Korea Shipping – Inner competition to test new intra-Asia alliance

Journal of Commerce Online
Greg Knowler, Senior Asia Editor | Aug 10, 2017

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SC Lowy Co-Founder & CIO Soo Cheon Lee

The cleaning up of South Korea’s container shipping industry since Hanjin Shipping went bankrupt a year ago and left Hyundai Merchant Marine as the new flag carrier took a surprising turn this week with the announcement that 14 of the country’s carriers were forming an intra-Asia alliance.

How so many container lines, all fiercely competitive with each other, will be able to cooperate in an oversupplied and cut-throat trade has analysts such as Alphaliner scratching their heads.

Nevertheless, the Korea Shipping Partnership was launched on Aug. 8 by the Korea Shipowners’ Association and is aimed at improving the Korean carriers’ operating cost competitiveness and at addressing the persistent supply-demand imbalance on intra-Asia routes.

The memorandum of understanding was signed in Seoul by HMM, KMTC, SM Line, Sinokor, Heung-A, Namsung Shipping, CK Line, Pan Continental Shipping, Dongjin Shipping, Pan Ocean, Dong Young Shipping, Doowoo Shipping, Taiyoung Shipping, and Hansung Line (an affiliate of Sinokor).

Alphaliner said the formation of the partnership was part of the Korean government’s plans to revive the country’s shipping industry after last year’s setback caused by Hanjin Shipping’s departure from the market.

Much of the work that needs to be done in Korea will involve consolidating and cleaning up the balance sheets of shipping companies, and an expert in that area is SC Lowy Co-Founder and Chief Investment Officer Soo Cheon Lee.

Lee was instrumental in resolving the critical financial woes of Korea Line and Pan Ocean, taking the Korean carriers from the brink of collapse to financially viable concerns. He said in general the shipping industry urgently needed cleaning up to address surplus capacity and better cope with demand that was unlikely to see the double-digit growth of the past.

“But so far South Korea is the only country in Asia that is actively cleaning up its shipping sector,” he told JOC.com. “It started several years ago with Korea Line and Pan Ocean and has now moved into container shipping and shipbuilding. Korea is restructuring its huge shipping sector and it looks like that is set to continue under the new President Moon Jae-in government.”

It will not be smooth sailing for the Korea Shipping Partnership. According to OOCL, the intra-Asia market is continuing to show signs of weakness with “markedly negative volume growth” in trade between North China, Japan, and Korea, although Southeast Asia and Taiwan trade was improving.

On its intra-Asia/Australasia segment, the Hong Kong-listed carrier’s first half container volume showed a 5.2 percent decline compared with the first six months of 2016, with intra-Asia largely responsible for the falling volume. Revenue on the segment rose 2.3 percent in the first half year over year.

But arguably the main obstacle to the Korea Shipping Partnership is the fact that Korean carriers are fiercely competitive with each other. Alphaliner said this was illustrated by KMTC and SM Line, two Korean container lines that opted to stay out of the HMM + Sinokor and Heung-A partnership and pursue their own growth plans.

Drewry put the intra-Asia throughput in 2016 at 30 million TEU, a 4 percent year-over-year growth. For 2017, the International Monetary Fund forecast the global economy to grow by 3.5 percent, and Drewry believed container throughput in the world’s largest trade would reverse the trend of the last two years and surpass GDP growth.

The 14 Korean carriers operate a combined capacity of 308,000 TEU on intra-Asia routes, which Alphaliner said was a good distance short of the 1.28 million TEU operated by the main non-Korean carriers on the trade.

“The Korean carriers’ disadvantages from lack of scale and from excessive competition in their common markets can only be overcome by full fledged consolidation — similar to the recent and ongoing efforts of the major Chinese carriers, Cosco and CSCL, and Japan’s NYK, MOL, and ‘K’ Line,” Alphaliner said. However, the analyst concluded that such a far-reaching move appeared to be remote in the Korean context.

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