The path towards oligopolization in container shipping took another step forward with the proposed $6.3 billion sale of Hong Kong-based Orient Overseas International Ltd. (OOIL) to Chinese state-owned Cosco Shipping Holdings Ltd. (Cosco) and Shanghai International Port Group Co. (SIPG), announced a couple of weeks ago.

On completion of the deal, Cosco will hold 90.1 percent while SIPG will hold the remaining 9.9 percent stake in OOIL. The joint buyers said they will keep the OOIL branding, retain its listed status and maintain the companies’ global headquarters in Hong Kong along with all management. Employees will retain their existing compensation and benefits, and none will lose jobs as a result of the transaction for at least 24 months after the offer close.

OOIL and its container unit OOCL have a good track record for above-average profits in a challenging market and a reputation for being a very well-run company, earning the moniker The Perfect Bride by Drewry Maritime Financial Research. This was reflected in the substantial price-to-book premium of 1.4x, which is a fair bit above OOIL’s historical average P/B of 0.8x. Retaining the management team, processes and systems is a wise move and could be of enormous value to Cosco, in our opinion.

The deal also contributes to the shift in some of the previously entrenched liner fundamentals that have made consistent profits so elusive for carriers. In a new spotlight report (Two steps away from liner paradise?), Drewry Maritime Advisors, argues that with the total system (liner and ports) benefits from economies of scale being exhausted and in a less fragmented market, carriers can finally reach the nirvana of sustainable profitability.

To assess the evolving state of market concentration in liner shipping Drewry has used the widely-respected Herfindahl–Hirschman Index (HHI), which is used to measure the size of a company (in this case liner operators) in relation to the industry they are in, and can indicate the amount of competition between them.

To be able produce the HHI score, a value for market share is needed. Drewry has used liner capacity as a proxy for market share. A higher HHI score indicates lower levels of competition with an increased market power; a low HHI score indicates high levels of competition, high levels of fragmentation and less market power.

The chart above indicates that for the industry to move towards lower fragmentation the number of major competitors need to come down. Even with 10 competitors the industry remains highly fragmented on the HHI scale.

As things stand, upon completion of the latest M&A (the Ocean Network Express, or ONE, merging of the Japanese companies’ container units is expected to become operational in April 2018) and taking into account future newbuild deliveries, there will only be 10 carriers with a minimum two-percent share of global capacity by start of 2021, which between them will control approximately 82 percent of the world fleet. As recently as 2015 there were 17 carriers with at least a two-percent share.

Shippers are getting used to consolidation in the container industry. That doesn’t mean they have to like it. As their pool of carriers shrinks they are more likely to lobby anti-competition regulators to step in. Recent container M&A such as Maersk Line’s recent takeover of Hamburg Süd and the proposed ONE merger of Japanese carriers have all encountered minor regulatory issues so any future deals may have to contend with conditions being applied that make them less attractive to conclude. The onus will be on carriers to disprove any form of collusive oligopoly is occurring.

There are risks that could spoil the party for carriers, but if these two developments (falling scale economies returns and further industry consolidation) were to coincide, the pressures arising from structural overcapacity and market structure would greatly reduce. Sustained liner profitability would no longer be an unattainable dream but a solid reality.