Could HMM spark a rates war that threatens the economic viability of some its rivals on the container shipping scene in these straitened times? It is certainly a possibility and one that is causing consternation among Europe’s largest box lines.
Last week South Korean President Moon Jae-in attended the christening of the 24,000 TEU capacity HMM Algeciras, the world’s largest container ship. It is the first of a dozen megamaxes HMM will introduce over the next year to an Asia-Europe trade lane that was struggling to cope with overcapacity even before the spread of coronavirus devastated demand.
HMM, currently the world’s ninth largest container line but soon to take eighth place as its newbuildings are delivered (see table below), has previously been the beneficiary of multiple state bailouts after racking up losses of over $1.5 billion in the last five years and nearly going bankrupt four years ago.
Some of its rivals believe state aid has, in effect, paid for HMM’s expansion even while it haemorrhages cash. Understandably then, the announcement last week that the South Korean government will provide its shipping sector with $1 billion of emergency funding, of which HMM is slated to receive circa $384 million, has not soothed nerves.
Liner dismay at State bailouts
Danish shipowners said they were “deeply concerned” by the move and, as reported in sister publication Lloyd’s List, both Maersk chief executive Søren Skou and Mediterranean Shipping Co president Diego Aponte have previously been critical of state support for carriers that lack a viable business model.
“HMM has another blank cheque,” a liner source told Lloyd’s Loading List. “Could they use it to start a rates war that puts one of their privately owned rivals out of business?
“I see no reason why not. They know they’ll be backed to the hilt. Korea won’t lose HMM like it lost Hanjin Shipping.”
He believes South Korea’s funding of HMM is not the only potential threat to European carriers. “The same goes for other state-backed lines,” he said. “Coronavirus could be their opportunity to thin the field.”
A market share grab?
Daniel Richards, senior analyst at Maritime Strategies International, believes state support of HMM raises two core questions for the liner shipping sector. The first is whether dumping rates is something HMM or its peers is likely to do. The second is whether it would matter if they did.
“On the first issue, you obviously have a company with stated plans to increase its market share - I think HMM is now shooting for 7% on the major East-West trades in/by 2021 - and which is about to substantially scale up capacity on the Asia-Europe trade,” he told Lloyd’s Loading List.
“That definitely creates an incentive to try to grab as much market share as possible now and hopefully lock in those customers.”
However, Richards also identifies multiple reasons why HMM might be discouraged from taking a ‘slash rates and grab market share’ strategy, most notably because the support package announced by the South Korean government is aimed at ensuring its survival, not as a subsidy to be used to undercut competitors.
“HMM’s operating loss in their container business was about Won340 billion ($277 million) in FY2018/19 which wasn’t a great year for HMM but likely a walk in the park compared to 2019/20,” he said. “Apparently they are due to receive about Won470 billion under this package as it currently stands.
“So while they do have an ultimate financial back-up I don’t think they have all that much space to absorb lower rates unless their market share goes up by a lot.”
Alliance structure might temper temptation
Container shipping’s network of alliances could also temper any bullishness on HMM’s part, not least because it only officially joined Hapag-Lloyd, Ocean Network Express (ONE) and Yang Ming in THE Alliance earlier this month.
“While pricing is something they agree independently, capacity is obviously determined at the alliance level and I suspect a more robust alliance system possibly also increases the incentive for liners to behave themselves on the pricing front - although I wouldn’t bet the house on this,” said Richards.
Even if HMM did drop rates in pursuit of market share, Richards notes that it risks its rivals following suit. In that scenario, HMM would lose a lot of money for very little gain.
“If you were thinking about dropping rates, you would want to be pretty confident that competitors won’t also do so and your market share would definitely increase,” he said.
“I wouldn’t rule this out – and there will be probably be a bit of it on the margins - but it involves very big risks. Even more so during a period where there’s an unprecedented external shock to demand and very little visibility over volumes in the year ahead.”
Ocean Alliance threat looms over rates
Richards also questions whether HMM has enough market clout to do more than apply minimal downward pressure to rates, and also notes that current market turmoil will likely overwhelm the actions of any single carrier.
According to Richards, a bigger concern for container line freight rates “given the carriers involved are so much larger and you have a carrier backed by the Chinese government in the mix”, might be the relative lack of blanked sailings announced for the current quarter by the Ocean Alliance, which comprises CMA CGM, COSCO Container Lines, Evergreen Line and Orient Overseas Container Line.
Will common sense prevail?
Richards takes the view that common sense will likely prevail among lines. “A situation in which everyone culls capacity and rates do not collapse, and there’s basic trust and awareness that this is the ‘goal’, is a better equilibrium for carriers than other alternatives,” he said.
“So I’d say the European operators’ fears are not baseless, and there will likely be some competition on the margins over market share - although reliability might be a better vehicle than price for achieving this at present.
“But a full-blown rate war is not our base case and Korea-style response measures are not being implemented with that goal in mind.”
No response was forthcoming from HMM at the time this article was published.