Sunny Ho, Hong Kong Shippers’ Council Executive Director says that mergers are ‘unavoidable’ and that reduced capacity will provide long-term benefits to carriers.

With falling freight rates and too many vessels for too few goods, the long awaited consolidation in the container shipping sector is under way with the proposed acquisition by CMA CGM of NOL and the recently approved merger of COSCO with China Shipping Group by the Chinese Government.

If there are no objections from anti-trust authorities in the US and EU, it is likely that approval will be granted for the CMA CGM acquisition of the Singapore-based shipping group and that the sale will be completed in August this year.

The consolidation is driven in part by the widening of the supply-demand imbalance at trade route level and surplus vessel capacity which will lead to freight rate reductions and industry-wide losses in 2016, according to the latest Container Forecaster report published by global shipping consultancy Drewry.

“It is an unavoidable trend and I think that mergers in the longer term will help carriers to consolidate and reduce overcapacity in the container shipping sector,” said Sunny Ho, Executive Director of the Hong Kong Shippers’ Council. (See Big Questions)

The decline in global container shipping freight rates is anticipated to have been as great as 9% in 2015 and Drewry is forecasting that carrier unit revenues will decline further in 2016, albeit at a slightly slower pace.

With the idle fleet touching one million TEUs in late 2015, or just under 5% of the global fleet, decisions need to be taken by lines to remove more vessels and re-structure more trade lanes with new operational agreements. Big vessels no longer guarantee decent profitability (see Liners could learn from tanker sector that size is not everything) and should Asia to North Europe contract rates be signed at an average $900 per FEU for 2016, this equates to an estimated $1.4 billion loss for the carriers on one trade lane.

Falling bunker prices helped carriers mitigate lower freight rates in 2015 but BP Chief Executive Bo Dudley said that oil prices will bottom out during the first quarter of 2016 and he did not foresee rates at below the US$30 a barrel threshold.