Independent SM Line needs big ships and partners, says SC Lowy executive

Greg Knowler, Senior Editor | 6 July 2017

Soo Cheon Lee - SC Lowy

Soo Cheon Lee, co-founder and chief investment officer at
SC Lowy,
has been impressed at the growth of Korea’s newest
liner shipping company.

A need for scale will ultimately force SM Line to acquire larger vessels and drive the new liner shipping entrant into the arms of alliance partners, believes Soo Cheon Lee, cofounder and chief investment officer at SC Lowy.

The investment bank executive described the rapid rise of SM Line as “impressive” with the Korean carrier taking just six months to accumulate a fleet of 30 ships and launch services on the trans-Pacific and intra-Asia.

SM Line plans to add nine more vessels to its fleet by the end of this year, which it will deploy on intra-Asia and trans-Pacific trades. The nine new vessels will take the size of the company’s owned fleet to 26, while it also operates four chartered vessels.

Lee said SM Line’s growth strategy was built around entering container shipping at the right time, finding a niche market and especially buying its vessels at good prices. “The line managed to successfully pitch it’s business model to the Korean government and then they employed all the Hanjin Shipping guys, so they were able to launch quickly with people that had an intimate knowledge of the container shipping business,” Lee told Fairplay.

“SM Line revived Hanjin’s intra-Asia and trans-Pacific liner services and I have heard that their load factors are high at 80% occupied. I have to say, if I was the CEO I would be nervous about buying so many vessels in six months, but they managed to find funding, they bought at low prices and now six months later they have made 30-40% capital gains on those ships.”

But the carrier will need to upgrade its vessel sizes in the future and find partners, Lee said, something that SM Line senior vice-president Ki Hun Kwon agreed with in a Fairplay interview earlier this week. Kwon said the company had little choice but to continue to operate as an independent carrier until such time as it managed to secure larger vessels. “If we want to join an alliance we need to secure bigger vessels. In the short-term at least, we need to stay independent,” Kwon said. “There are some advantages to this, including the ability to make faster decisions and to offer more flexibility and customised services. However, over the medium to long term, if we continue to increase vessel size and capacity, we will eventually need partners.”

Lee said even though SM Line was a small player, it had managed to pick up its vessels at the lowest prices seen in 20 years, and that gave it a significant competitive edge in container transportation.

“The main reason the 18,000-plus teu ships are coming into the market is because they offer cheaper costs per unit. But because SM Line was able to buy their secondhand vessels at the lowest part of the cycle, and their competitors bought their ships brand new four or five years ago, the unit costs of SM Line are cheaper, even though their vessels are smaller in container carrying capacity,” Lee pointed out.

However, he said this competitive edge would not last forever because a vessel was a depreciating asset. “SM Line will need to find ways to increase its capacity and keep operating expenses down, and that is going to be the long term challenge. That is going to be when they start looking for partners,” he said.

“SM Line must increase its vessel sizes at some point, and in the next 12 months, I think it will be critical that they find an alliance or some kind of vessel cooperation with other carriers.”

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