Container shipping will see mergers and alliance shifts in 2016, but still rocked by overcapacity.
Two big mergers look as if they will dominate the news about the container-shipping industry in the months ahead—the acquisition of Neptune Orient Lines (NOL), the parent of APL, by CMA CGM, and the combination of COSCO and China Shipping.
On Dec. 7, CMA CGM, the third largest container carrier announced it had reached an agreement to acquire NOL, the 12th largest, for $2.4 billion in a move that will bolster its standing as the world’s third largest container carrier. The deal still must pass muster with regulators in the United States, Europe, and China, and is not expected to be completed until this summer.
Rodolphe Saadé, vice chairman of CMA CGM, said the deal was important not just for CMA CGM and NOL “but for the shipping industry as a whole. At a time when our industry is facing very strong headwinds, joining our forces will enable us to grow further to the benefit of our clients, our associates, and all our stakeholders.
“Scale is more critical than ever to capitalize on synergies and capture growth opportunities whenever they arise,” he said.
CMA CGM said it plans to retain the APL brand, as it has with some of the other companies it has purchased, including the Africa trade specialist Delmas, Asian short-sea carrier Cheng Lie Navigation Co. (CNC), and US Lines, a specialist in the Australasia-North America trade.
While details need to be worked out, COSCO Container Lines (COSCON) and China Shipping Container Lines (CSCL) said they will combine to create the fourth largest carrier, behind only Maersk, Mediterranean Shipping Co., and the combined CMA CGM/APL.
COSCON “will rent CSCL’s assets, including ships and container boxes, etc.,” the companies said, while CSCL will be “transformed from a liner company into one that leases ships and container boxes, acquiring the leasing business held by COSCO and CSCL and injecting other ship financing business and assets.”
“Both COSCO and China Shipping have struggled to be competitive, with overlapping investments, high costs, similar business operations and industrial chains,” said COSCO chief Ma Zehua and China Shipping’s Xu Lirong.
U.S. Federal Maritime Commissioner Richard A. Lidinsky Jr. said there is nothing surprising about the two Chinese carriers seeking to merge and become a stronger company as Chinese officials have indicated they would like their national carriers to carry a larger share of Chinese trade than the 24 percent they carry today.
“Both companies have their strengths and we will see what happens,” he said.
Merger Benefits. Lars Jensen, chief executive officer at SeaIntelligence Consulting, explained that in addition to being able to use larger ships with lower operating costs on a TEU-per-mile basis, a merged network can allow a carrier to make more direct calls with larger ships and reduce feeder and transshipment costs.
He also said a merger allows companies to make their internal organizations more efficient and reduce staff. While many companies have reduced personnel costs by moving back-office operations to low-cost countries, Jensen believes more companies will reduce headcounts and costs by using automation.
“If you can move a back-office function to India, that must be because you are able to describe very well in detail exactly what a process is supposed to do. Now if you can do that, then over time you will also be able to automate this through your IT systems,” Jensen said.
Maersk announced in November it would eliminate 4,000 jobs as part of a cost-cutting initiative, weeks after lowering profit projections by 27 percent for 2015. It called the move “a response to both the short-term and long-term market outlook. In light of the lower demand these initiatives will allow Maersk Line to deliver on the ambition to grow at least in line with the market to defend the market-leading position.”
Maersk’s reduced profit outlook and idling of one of its “Triple-E” flagships “is a stark reality check for an industry teetering on the edge of a return to heavy losses that has thus far only been avoided because of low fuel costs, and could be the trigger for action that is required to stop the rot,” said the London-based consultants Drewry. “It is good news for the industry that it has decided to try and restore ailing profits by laying up large ships as there is a very high likelihood that others will follow.”
Alliance Do-Si-Do. The two big mergers seem likely to result in the realignment in at least three of the four major alliances among container carriers in 2016.
Alliances are beneficial to carriers and shippers, because they allow the use of larger, more efficient ships and offer more frequent and wider array of services that connect more port pairs.
But they also have their limits, explained Ng Yat Chung, president and chief executive of NOL, during the press conference where the agreement with CMA CGM was announced.
Shipping alliances “have been helpful to bring better cost rationalization to all the players, particularly for the mid-size players like NOL. Unfortunately the alliance does not really give you the full benefit of an equity combination where you can really enjoy the benefits of scale fully, in terms of procurement, in terms of coverage, in terms of balance sheet strength, in terms of ability to obtain financing. So the alliance helps, but for NOL it is not enough,” Ng explained. “It is very clear that for us to stay competitive on a standalone basis we would have to put in a lot of capital” and NOL decided a merger with CMA CGM was preferable.
Saadé said in addition to the benefit of scale, the two carriers are complementary, with CMA CGM strong in the Asia-Europe, Asia-Mediterranean, Africa and Latin American routes, while APL is strong in the transpacific, intra-Asia and Indian Subcontinent shipping routes. He said the combined companies will have significant presence on “all key routes” and make the company more balanced and resilient in the face of market variations.
Saadé said APL will join the Ocean 3 Alliance created by CMA CGM, China Shipping, and United Arab Shipping Co. The G6 alliance to which APL currently belongs—the five other members are Hapag-Lloyd, Hyundai Merchant Marine, NYK, MOL, and OOCL—announced several days later it will continue to operate as is until regulators approve the CMA CGM/APL merger.
The merger of COSCON and CSCL could lead to further disruption of the alliances.
It is unclear if COSCO will remain a member of the CKYHE with “K” Line, Yang Ming, Hanjin, and Evergreen, or take CSCL’s place in the Ocean 3, or whether there will be some other redrawing of the alliances in the months ahead.
“There are many permutations,” noted Neil Dekker, head of container research at Drewry. With no definitive announcement, “It’s pure conjecture as to what might happen.”
A 2014 proposal to allow Maersk, MSC, and CMA CGM to operate the P3 alliance was shot down by Chinese regulators.
China’s State Council, however, approved the merger of the two large national container carriers, and it seem likely their alliance plans would be approved.
Even if the combined Chinese companies join the Ocean 3 alliance, it will still be smaller than the 2M alliance that Maersk and MSC created after the Chinese regulators objected to the P3. Lidinsky noted what really seemed to draw objections from Chinese regulators was not simply the size of the P3 alliance, but plans for a joint operations center in London.
“There are those who say the only challenge that can really be mounted to the 2M would be a revitalized O3. This ultimately could be in shippers’ interests to have the two sort of mega-dinosaurs go at each other—Godzilla and King Kong,” Lidinsky said.
There have been rumors that the two major Korean carriers—Hanjin and Hyundai—or even two of the three Japanese carriers—NYK, MOL and “K” Line—might merge. But some analysts think this is highly unlikely. They say the divisions between the Korean chaebols and Japanese keiretsu to which these ocean carriers belong are so wide that merging the leading Korean and Japanese container carriers may be as difficult, or even more difficult, than a merger across national boundaries.
Rate Slump. As big as the CMA CGM/APL and China Shipping/COSCO deals are, it’s unclear whether those mergers, which come a year after Germany’s Hapag-Lloyd acquired the container operations of Chile’s CSAV, will do anything to shore up container-shipping freight rates that continued to trend downward during 2015, or restore profitability to an industry in which many companies have struggled to make a profit for several years.
On Dec. 11, as this issue of American Shipper was being prepared, the Shanghai Shipping Exchange said its Shanghai Containerized Freight Index, which reflects spot rates from Shanghai to 15 different port ranges around the world was 527.17, compared with nearly 1,100 early in 2015. The spot rate on Dec. 11 for four of the busiest container routes out of Shanghai were: to North Europe, $703 per TEU (which was actually up a whopping $428 per TEU a week earlier); to the Mediterranean, $585 per TEU; to the U.S. West Coast, $816 per FEU; and to the U.S. East Coast, $1,506 per FEU.
The drop in rates is particularly stark when you look at the U.S. East Coast trade where the rates were over $5,000 per FEU early in 2015 when demand on the route surged because of congestion at U.S. West Coast ports during the stalled International Longshore and Warehouse Union contract talks.
Despite these seemingly rock-bottom rates, China’s National Development and Reform Commission has reportedly been investigating carriers to look at surcharges that shippers say can equal or even exceed base-freight rates, and the Hong Kong Shippers Association said some carriers had rolled back charges as a result.
In November, the 15 carriers that are members of the Transpacific Stabilization Agreement (TSA) recommended rate increases of $1,200-per-FEU on the Asia-to-U.S. West Coast trade Jan. 1 and wanted carriers to seek a minimum rate of $1,700 per FEU to the U.S. West Coast in their 2016-17 service contracts.
“We’ve announced quite a high number, but it is what’s needed,” said Brian Conrad, TSA’s executive administrator
He noted that anything to do with capacity is not discussed inside the TSA, but agreed plentiful capacity is one of the factors putting pressure on rates.
“You’ve got carriers with utilization on their ships of 75, 80, and 85 percent. When the utilizations are that low, the carriers do feel pressure to try to improve those and in the current market, they can only improve those load factors by attracting more cargo through rate action,” Conrad said.
Dekker said “We don’t appear to be yet where the industry is on its knees, despite the very low revenue, because the lines, let’s be honest, they’ve been propped up by the very low fuel costs. But that will only prop them up for so long.
“Eventually there will be a tipping point where they won’t be able to do it anymore, and I can’t say when that tipping point is going to come,” he said. “Potentially there could come a time when the lines run out of money and, as happened in 2009, they will be forced to lay up a lot of tonnage. And on that basis the shippers will have less choice.”
Oversupply For Years? “Personally I have a very tough time seeing that any mergers, regardless of which constellations we’re talking about, are going to have any meaningful impact on the outlook, certainly for the next year and maybe for the next couple of years,” said Esben Christensen, director at AlixPartners, “Unless part of that merger would be to take a lot of tonnage out… sideline tonnage.
“Because I think the fundamental problem that these carriers are dealing with still is that there’s an imbalance in supply and demand,” he said. “Until that situation is addressed then the volatility that we’re seeing this year, and we’ve seen in the past few years, is going to continue.”
Alphaliner said on Dec. 11 there were 6,098 ships active in the liner trades with 20,376,612 TEUs of capacity, mostly on 5,163 fully cellular ships with 19,926,775 TEUs of capacity. (The difference arises because multipurpose or breakbulk ships also carry containers.)
Alphaliner forecast in August that the containership fleet would grow by about 1.8 million TEUs in 2015, after taking into account scrapping and delayed deliveries, and over 1.3 million TEUs in capacity would be added this year, over 1.4 million TEUs in 2016, and 548,374 TEUs in 2018.
Weakness Everywhere. “From a vessel point of view, quite frankly no one needs any more ships at the moment to integrate in their fleets,” Dekker said. “There’s weakness everywhere, in East-West trades, North-South trades, and regional trades.
“You either idle the ships or you scrap them to have any big changes at the trade route-level which also are going to impact revenue,” he said.
Could orders be canceled or postponed? That might be difficult. Shipyards are less likely to be accommodating than they would be if there was booming demand for tankers and dry-bulk ships to build in place of containerships. Besides, the shift to larger ships with lower cost per-TEU-mile is a key strategy for many carriers. They believe short-term pain is worth the gain.
Drewry estimated that as of November 16,238 ships with 901,000 TEUs were in layup; Alphaliner in a Nov. 18 newsletter estimated the number of ships in layup to be at 1.2 million TEUs.
“We have different methodologies,” Dekker said. “The point is the idle fleet is increasing, but this needs to be fairly long term and perhaps carriers and owners need to be thinking more in terms of cold layups, like we had back in 2009.
“What’s driving the move strategically, even in smaller trade routes like Latin America, where lines are coming together and forming more consortia agreements,” he noted.
“One trade where that isn’t happening and desperately needs it to happen is Asia-Mideast,” he said. “There’s far too many players, there’s too many services and too much capacity. You have at the moment, you’ve probably got 5 percent year-to-date trade growth on the head-haul, which is actually quite good compared to most other trades routes. And yet rates into Dubai from Asia are $300 per FEU, which is quite frankly appalling and obviously below breakeven.”
Dekker said the oversupply needs to be addressed on a trade lane-by-trade lane basis.
Speaking on CNBC, Esben Poulsson, president of the Singapore Shipping Association, said “there is definitely a consolidation trend going on” and compared the activity to the period when Maersk purchased Sea-Land in 1999 and P&O Nedlloyd in 2005, as well as Hapag-Lloyd’s purchase of CP Ships in 2004.
“At a difficult moment of the cycle, consolidation is obviously a way for these players to gain greater market share and greater strength toward the customer,” Poulsson said.
But the mega-mergers of yore pale in comparison to the deals being made today. According to Alphaliner, P&O Nedlloyd operated just 460,000 TEUs of capacity at the time of the Maersk purchase, while Sea-Land and CP Ships had around 200,000 TEUs.
In contrast, APL has a fleet of 86 owned and chartered ships with 538,587 TEUs of capacity that CMA CGM plans to integrate into its fleet of 462 owned and chartered ships with nearly 1.8 million TEUs
of capacity. CMA CGM’s orderbook alone of 25 ships amounts to 285,723 TEUs.
A combination of the sixth largest container carrier COSCO (159 owned and chartered ships with 842,153 TEUs of capacity and a 22-ship/332,003-TEU orderbook) and China Shipping (133 ships with 707,345 TEUs of capacity and a 14-ship/233,928-TEU orderbook) will create the fourth largest container carrier.
“One thing you need to be wary of is just because the lines essentially disappear, it doesn’t mean the capacity or the tonnage is disappearing,” Dekker said.
Orders for new ships are concentrated in the largest size vessels.
CMA CGM noted during its presentation about the acquisition agreement with NOL that there are more than 100 ships with capacities of more than 14,000 TEUs on order, with the value of those orders estimated at $15 billion to $20 billion.
“With every new ship that’s ordered, this is just pushing any sort of recovery out,” Dekker said. “We were talking about some kind of recovery in 2017. If you look at the orderbook, we are pushing it out to 2018 and 2019 now.”
Economic Outlook. The developments are taking place against a background of slow economic growth.
In November, Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said “global growth prospects have dimmed again,” with the global economy growing just 3 percent in 2015—the weakest since 2013—and recessions in Brazil, Russia and a slowdown in China “hitting activity in key trading partners.”
Trade growth last year was “a disappointing 2 percent. Over the past five decades there have been only five other years in which trade growth has been 2 percent or less, all of which coincided with a marked downturn of global growth,” Gurria said.
OECD projects a gradual strengthening of global growth in 2016 and 2017 to an annual 3.3 percent and 3.6 percent, respectively, and for trade to increase 3.6 percent in 2016 and 4.8 percent in 2017.
Macroeconomic forecasters are not predicting in 2016 a “ratcheting downward further of the U.S. economy, but it’s also not a situation where they’re anticipating faster growth next year. I don’t see any credible signs that we’re expecting a dramatic uptick in economic growth,” said Paul Bingham, a freight and trade economist at the EDR group. “I think the prospects now are for continued weak growth.”
He said some countries that are trading partners of the United States “are bordering on or in recession” and that demand for U.S. exports is aggravated by the strong U.S. dollar.
U.S. retail sales, particularly if automobile sales are excluded, were weak for much of 2015. While they were up 0.2 percent in November at the beginning of the holiday shopping season, that was below the level some analysts were predicting.
Bingham said inventory levels of some products are probably higher than businesses want, another bearish sign for the 2015 economy.
“It’s not clear that the energy cost savings from the lower oil prices are translating dollar for dollar into other consumer spending… a one-for-one substitution where they’re taking the savings on energy and spending it on other manufactured or finished goods,” he explained.
There is also “some evidence that some of the consumer-spending composition is a shift into services—some of that is into healthcare, but even into other services like entertainment or restaurants that don’t directly translate into very much if any trade demand,” Bingham said.
AlixPartners’ Christensen noted there used to be a rule of thumb that the container industry grew at about three to 3.5 times GNP.
“That math doesn’t work any longer because it was driven by outsourcing and conversion of cargo from moving in breakbulk ships to containers. A lot of that has already been done,” so those trends have slowed, he said.
No More Family Silver. Are container-shipping companies in as much trouble as they were in 2009 during the great recession?
Drewry said while the operating cash flow for a sample of 14 major shipping companies in the first nine months of 2015 was about $10 billion, about the same as in the first nine months of 2014, and most are expected to end the year in the black. That’s far better than in 2009 when the same companies had operating cash flow of zero, and many recorded large losses.
Unlike 2009, they are benefiting from low fuel prices
The volatility in the industry “could be more problematic,” Christensen said, because many carriers “have done a good job taking out costs and becoming more efficient in their operations between slow steaming and consolidating services and just taking a hard look at costs… Those levers have already been pulled now to a certain extent and so if the market continues the way it is now I worry what their next move is going to be.”
Some carriers have sold assets such as terminals to support their core container-shipping businesses, but Dekker noted “a lot of the family silver is gone already.”
As their new ships are delivered, some carriers are likely to return those coming off charter to the third-party companies that own them. That could hurt the so-called “KG” companies and other containership owners who charter them to liner companies.