What future for a business that has destroyed $100bn in value?

McKinsey and AP Moller-Maersk reveal the long road to consolidation the liner sector must still travel if it is to become stable and sustainable

It is a business that has helped generate a $15trn boost to global economic output by facilitating efficient supply chains. But in doing so, it has destroyed around $100bn in shareholder value over the past 20 years.

That is McKinsey & Co’s blunt assessment of the current state of the container shipping industry. Worse than that, the consultancy is not as optimistic as most industry watchers about predicting an end to the current destructive freight rate environment.

That issue was on clear display when AP Moller-Maersk revealed lacklustre 2017 results last week. While Maersk Line’s figures were a little better year-on-year, they were well below expectations despite the efforts the Danish giant is putting in to reinvent a profitable future for itself.

When the world’s biggest line again fails to deliver, and one of the world’s highest-profile "business change" consultancies says there is a problem, then it is surely time to stop and ask some tough questions.

What does the future hold for investors, shipowners and operators in a business that is now 50 years old, but which displays the maturity of a wilful toddler, repeatedly refusing to take the necessary medicine and demanding others clear up the mess?

McKinsey is not optimistic that trade demand growth will pull the industry through on its own, as some others have it. In a recent sector report, it highlighted that at one time container trade grew at a rate two to three times that of global GDP. But no more.

Losing momentum

The multiplier is now closer to one. Worse still, while the world economy has been looking a little rosier recently, growth remains slower than in the boom years of the first decade of the millennium.

"Container shipping is now 50 years old but displays the maturity of a wilful toddler, repeatedly refusing to take the necessary medicine and demanding others clear up the mess"

With current container carrying capacity afloat around 20% higher than demand, the structural oversupply will not be absorbed until the early 2020s, even if ordering remains conservative.

With such overcapacity, lines often accept cargo even if it barely covers marginal cost. After all, as McKinsey says, carrying something on today’s ship is usually better than carrying air.

Under such pressure there is likely still further value destruction in the next few years, McKinsey argues, despite the recent flurry of mergers and acquisitions in the sector.

Of the top 20 stand-alone lines in 2013, shortly only 10 will remain, with the top five now accounting for 67% of capacity.

That may appear a dramatic consolidation from the subjective viewpoint of the sector. However, looking at liner shipping in the more objective context of other global transport modes, it remains relatively fragmented.

8ab04099d688cfd6abcca8f2c0a494be AP Moller-Maersk chief executive Soren Skou Photo: AP Moller-Maersk

While the top three lines now account for 47% of the market, the top three international express companies control nearly 90% of their market, the top three US airlines hold a 70% share, and the top three cruise lines more than 75%.

Seeking synergies

It means more mergers are inevitable, both for greater control of pricing and for greater cost synergies. Maersk Line, for example, expects to save $350m to $400m annually from its $4bn acquisition of Hamburg Sud.

Many observers will be sceptical over the likelihood of a fresh round of consolidation. Political, cultural and financial hurdles can all block takeovers.

Yet McKinsey makes a telling observation. In the past 15 years, shareholders selling out of liner firms made a gain of 10% on their stock, while buyers have seen their shares fall 3%.

In shipping, knowing when to sell is just as important as knowing when to buy. And in the liner sector it looks like being a sellers’ market for a few years to come.

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