Consolidation in the container shipping segment via alliances or mergers is likely to accelerate due to persistent overcapacity and freight rates pressure, Fitch Ratings says. Recent developments, including the proposed merger of Hapag-Lloyd and CSAV, US regulatory approval of the P3 Network, and the expansion of the CKYH alliance to include Evergreen will all add to the pressure on smaller operators to consolidate. Despite overcapacity, around 80% of the new-build orders at end-2013 were for larger vessels, which are estimated to be up to 25% more cost efficient. However, mega ships are largely limited to Asia-Europe trading lanes. Demand growth in these lanes was soft in 2013 and likely improvement from 2014 may be insufficient to absorb the new capacity of mega ships scheduled for delivery within the next two to three years. In addition, their full cost efficiency can only be reached if utilisation rates are high. This situation prompted the world's three largest container liners - Maersk Line, CMA CGM and MSC to establish the P3 Network, which is due to start operations in mid-2014 and has paved the way for expansion or creation of other alliances. In our view the tie-up of liners into alliances will intensify competition and put further pressure on smaller, less financially stable independent companies. We believe the formation of alliances has been largely driven by the continuing tonnage oversupply and we do not expect them to address the fundamental supply-demand imbalance. The alliances are expected to drive cost efficiencies through lower slot costs, maximising capacity utilisation and network coverage optimisation. However, they are unlikely to materially curb overcapacity while the container shipping sector remains highly fragmented and companies continue to order new vessels. We expect cost-cutting to remain key to the financial performance of container shipping companies in 2014. Rigorous cost containment helped by lower fuel prices were the main factors contributing to some improvement of the financial profiles of Maersk Line and Hapag-Lloyd in 2013, as average freight rates were down compared with 2012.