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American Shipper

MSC finally shows its hand

MSC finally shows its hand

   On June 29 veteran Chilean liner shipping company Compagnia Sud Americana de Vapores (CSAV) advised its shareholders that it had entered into discussions with Geneva-based Mediterranean Shipping Co. and CMA CGM of France to form joint operations or consortia in key container trades.

   Negotiations mainly related to the routes from Asia to Africa, Brazil and the Mediterranean, from West Coast South America to Europe, and from East Coast South America to the Middle East.

   CSAV already had longstanding joint operating agreements with MSC in the trades from North Europe and the U.S. East Coast to East Coast South America. It also said May 19 that formed an operating alliance with CMA CGM in the Asia/East Coast South America trade lane.

Phillips

   What suddenly caught attention, though, was that MSC might be becoming involved on a long-term basis with any other line at all. In its 41 years of existence it has never expanded through acquisitions or formal joint ventures, only through internal organic growth. Was it about to break its own rule?

   On July 13 CSAV announced it had reached agreement with MSC on a comprehensive three-year arrangement to shutter almost all its own services and join MSC's. The agreement's scope covered:

   ' North Europe/West Coast South America.

   ' Asia/South Africa.

   ' Asia/East Coast South America.

   ' East Coast South America/Middle East.

   ' South Africa/Middle East/India.

   In return, MSC seemed to be joining CSAV's ASAX service and thereby gaining entry to the Asia/South America East Coast trade.

   However, within two hours of issuing this carefully prepared press announcement on behalf of MSC and itself, CSAV amended it by e-mail. This simply said: 'In relation to the press release sent a couple of hours ago, regarding the CSAV and MSC cooperation agreement, please disregard the agreement for the Asia/East Coast South America trade (Asax service), as it has not been finalized yet. In fact we would appreciate your not including anything about that specific trade until further notice from our side.'

   This, of course, was the trade in which CSAV had only recently entered into an operating agreement with CMA CGM, so it is tempting to suppose that some higher power had swiftly intervened to squash this part of the deal that had just been announced. However, CSAV and MSC continued to further cement their alliance by announcing July 18 that CSAV would terminate its standalone Europe/India service and join one of the loops MSC operates in this trade.

   Geneva-based Swiss-Italian container giant Mediterranean Shipping Co. has always been something of an inscrutable enigma. The private family-controlled carrier shuns publicity by dint of rarely talking to anyone about its global activities, far less about the full spread of services it offers and its schedules. There is no user-friendly central public Web site with a flow of links walking you through the group worldwide.

   Yet this global operator, with a fleet capacity of about 1.98 million TEUs, is No. 2 in size behind Denmark's A.P. Moller – Maersk group (2.26 million TEUs). Both are way ahead of CMA CGM (1.26 million TEUs) or any of the remaining seven in the world's top 10 (all below 650,000 TEUs). Even more remarkable is the fact that the company only started in 1970 as a conventional liner carrier and did not attract any significant attention until the early 1980s when it still had only about 20 ships.

   When MSC first emerged from the Mediterranean to link North Europe with East Africa, still as a conventional operator, British lines were frankly baffled at this newcomer challenging their safe conference trade. No one seemed to know who was behind it.

   As already indicated, what makes MSC different from other major industry players (and still baffles observers) is that it has never needed to play by the same rules. It has never seemed constrained to expand through acquisition (or 'consolidation' as it is now euphemistically called). Everyone else had to either buy or fight their way into new trades to establish their trade 'rights' and conference shares. MSC just went on growing organically, seemingly facing very little genuine opposition.

   Most interesting of all is the lack of any overt opposition from Maersk and CMA CGM or Germany's Hamburg S'd and Hapag-Lloyd. Maersk Line fought long and hard to gain admission to the Europe/Asia conference, for instance, yet by the time MSC was admitted the way was largely cleared.

   For everyone else the goals of consolidation were as much to eliminate competition as to expand into new trades. By the time Maersk took over the great P&O group's liner interests in 2006 the latter had obligingly bundled together eight of nine other large British lines, plus all four Dutch ones and Farrell Lines of the United States. Taking into account some minor help from Hamburg S'd, OOCL, Evergreen and Senator-Hanjin, the bundle accounted for just about all the world's significant north/south trades in one sweep. Only the United Kingdom's China Navigation (Swire Group) got away, settling for a regional role on the Pacific Rim instead.

   At the same time CMA CGM was corralling all the French-controlled lines as well as the Australian National Line, and Hapag-Lloyd was taking a surprisingly close and helpful interest in CP Ships. The latter was rounding up numerous residual small entrepreneurs before Hapag-Lloyd acquired CP Ships for itself. Maersk also bought South Africa's Safmarine.

   But still MSC kept its head down and just grew and grew. It watched Hamburg S'd take over lines in trade with Latin America including Brazil's Alianca and Crowley's former Lykes interests. Hamburg S'd also took over the non-domestic liner interests of Russia's FESCO in the Pacific.

   MSC also watched family-owned CSAV of Chile, which was creating a bundle of its own. It took over Swiss-based Norasia, a stone's throw from MSC in Geneva, and moved it to Hong Kong to become CSAV Norasia. CSAV also took over two Spanish-speaking South American East Coast carriers, Libra and Montemar.

   Until now there has hardly been enough evidence to link MSC with more than a passing interest in CSAV beyond cooperating in the East Coast South America trades to North Europe and East Coast North America. Indeed ComPair Data analysis of MSC's services only reveals how startlingly close it is to Maersk and CMA CGM and to hardly anyone else. Mostly it operates alone providing every ship in each of its loops. Out of 44 significant loops listed in ComPair Data, it is only a slot charterer on two: Maersk Line's TP5 in the Pacific and the Asia/Oceania CAS service. The latter is a special case. MSC only finds itself as a slot charterer there because of the vessel sharing 'Boomerang' loop it entered into jointly with Maersk (two MSC ships out of 10). Boomerang subsequently entered into a mutual slot swap arrangement with the lines jointly operating CAS.

   In the Pacific MSC provides three out of six ships averaging 8,300 TEUs with CMA CGM on the Bohai Rim loop, and a similar three out of six, again with CMA CGM, on the 9,500-TEU Pearl River Express. They run from North and South China, respectively, to California. On the U.S. East Coast/South Africa trade MSC provides four out of eight ships in a VSA loop with Maersk.

   MSC has a close VSA relationship with the government-owned Shipping Corp. of India, enabling SCI to provide two out of six ships connecting the Subcontinent with the Mediterranean, plus another four out of seven in a joint loop to North Europe. (MSC has another seven-ship loop in the Europe/Middle East trade, run entirely with ships of its own. It is this loop that CSAV will be joining.)

   Finally, MSC allows very few lines to charter slots on its own non-VSA services. CMA CGM takes slots on its Asia/Mauritius/South Africa Cheetah loop. Maersk shares one of its two Mediterranean/East Coast South America loops and similarly one of its two North Europe/East Coast South America loops. Finally both Maersk and CMA CGM take slots on MSC's six-ship 8,300-TEU China/California 'Eagle' service.

   It is remarkable how few other loops MSC allows to fall outside this close family alliance. Hapag-Lloyd and Stinnes take slots on MSC's seven-ship 6,900-TEU service from North Europe to South Africa, and Hapag-Lloyd is on the joint MSC-CSAV loop between the East coasts of North and South America. It is only through a previous rationalization that MSC now provides just two out of four 3,600-TEU ships alongside one each from Hapag-Lloyd and OOCL in its service between Montreal and North Europe.

   It therefore attracts keen attention to find that of all the major carriers MSC should be the one providing an across-the-board helping hand to CSAV of Chile. It appears a very one-sided deal given MSC's global strength and CSAV's retreating stance in a waning global market. This year CSAV has already unilaterally shut down its standalone Asia/Med Mare Nostrum loop and the transpacific ASIAM service. It now only remains in the Asia/Europe and Asia/Black Sea trades through a slot swap deal with Evergreen.

   The European majors have shown themselves to be patient over the years, but it is obvious they would all stand to gain from CSAV's departure from the global scene and as a center of independent liner management expertise in Latin America.

   What is so striking is the similarity of the present situation to that which pertained before Maersk acquired Sea-Land Service. Owning control of financially troubled CSAV has just transferred to the Luksic Group from the Claro family in much the same way ownership of Sea-Land passed to the CSX Corp. railroad group at the same time as a joint operating partnership was established between Sea-Land and Maersk Line. There seems to have been a clear understanding with CSX's management that Sea-Land and its global terminal network would be spun off to Maersk, subject to a suitable offer, somewhere down the line. This indeed came to pass, perhaps quicker than CSX expected, in 1999.

   The terms of the current CSAV-MSC trade lane deals are not public knowledge, except CSAV has said they will have an initial period of three years to run. This suggests the overall shape of the arrangement has already been agreed, and that all that remains to be settled are the details. When Malaysia's MISC Berhad group announced it was looking for a partner to jointly develop its long-term liner interests, it later dropped this plan explaining that every single candidate it could find to work with had insisted on a compulsory buyout of its interests once a fixed joint operating period expired.

   Compared to other more high profile lines MSC more closely resembles a no-frills low-cost operator. Many of its ships are old and chartered and the secrecy that surrounds its schedules enables it to constantly switch ships around and temporarily alter rotations. Recently a number of its Australia/Europe ships went through a phase of turning back in the Mediterranean instead of continuing on to North Europe, for instance. Its on-time performance is poor and it is not noted for any green credentials.

   It does not take direct electronic bookings; shippers must do so through INTTRA, the leading industry e-platform of which MSC was an owning co-founder (along with Maersk, CMA CGM and Hamburg S'd. P&O Nedlloyd was a fifth equal partner, but its 20 percent share passed to Maersk when it was acquired).

   MSC differs from Maersk and CMA CGM when it comes to pursuing an ultra-low-cost operating strategy. All three seem intent on raising the global stakes by rapidly increasing the size and number of their biggest ships sufficiently to make it difficult, if not impossible, for any other single carrier or group of carriers to stay in contention. However, Maersk has been working on a balanced and resilient network of terminals, as well as ships, with a global hub-and-spoke design. It shares many of its bigger Asia/Europe loops with CMA CGM so as to reduce their individual exposure while both enjoy the same economies.

   By contrast MSC is going the big-ship route entirely on its own, with many of its loops following one another round the same series of port calls and taking longer as a result. It has developed a series of mainly offshore hubs in order to cunningly grow into new trades, using a style reminiscent of Zim in its early days (later copied by Maersk). These are in locations like Las Palmas, Freeport (Bahamas), Caucedo (Dominican Republic), Sines in Portugal or Mauritius. If anything, its big ships have been coming into service faster than the others, so it is the leading line in cascading comparatively larger tonnage from Asia/Europe into secondary trades.

   MSC makes excellent use of a major hub in Gioia Tauro in mid-Mediterranean, also Valencia and now (for smaller ships) Cristobal and Balboa in Panama. It is making increasing use of Salalah too.

   There are gaps in its network though. Very few of its ships call in Japan or Taiwan. But it is a heavy hitter in China, with a major hub in Chiwan. It is also a giant in North Europe, where it dominates its homeport of Antwerp and it is a major force in the transatlantic trades.

   This leads to the conclusion that MSC's most tantalizing remaining gap is probably the growth trade from Asia to East Coast South America. MSC has a strong presence in South Africa: from Asia, North Europe, North America and the Middle East. It is extremely strong from East Coast South America to North America (East Coast and Gulf) to North Europe and the Mediterranean. Even though it knew Maersk and Hamburg S'd in particular were heavily committed to new investments in Asia/East Coast South America, it is easy to see why the opportunity to jump in with CSAV (and break its own rules) may have been so difficult to resist.

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