HMM Plans Major Revamp of Asia-Europe Trade

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(Image Courtesy: Fortune)

South Korean ocean carrier Hyundai Merchant Marine (HMM) has confirmed it will return to the Asia-Europe trade lane as a vessel operator starting in April. Media reports earlier in the week tipped HMM to launch a standalone service between Asia and North Europe, independent of its slot sharing agreement with the 2M Alliance of Maersk Line and Mediterranean Shipping Co. (MSC).

In a statement late Tuesday night, the carrier said the new Asia-North Europe Express (AEX) will be operated with 10 ships with an average capacity of 4,600 TEUs, much smaller than the 20,000-TEU-plus ships operated in the trade by other global carriers, including the 2M. Prior to the launch of the new loop, HMM had exited the trade entirely as a vessel operator, only selling space on 2M services.

According to HMM’s most recent online sailing schedules, the AEX will commence with the sailing of the Hyundai Grace April 8 from Busan and will have a full port rotation of Busan, Shanghai, Ningbo, Kaohsiung, Shenzhen, Singapore, Colombo, Rotterdam, Hamburg, Southampton, Singapore, Hong Kong, and back to Busan.

Despite the early reports of HMM’s decision to return to the Asia-Europe trade with a standalone loop, the news came as a bit of a surprise to maritime industry analysts, in particular the size of the ships being used. According to ocean carrier schedule and capacity database BlueWater Reporting, the vessels deployed on the AEX will be the smallest of any Asia-Europe container service currently on offer.

Average vessel size on services connecting Asia with North Europe currently stands at 14,101 TEUs, with individual loops ranging from 5,281 TEUs on CMA CGM’s South East Asia North Europe Service (SEANE) to 19,160 TEUs on the 2M Alliance’s AE1/Shogun loop. On the flip side, the AEX will also sport some of the fastest available transit times available in the trade. HMM’s advertised transit time of 30 days between Busan and Rotterdam, for example, is two days shorter than the next closest competitor, THE Alliance’s Far East Asia Europe (FE4) loop.

In addition to confirming its plans to reenter the Asia-Europe trade, HMM also confirmed plans to order new mega-containerships in the first half of 2018. The carrier said that the reason for the newbuild ships is to comply with new environmental regulations that begin January 1, 2020, a reference to the International Maritime Organization’s lowering of the maximum allowable percentage of sulphur in marine fuel from 3.5 percent to 0.5 percent. But HMM added that it would consider deploying these mega-vessels in the Asia-Europe and transpacific trades.

“New environmental regulations are expected to drive changes not only to the shipping industry, but also to competitive market environments,” C.K. Yoo, CEO of HMM, said in a statement. “I believe that HMM can secure competitiveness in a global market after 2020, if HMM arms itself with eco-friendly mega containerships in preparation of environmental regulations.

“The 2020 environmental regulation will be an important market-changing factor in the shipping industry, and the new independent AEX service will be the touchstone of a game-changer,” he added.

London-based maritime shipping research consultancy Drewry, however, was not so optimistic. In a recent Container Insight Weekly article, simply titled “What is HMM thinking?,” Drewry says the carrier’s plans to expand its fleet and reenter the Asia-Europe trade as a vessel operator are “incompatible with market stability.”

“The two developments appear to be connected,” wrote Drewry. “HMM has two years left to run on a slot-charter agreement signed in 2016 with 2M carriers Maersk Line and MSC, and presumably sees the new ships either as a bargaining chip to continue that partnership as it will have more to bring to the table, or to leverage full membership of another carrier group, or in the worst case scenario, to have sufficient means to operate independently, building on the custom generated by the AEX service.”

The success of HMM’s plans, according to Drewry, relies heavily on whether it chooses to stick to previously announced plans to control 5 percent of the world containership fleet by 2021, noting that those plans were made more challenging to accomplish when HMM “was forced to relinquish a number of charter vessels to Maersk and MSC as a condition for sharing space with them, with the 2M carriers needing to appease customers fearful of a repeat of the situation when cargoes booked with Hanjin Shipping’s service partners were left stranded when that Korean line went bankrupt.

“If HMM still maintains that vision,” the firm argues, “the first batch of new ULCVs will just be the start. From its current position – operating approximately 1.5 percent of the world fleet – it will need a total of 1.2 million TEUs based on today’s active fleet and orderbook to reach its target. To do so will require an additional 830,000 TEUs (or 38 22,000-TEU ULCVs); more than twice what it currently has on the seas.

“Frankly, that seems like a pipe dream,” wrote Drewry. “Firstly, the company lacks the financial resources – despite improving the debt ratio, it just reported a net loss of KRW 1.2 trillion (USD 1.1 billion) for 2017 – and will be dependent on funds from the state-owned Korea Maritime Corp. to even secure the first order. There is a high likelihood the company will benefit from further government support as part of a wider policy to support the flagging shipbuilding industry, but not to the extent that would propel HMM into the big leagues.”

Even more important, according to Drewry, is the fact that an expansion plan of this magnitude could be “ruinous” to the delicate balance of supply and demand in the container shipping industry.

Carriers have for years struggled with persistent overcapacity, which has put extreme downward pressure on freight rates. This ultimately led to a race to the bottom in terms of pricing that resulted in a calamitous 2016 year in which the industry lost an estimated $5 billion and several major carriers were either merged, acquired, or went bankrupt, including Hanjin, the seventh largest in the world at the time.

HMM itself came close to declaring bankruptcy in 2016, but was able to stave off insolvency through a significant financial restructuring. During the restructuring, however, THE Alliance rejected HMM’s bid to join the newly formed east-west vessel sharing agreement, forcing the firm to resort to its current slot charter deal with the 2M.

Drewry argues that such rapid growth in HMM’s fleet would “inevitably [lead] to a vicious bout of rate discounting that would deepen HMM’s losses and once again raise fears of a collapse.

“Such a scenario is incompatible with what should be HMM’s primary objective; to restore trust and confidence in its brand,” it added. “Its reputation took a hit when Hanjin failed, when many realized it could just have easily been HMM instead, but for the whim of the Korean government.”

As such, Drewry concludes that HMM is “too far behind the leading pack, which will likely stretch their lead further with more orders, to play catch up without destabilizing the market,” adding that the carrier would be better off focusing on “restoring its profitability and reputation, dull as those ambitions may be.”

(Source: American Shipper)

Sea News, March 5