More companies form alliances due to financial problems

7 December 2016

Container Shipping Companies forming major alliances is an increasingly common phenomenon. They do this in order to reduce costs. Japanese companies have announced plans to work together next year. Companies NYK Line, MOL and “K” Line are involved in such negotiations.

Forming alliances to survive

Working together has become necessary because sea freight prices have fallen sharply over the last 3 years. This has lead to companies running heavy losses. The alliance between the three Japanese companies is not the first and most likely will not be the last in shipping. Others have already gone ahead, for example, the alliance between 2M and Ocean Alliance.

The low rates are the result of a substantial decline in exports from Asia, but also the increase in vessel capacity in which fleet expansion plays a role. This left plenty of unused capacity aboard ships, further ensuring low prices and more losses. To bring a change in this tight financial situation, companies are forming alliances. In addition, they are taking ships out of service, which creates a capacity shortage. In this way, a higher price for sea freight can be sought.

Japanese companies turning billions of losses

NYK Line, MOL and “K” Line wrote red figures last year. NYK Line recorded a loss of $2.2 billion in the first half of 2016. In 2015, MOL recorded losses of about $1.5 billion and “K” Line $475 million.

Through this cooperation the companies can save around one billion dollars per year. The new company will be set to earn a market share of 7%. Thus they will be the sixth largest container carrier at sea. From April 1, 2017 the new joint company officially starts.

Consequences for sea freight

New alliances, losses due to the decline in exports from Asia and limiting capacity will contribute to raising ocean freight rates. The loss of shipping company Hanjin, also adds to the impact. In addition, diminishing competition has led to less freedom of choice. Due to the adverse conditions faced by container shipping companies, the need to raise rates looks likely to persist.