistics intermediaries, although the container liners would have enough expertise and resources to handle the workload. Historically however this constellation appears to have been set in stone when container trade really has been enhanced by China’s opening to the world trade. Was it a too generous and conservative allocation and positioning within the supply chain?

The average weekly capacity on the three main hauls was at just about 950.000 TEU – that makes about 49 Mio TEU per year. Let’s further assume that utilization is at roughly 90% (i.e. 44 Mio TEU).

The top 15 3PLs had in 2015 about 25 Mio TEU liftings. In order not to exclude all other trades and to make the numbers comparable, let’s assume just 75% of all 3PL liftings go onto the main hauls (i.e. 19 Mio TEU, but believe it’s actually a bit less).

So here we have a rough dependency between the 3PL and the container carriers of an estimated stunning 40 (+/-) %!

By the way: on average about 41% (+/-) of 12 of the top 15 3PLs revenues are related either to ocean carriage or (wider) freight (that would include non-containerized goods as well, but let’s neglect that for sake of have an easy comparing study here).

The dependency works two ways – the 3PLs will need the carriers and vice versa. But as long as capacity is high, and the prices are low (the Shanghai Containerized Freight Index (1.000 = Oct 2009 – which was at that time already hardly sustainable) is creeping at a low level of just about 700), the loyalty of the 3PL towards a carrier can be assumed as non-existent. The carriers however use the steady and reliable cargo flow as their base case to fill their ship’s space.

What really needs to be questioned is how much is growth and market share worth?

The recent developments within the container carrier industry are not coming too much as a surprise:

The Top 14 lines (of 15) managed to accumulate for the first half year 2016 nearly 2 billion US$ worth of negative earnings from operations (losses!)

before interest and taxes. Expansion of capacity was exceeding demand, prices per lifted TEU declined almost a decade now and became hugely unsustainable.

By comparison (and already discounted by the above mentioned averaged 41% relation to ocean or freight and only those where data was readily available),

the accumulated EBIT for the first half year 2016 of 11 of the top 15 3PL stood at 6 billion US$. But what this number also shows is that end receivers pay up for using a 3PL.

Or contrary, do container carriers not have the same standing with receivers??

Check the data tables for the
logistic providers 
 and
container carriers
 here.

The delta of the operating profits between the two industries (and those mentioned selected companies) is expected to be

  • beyond 8 billion US$ for the first six months 2016 and
  • 5 billion US$ for the last 18 months.
  • If we would take out the two market leaders Maersk and CMA CGM (and privately owned companies such as MSC and Hamburg Süd are completely taken out if this equation), we would even face an accumulated 18 months negative EBIT of 1,6 billion US$.
  • That widens the gap to 8 billion for the last 18 months
  • (to get a feeling for large numbers: the GDP of Iceland 2015 was roughly 17 billion US$ (rank 111) or the 8 billion would be ranking somewhere at 141 between Moldova and Niger out of 239 countries).
Let’s stay in this simplistic approach and take the delta and divide it by the TEU lifted of the selected 3PLs in 2015, that would give a potential saving for the receiver (= party who pays the freight) of about 300-400 US$ per TEU, which should be used by the container line to slide in-between.
(if you find reliable statistics hereto, please share it) we are anyway only talking about 3-4 per mill of the value… A significant freight increase however to improve sustainability of the container carriers in relation to value seems not to harm the receivers.

The average equity / liabilities ratio of the 3PLs compared with the container carriers

  • is 80% for the 3PL
  • and 40% of the container carriers.
  • The cash position of the one or the other carrier is indeed concerning weak with EBIT negative and the ratio low. 
 

The 3PL must be scared of further parties of the industry going bust in the same scale and manner as recently Hanjin proved.

Comparing all the publicly available data, it does not take much to speculate two possible scenarios:

  1. The container carriers will emancipate their selves and manage to loosen the tight grip of the 3PL. How and how fast can they lift the potential gap and bring more value into the logistic chain? But are receivers price sensitive and non-loyal, either? Do receivers only see their target budgets and how to achieve them? How much are they willing change their habits and change their logistic providers?
  2. The one or the other cash rich 3PL with a large strategic interest in the container industry will swallow a container carrier with high leverage + low EBIT + low cash position. Is that unheard of? Will they aim for just tonnage acquisition or also take over line set ups and integrate those into the own group?

A discussion is needed to be started to identify what led to this significant disparity of the two industries despite their interdependency, apart from the well cited chronic oversupply of tonnage.

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(Not taking any responsibility on the accuracy of above. No responsibility is taken if above is taken as the base for decisions. All data presented sourced from publicly available data and referenced company’s websites. Author: alexander@schepers.de for Maritime Trust Platform c/o SMS Chartering GmbH, 05.10.2016)