Global container shipping is focusing more on vertical integration, moving into logistics and away from consolidation amid slowing growth in container trade as well as digital disruption, Fitch Ratings says.
The credit implications are not yet clear as shipping companies' ability to generate relatively stable cash flows through vertical integration could be offset by the competitive and fragmented nature of logistics markets.
We believe that the consolidation wave in container shipping is approaching its end. The top six container lines account for over 70% of global market capacity. While we do not discount the possibility of further consolidation through the defaults of smaller, financially weaker companies or their acquisition by stronger rivals, we believe any large-scale acquisitions are unlikely. This is because only limited additional cost efficiencies are achievable through further increases in scale. Moreover, obtaining regulatory approvals may become challenging due to competition issues, while funding large acquisitions requires an ability to demonstrate a clear deleveraging path, which could be difficult in the prevailing market conditions.
Shifts in strategic initiatives announced by a number of container shippers highlight the emerging trend of vertical integration into logistics. This includes the acquisition of CEVA, one of the world's leading logistics companies, by the fourth largest container shipper, CMA CGM. Meanwhile A.P. Moller-Maersk is transforming itself into an integrated container logistics company with a view to balancing its Ocean (shipping) earnings by developing its non-Ocean (logistics & services, and terminals) business by 2023. In its "Strategy 2023" document Hapag-Lloyd also emphasises the necessity of building leadership in quality, agile organisation, digitalisation and automation. A similar focus is being pursued by COSCO Shipping, which envisages improved customer experience through digitalisation and end-to-end services.
The shift from consolidation to vertical integration provides an opportunity for container shipping companies to generate more stable cash flows and to reduce exposure to highly volatile freight rates. However, the logistics business is also competitive and fragmented and includes freight forwarders, logistics companies, digital start-ups and now container lines. The speed of adaptability along with the ability to build agile operations will be necessary for long-term winners. Although boosted by e-commerce, global growth rates in logistics have slowed down, and the margins in freight forwarding are under pressure from digital competition.
Source: BIFA
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