[Container Insight] Helping Hands

Source: Drewry Maritime Research

Agreement between expansionist carriers Hamburg Süd and UASC opens up new trades for each line, but the carrier industry is still a long way from having truly global alliances that cover both East-West and North-South markets.

A few weeks ago we wrote that the Ocean Three agreement between CMA CGM, CSCL and UASC was the final piece in the East-West “alliance” jigsaw and that we did not expect these large scale partnerships to extend to the North-South lanes.

Drewry stands by that statement, but the announcement of a slot exchange agreement between North-South specialist Hamburg Süd and UASC, hitherto focused almost exclusively on East-West routes (including the Middle East), probably necessitates that we elaborate further.

The terms of the agreement are vague, but the press release does say that Hamburg Süd will take slots from UASC in the Asia-North Europe trade (December 2014) and in the Asia-US lane (January 2015), while UASC will enter the Asia to East Coast South America and Europe-ECSA trades from mid-2015.

The carriers added that discussions are planned that will potentially expand the geographic scope and even extend the nature of the agreement from its initial slot exchange parameters to include vessel sharing on services.

Further details of the services have been promised shortly, but in the meantime it is very difficult to know how deep the agreement will go. For example, will the slot exchanges cover all of the services offered by each carrier in the relevant trades or will they be limited to just those services in which the two carriers operate vessels?

The task is made more complicated by the pending start of the Ocean Three agreement, scheduled end-2014. Deployment details for Ocean Three have yet to be announced and furthermore each carrier will still be free to continue with existing service agreements and UASC is yet to announce its plans on that front.

Table 1
Current and Forecast Services Offered by Hamburg Süd and UASC Within Trades Covered by the Agreement

Table 1 provides an overview of the services currently operated by the two carriers in the agreement’s geographical scope, as well as what the future offering might be when Ocean Three commences, assuming that UASC severs all existing ties.

Were the agreement to start today, Hamburg Süd could take space on up to five weekly Asia-North Europe services in which UASC participates, or just two loops if access is restricted to services in which UASC provides vessels. For the Asia-USWC trade UASC is involved on four services, two of which it contributes vessels to, while it currently has just the one Asia-USEC loop that includes UASC chartered-in tonnage.

When Ocean Three becomes operational, Hamburg Süd could theoretically offer space to shippers on four Asia-North Europe loops, five Asia-USWC services and two Asia-USEC strings, one of which via the Suez Canal and one via the Panama Canal.

In return, from mid-2015 UASC will potentially have access to five Asia-ECSA services and three Europe-ECSA loops, or two and one respectively if slots are limited to Hamburg Süd-deployed services.

UASC does already have a very small presence in the Europe-ECSA trade as it takes space on the SAM service of MSC to and from the Mediterranean.

Therefore, as things currently stand, this agreement cannot be seen in the same context as the far wider reaching alliance pacts and Drewry believes that the industry is still a long way from having truly global alliances that covers both East-West and North-South markets. The Hamburg Süd-UASC agreement differs from the likes of 2M and Ocean Three in that it opens doors to new trades and as such each carrier will lean heavily on the other for guidance as they find their feet in new land.

Why these two companies and what incentives is there for each in breaking from their traditional trade specialties into new untested territory?

Despite having no obvious connections, either culturally or through previous service agreements, Hamburg Süd and UASC do share one important trait that could have drawn them to one another. Both companies are expansion minded; as alluded to in the executive quotes from the press release:

Jørn Hinge, President and Chief Executive Officer of UASC: “As a customer-focused and emerging global operator, UASC is committed to continuously delivering new and enhanced service patterns. This cooperation with Hamburg Süd enables access to the South America trades and illustrates our ambitious approach to enhance geographic coverage.”

Dr. Ottmar Gast, Chairman of the Executive Board of Hamburg Süd: “This cooperation will enable Hamburg Süd and UASC to complement each other’s core services and networks, offering both lines’ customers a more comprehensive global reach and reliable services without incremental investment in new tonnage.”

Figure 1
Annual Volumes of Hamburg Süd and UASC, 2003-13 (’000 teu)

Hamburg Süd is one of the fastest growing carriers in terms of volumes with CAGR of 11% between 2003 and 2013, on a par with the Chinese carriers Cosco and CSCL and just a few points below MSC and CMA CGM. Most of that growth came in the five years before the global financial crisis when the German carrier purchased a number of regional carriers (see Table 2).  Between 2003 and 2008 Hamburg Süd’s volume CAGR was a staggering 18.3%.

Table 2
Hamburg Süd’s M&A History Since 2003

The slowing growth trend is not exclusive to Hamburg Süd, but the carrier has clearly decided that it needs to reenergize itself, previously demonstrated by its order for reefer-heavy 9,000 teu newbuilds, and more recently by its pending takeover of CCNI and now the move into the East-West sector via UASC.

UASC’s volume growth over the last 10 years has been more sedate, but more consistent over the period. The company’s volumes between 2003 and 2013 grew at 6.6% CAGR with little change since the 2008 crash. The carrier, owned by a consortium of Middle East countries with Qatar as the new majority owner, has, unlike Hamburg Süd, preferred to grow organically, but recent forays into the newbuild market will give its capacity a steroid injection that will take it into the Top 10 carriers by operated fleet.

Table 3
Containership Fleet and Orderbooks of Hamburg Süd and UASC, as of 1 October 2014

Table 3 lists the existing fleets and orderbooks of the two carriers. UASC has the third largest orderbook behind MSC and CMA CGM, with orders for 17 new ships (6 x 18,000 teu and 11 x 14,066) totaling 263,000 teu due for delivery by the end of 2016.

All of the new UASC ships are expected to be put to work in the Asia-Europe trade, alongside similar-sized leviathans from Ocean Three partners CMA CGM and CSCL, so bringing in Hamburg Süd must have been partly motivated by needing help to fill the new ships. Without any prior presence in the trade, the German carriers is likely to need time to build up its customer base in order to make a significant contribution. Yet, despite its novice status in the Asia-Europe trade, Hamburg Süd is a logical choice of partner for UASC as being a relatively big and well-established company with a presence in both regions through involvement on other trades it should get up to speed quickly.

Similarly, UASC will help to fill Hamburg Süd’s growing number of ships on the ECSA route, particularly with Middle East cargo transhipped in Europe and Asia.

As the press release hinted, the agreement could be extended to include vessel deployment. The risk here would appear to lie more with Hamburg Süd as the Latin America trades are already seeing rate erosion from the cascade of smaller 9,000 teu ships previously assigned to East-West lanes. However, the make-up of UASC’s existing fleet doesn’t contain any owned-ships suitable for North-South operations with those currently on Asia-Europe duty being 13,500 teu in size.

Neither are Hamburg Süd’s ships (current fleet or on order) large enough at a maximum of 10,500 teu to be competitive in the Asia-North Europe trade, suggesting that the Transpacific would be the most obvious choice if they decided to extend the agreement to ship deployment.

Scary movies tell us not to invite vampires into our homes, but shipping lines have never seen a problem with introducing supposed rivals into their trades. The Europe-ECSA trade is a prime example of such “co-opetition” with only three carriers operating vessels on weekly services (Hamburg Süd, Maersk and MSC) but 10 carriers (excluding subsidiaries) offering services. What’s more the three vessel providers all take space on each other’s’ services.

Slot exchange deals can be a useful method for carriers to branch out into new trades without having to make any heavy upfront investment. The risk is that new entrants effectively have to buy their new customers with cheap rates on the spot market that undercut the existing players, or introduce unsuitable tonnage that destabilizes the market.

While these risks are evident, clearly for Hamburg Süd and UASC they are outweighed by the upside of new business opportunities to support their grand expansion plans. While on the surface the agreement is just another slot swap it has much more value as the two lines can use it to announce their arrival as serious global players in the container shipping arena.

Our View

The message is clear that in order to compete with the likes of Maersk Line, MSC and CMA CGM it is no longer enough to be specialists in niche regions. The mantra for expansionist carriers now seems to be “go global or go home.”