MSC – The drive to be bigger and better


MSC‘s strategy of doubling down on what they know well and do best has the great virtue that it is readily understandable to their own staff and their clients. There is even value that their competitors are clear.

The huge fleet expansion through a combination of new builds ( whether owned or long term charted ) and second hand purchases is of course unprecedented. In the last few years they have not only overtaken Maersk as the biggest container carrier in the world but put a million slot gap between them.

The size of their/other’s fleet expansions are obviously not justified by any immediate potential for trade growth and big capacity injections are forcing measures to reduce their impact. Slow steaming may soak up some capacity but moving the same (or even less) TEUs with more ships and more total port calls is certainly not a recipe for good short term results – even if there are savings per slot mile on bunkers. There is hope amongst carriers that reductions in capacity ( or more exactly limiting the impact of capacity injections ) will reduce overhang in some trades to the point that demand for space minimally exceeds supply of space – thus quickly changing the market psychology. We have seen some recent signs that’s its helping in some trades when its accompanied by a short term burst of volume but that is unlikely to be sustained.

Barring a major turnaround in trade, carriers parking a lot more ships or scrapping taking place on a much bigger scale, we can expect a world surplus of slot supply and rates to be at best volatile for the foreseeable future. There are few places to hide. As ships are re-deployable assets and the bigger new builds create cascading, its only a matter of time before a trade that is in healthy balance with respectable rates becomes oversupplied with plummeting rates.

Few people doubt MSC’s shrewdness or their ability to weather storms and it is noticeable that they have not taken their foot off the gas since trade forecasts started to become dire so clearly they feel their long term strategy is a winner.

Here are some reasons that MSC might retain confidence that their voracious appetite for controlling more of the world container ship fleet will play out well for them:

POWER: MSC’s higher share of global slot capacity increases their influence on results. They are obviously a long way off being able to individually control trades but as they have historically been at the more aggressive end of the scale on rates and cargo acquisition, their increased size is important. It means they can be more pivotal in stabilising trades where they decide to be conservative and dare we say more intimidating when they signal they want higher share.

INDEPENDENCE: MSC has by nature always been an independent carrier that wants to operate ships flexibly.
The ability to do so without wrangling with partners or having the regulatory oversight a consortium has, simplifies life and increases efficiency.

CLIENTS: Their client base will predominantly like an independent MSC and have historically been tuned to accept service solutions that are not always at the premium service end ( see qualification below under risks and downsides ) but are pitched with competitive rates.

TRADE GROWTH: Economic conditions in Europe and North America are certainly not currently favourable to trade flows but recessions are temporary. There is a lot of hype re on-shoring but the reality is that the great majority of businesses that source internationally need to continue to do so to remain competitive. The distribution between sourcing countries may change but if the product is one third of the price in Asia, economic reality dictates continued sourcing there.

DEPLOYED CAPACITY AND MARKET SHARE CORRELATION: Other carriers are not going to easily roll over and let MSC take market share at their expense but there is over time a natural correlation between a carrier’s share of deployed capacity and its share of the cargo available. MSC’s sales teams have high expectations thrust on them and their pricing policy will tend to the more aggressive end of the scale so as more capacity is deployed they will build share and there will be a reluctant acceptance from the smaller carriers that they are going to.

REDUCED IMPACT OF NOVO’s: The extensive buying forays by MSC and others mean that Non Operating Vessel Owners can have less impact in the next up cycle.
The ability for existing participants or new carriers to enter trades will be inhibited to some degree by the reduced fleets available for short term call up.

ABILITY TO MAKE HEALTHY PROFIT IN AN UP TURN: The industry has become more consolidated and the top carriers ( who have an ever larger share of total capacity ) can quickly lead a rate surge. Without historical restraints like conferences, the Covid boom showed that when demand/supply is their favour, carriers have the ability to make a lot of money very quickly. The biggest carrier in the world makes proportionately more !!!

FINANCIAL STRENGTH: There is little doubt that cash reserves from the recent good years and ability to access cash – case need – is in good shape.
Others are more vulnerable and if there are casualties without rescue acquisitions, MSC is well placed to organically grow.

FAMILY COMPANY, STRONG DECISION MAKING: MSC’s family ownership has allowed it to move quickly and decisively so as long as those decisions remain generally good its going to a long term winner.
One thing we do know is that whatever comes down the pike, MSC will tend to adjust quickly and adroitly.

The above are a pretty powerful combo but MSC’s policy is not without risks and some inevitable downsides:

INSTABILITY: With the dissolution of 2M in Jan 25 ( and the ramp up to it ) both MSC and Maersk face the dilemma that they more capacity they introduce to provide robust port coverage and frequencies as independent carriers, the more they will de-stabilise key trades.

Bizarre as it may sound, that destabilisation could be alleviated by the 2M partners buying some slots from each other for a period post dissolution but of course the desire to go partially back to bed with the partner you are separating from may be limited – particularly as MSC will want to revert to a more fluid schedule than they had in 2M !!!

Other options to limit capacity injections as independents are to run upgraded ships around more ports ( ie have less loops ) and/or to use smaller ships, trans-shipment solutions and local feeders to serve some port pairs previously served by the partner directly.

It remains to be seen whether Maersk will opt for independence in the East to West trades, full bloodedly join a new Alliance ( subject to some regulatory and Alliance gymnastics ) or cobble together some slot deals that give them the product coverage they want. If they can successfully create a new set of alignments their need to independently introduce tonnage to produce a strong set of products will diminish.

There is also the possibility that Maersk will make an opportunistic purchase that will enable them to fill some strategic coverage gaps and potentially give them a back door entrance to a consortium ( subject to all sorts of regulatory restrictions no doubt ). This would also potentially limit capacity injection.

In MSCs cases it seems clear that they will be predominantly on their own but the combo of huge capacity injections and poor trade growth may force them to consider solutions that limit slot growth as the least damaging short term course.

An important side note to the above is that ZIM has a significant TP product and becomes a sought after piece of the post 2M jigsaw. Its reasonable to assume that active discussions are going on between ZIM and each of the 2M partners about the post 2M world but that ZIM may not be exclusively talking to them.

PRODUCT QUALITY: As stated above MSC’s clients have historically had a tolerance for variable product quality. In recent years they have, however, enjoyed the transit times, frequencies and reliability enforced by Maersk in the East to Wests.

Partly because of the need to limit capacity injection and partly because it’s a reverting to previously successful operation formulas MSC will undoubtedly revert to longer loops, more trans-shipment and more local feeders when 2M dissolves. This may be in combo with slow steaming – particularly on return legs.

The reality is that this will mean a deteriation in service for MSC clients on some East West port pairs. Those clients who have picked MSC within 2M as the ideal way to get 2M service at MSC prices and user friendliness will make a hard review of their position and MSC will not be immune from cargo loss.

GEOPOLITICAL EVENTS: Geopolitical tensions are certainly significant at the moment although it should be noted that most serious governments do not question the benefits of trade. It has to be recorded as a wild card because carriers have no control on trade barriers.

ENVIRONMENTAL REGULATIONS: MSC has bought a lot of comparatively old ships. Environmental regulations are steadily getting more onerous and as they tighten MSC’s ability to operate all these ships at optimum speed in the trades they want to operate them in are likely to be seriously inhibited within the lifetime of those ships. If governments and regulatory bodies – in the wake of ever more serious climate impact – decide to strengthen and accelerate restrictions on carbon emissions in shipping, old ships that are the wrong end of the carbon emitting scale could end up being questionable investments.

The scale of the risk issue goes beyond the purely sort term regulatory impact as pressure groups bring increased attention to the impact of shipping in global emissions and some high profile shippers start to demand access to low/no carbon emission capacity. Pressure from shippers and the consumers who drive them have the potential to build a strong momentum quickly and in turn encourage regulators to be more ambitious.

It’s worth noting that MSC has been aware of the evolution of these regulations and it does not seem to have materially affected their second hand buying decisions. This is clearly more of a gamble element in this than the other things they are doing.

HEART VERSUS BRAIN: The upside of a family business with very shrewd senior management is that it can do things more quickly and decisively than most publically listed companies . The downside is of course that the decision making may contain elements that are not solely driven by objective assessment ( such as securing a legacy ) and may be affairs – at least partly – of the heart . Longer term of course there is the question of whether succession produces the same drive, tenacity and survival instinct of the founder.

Of the above the most immediately and tangibly concerning would appear to instability and product quality which are two sides of the same coin but environmental impact can not be dismissed.

Alliances have their critics but the fact is that they have enabled carriers to build far more powerful networks of services than would be possible as independents. The shear size of MSC’s fleet expansion means they can do a lot on their own but the more they do quickly and with significant capacity injection, the more likely trades will be destabilized.

MSC might need to look for a middle road for a period beyond Jan 25 where they buy and sell some slots to strengthen their overall product and minimise capacity injection.

The combined impact of environmental regulations and the carrier’s clients expectations of what carriers should do in this area can not be easily dismissed. MSC has made some investments that are a bigger gamble than may be ideal for the world that is emerging but time will tell.

In summary where MSC’s expansion fits between a brilliantly timed investment in the future of the container shipping industry ( given consolidation and the increasing relative importance of the big carriers ) and a partial gamble influenced by a desire to be an independent no 1, remains to be seen.

It’s a rocky road ahead then – particularly the closer we get to Jan 25 and there are going to be some tough calls to make ( including potentially being a little less tied to independence and cutting losses on some old ships).

It seems probable, however, that MSC is nimble enough and the upsides are big enough that they will endure a couple of difficult years but emerge well positioned to benefit from up turns. Critically those up turns may not be on the scale of 2021/22 but will be stronger than historically was the case because the industry is less fragmented. Results and war chests may vary considerably still over the cycle but the average levels are likely to be higher for the strong carriers . If there was anytime then over the last 30 years to invest in the future of the industry this seems a better time than most.