February 13, 2018
Consolidation has traditionally been a bit of a chimera to the shipping industry. Many demand it, some advocate for it and a few drive it, but while much hoped for, it has appeared harder to achieve in practice. At last, on the cusp of a recovery, there are signs that industry could be ready to embrace the concept wholeheartedly.
Shipping starts from a position some way behind where it wants to be. It is an oft-repeated assertion that the average shipping company is not a Maersk, Scorpio or Euronav, but rather a private enterprise owning the equivalent of four or so ships. The fact that these are sometimes owned by single-purpose entities makes the assessment even more cloudy.
There are plenty of examples where consolidation has worked but these have tended towards the top end of the market. When John Fredriksen set out to corral first the tanker, dry bulk and then the offshore markets he set a precedent that served as both a paradigm and cautionary tale.
Container lines have set the pattern – though they have always preferred short term collaboration – and consolidation is normally a last ditch option, driven by survival instinct as much as by growth. The interest of anti-trust authorities in this very public sector of shipping is far greater than in dry bulk or even tanker owning and it remains an influence on the scale that consolidation can reach.
When class societies DNV and Germanischer Lloyd merged some years ago it quickly became clear who was buying whom and ever since, speculation has been rife about which of the big five would be next to go.
Yet for an industry with a buccaneering reputation, it doesn’t always pay to get out in front of the trend, but instead to adopt the traditional posture; opacity trumps transparency every time. Others prefer to control assets not organisations and the hunt for bargains over the much tougher business of blending two organisations, cultures and workforces.
The pre-digital industry might prefer it this way but as markets recover from a decade of downturn, the prevailing wisdom is that scale matters and size pays dividends.
The problem with consolidation is that it requires the kind of foresight that few are born with as well as the ability to time that markets that comes perhaps once or twice a generation. That may be about to change as a new wave of financiers, owners and operators look to time their entry or re-entry to markets that are beginning to show signs of sustained improvement.
Research just published by consultancy Petrofin on the traditionally highly fragmented Greek shipowning community found that consolidation is being led by the cluster’s smaller companies while capacity growth is being spearheaded by its largest owners.
The number of shipping companies registered in the country in 2017 dropped to 597, its lowest level since Petrofin started collecting data in 1998 and the biggest annual decline since 1999. Companies with just one or two ships dropped at the steepest rate, falling 12% compared with 2016 to 233 firms.
“It becomes evident the picture of Greek shipping that emerges shows an extensive internal reshuffle. Hardly any company remained unchanged in terms of tonnage,” observed Petrofin founder Ted Petropoulos.
The announcement just before Christmas of the acquisition by Euronav of tanker compatriot Genr8 was another signal that larger owners are taking positions ahead of an expected upturn – even though many analysts forecast that 2018 will be flat to 2017 at best in terms of earnings. The merged company will own 75 large tankers including 44 VLCCs and 28 Suezmax tankers with a total tonnage of 18m dwt after six VLCCs are sold.
The most evident consolidation of the last decade has been in the form of pooling, but despite its advocates stressing the positives of providing a more flexible response to charterer demand, the fact remains that many adopted it as defensive move; a way to cut operating costs rather than driving better earnings.
It’s perhaps this continued emphasis on competition over co-operation that has held back large scale consolidation until now and on the supply side it seems likely that buyers will continue to hold the advantage.
Even accounting for the number of active owners and managers, there are too many service providers chasing increasingly slim margins. In IT, navigation, communications, machinery spares and service, port agency and more sectors besides, the number of suppliers easily outpaces demand, making differentiation on service hard, when price is the primary driver.
Software companies for example have typically pointed out that the specific demands of the shipping industry make it a requirement that systems are dedicated and bespoke, and therefore harder to integrate with other systems or applications. Ship agency providers will similarly sell their own operations software and systems for the same reasons as will ECDIS manufacturers and even shipmanagers.
The growing trend towards digitalisation is fast making such strategies redundant and savvy suppliers will soon start to realise that in order to continue to have a viable competitive position, they will need to offer more services and make them available globally, on-demand.
The era of open APIs and cloud computing is driving the development of platforms and ecosystems that can support a broader range of services from a single source and scale as user needs grow and change.
It will change for good when owners and managers start to recognise that a system of using many smaller suppliers doesn’t fit the business model they will need for the next wave of smarter shipping.
While it remains a truism that the supplier in the far flung port with the critical part you need will always have a place, an increasingly digital industry shouldn’t have to rely on a zero sum game business model that will always seek to trade-off price against service.