ACROSS ASIA

Shipping industry shakeout hits Asian shores

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A PSA container terminal is seen at dusk against a backdrop of the Singapore skyline.

SINGAPORE Overcapacity and weaker global trade have fueled talk of a shakeout in the global shipping industry. Now, consolidation appears to be picking up, with much of the activity centering on Asia.

France's CMA CGM, the world's No. 3 shipping company, is negotiating to buy Singaporean container shipper Neptune Orient Lines. Over in China, the top two state-owned operators are in the final stages of merger talks.

Neptune Orient on Nov. 21 announced that CMA CGM had been granted exclusive negotiating rights, through Dec. 7. Singaporean sovereign wealth fund Temasek Holdings, which owns 68% of the shipping company, has been seeking a buyer since early summer. The French suitor beat Denmark-headquartered A.P. Moller-Maersk, the world leader, for pole position. The industry is watching closely whether it can strike an agreement before the exclusivity period expires.

The combination of Neptune Orient and CMA CGM "would contribute to the consolidation of the container shipping industry, at a time when scale is more critical than ever," the French company said in a news release on Nov. 22.

Neptune Orient, like many other midsize shipping companies, has been struggling financially. Starting in 2011, it logged annual losses for four straight years. It posted a $96 million loss in the most recent quarter through September, worse than expected. While striving to cut costs and curb overcapacity, the company in February sold its profitable logistics business to Japan's Kintetsu World Express for $1.2 billion.

Although the sale is expected to lift the company into the black, the outlook remains bleak. Neptune Orient's total volume in 2015 "is on course to be the lowest since 2009, while average freight rates are destined to be the lowest in at least a decade," said Rahul Kapoor, director at U.K.-based Drewry Financial Research. "Temasek appears to have seen the writing on the wall that a turnaround is not imminent."

CMA CGM, which controls 9% of the global market according to French shipping consultancy Alphaliner, has decided that pursuing scale is the only way to go. The top tier of container shippers, ranked by tonnage, is dominated by European companies that have invested in huge vessels to build up market share. Maersk leads the pack at 15%, followed by Switzerland-based Mediterranean Shipping at 13%. The Neptune Orient acquisition would not propel CMA CGM up from the third spot, but it would significantly strengthen its trans-Pacific business.

SINKING RATES With shipping companies facing intense price pressure, something was bound to give. Spot rates on main routes from Asia to Europe currently stand at about $550 per 20-foot equivalent unit, or TEU, down 25% on the year and far below the industry's $1,400 to $1,500 break-even line. This means many companies are operating at a loss.

Slack demand following the global financial crisis of 2008 pulled down rates and left the industry with a glut of container vessels. Rates have been falling even faster since 2014, due to China's economic slowdown.

To increase efficiency, shippers since last year have been introducing ultralarge ships capable of carrying 14,000 to 20,000 containers. But this has exacerbated excess capacity, and quite a few companies with empty container space are offering steep discounts, further weighing on rates.


"The average freight rates in the July-September quarter fell 20%," Maersk CEO Nils Andersen said in a teleconference in early November. "The situation is unlikely to improve for some time."

To cope, companies have been teaming up to share vessels and cut costs. Neptune Orient is a member of the "G6 Alliance," which includes Japanese rivals Mitsui O.S.K. Lines and Nippon Yusen as well as Germany's Hapag-Lloyd. Maersk launched the "2M Alliance" with rival Mediterranean Shipping on the Europe-Asia route last year. Japan's Kawasaki Kisen Kaisha, China Cosco Holdings and others, meanwhile, formed the "CKYHE Alliance."

This redrawing of battle lines foreshadowed the Maersk-CMA CGM tug of war over Neptune Orient. Maersk and Mediterranean Shipping intended to form a three-way alliance with the French peer. But the plan was scuttled by Chinese authorities, who rejected it out of concern that the world's top three players -- all based in Europe -- would increase their presence in Asia. CMA CGM went looking for a new partner and set its sights on Southeast Asia's largest shipper.

CHINESE MONOPOLY At the same time, the Chinese government is on its own quest for scale with the merger talks between two state shipping companies.

The negotiations between Cosco and China Shipping Container Lines began this summer at the initiative of the State Council, the nation's cabinet, which administers large state-owned concerns. The two companies are expected to formally agree to integrate once the State Council gives the go-ahead, possibly in January. The government wants the merger to happen by 2017.

The government is in a rush because Chinese shipping companies, too, have been suffering amid price wars at home and worldwide. The merger would end the rivalry between the country's largest shippers, creating a domestic monopoly with a bigger slice of the global market.

Cosco, which ranks sixth in the world, and China Shipping Container Lines, which ranks seventh, would together move up to fourth place with a total capacity of more than 1.5 million TEUs -- just behind CMA CGM's 1.8 million TEUs. This is likely another reason the French company is chasing Neptune Orient.

A truck carries a container bearing the logo of APL -- Neptune Orient's brand -- at a terminal in Singapore.

Since Maersk and CMA CGM bought rivals in 2005, things have been quiet on the realignment front. But Hapag-Lloyd's 2014 merger with CSAV of Chile may have been a sign of things to come; the deal created a virtual tie for fourth place in the industry, with Taiwan's Evergreen Group, including its flagship Taipei-listed Evergreen Marine.

The Neptune Orient acquisition talks show the big European shippers are keen to swallow up rivals in emerging economies. Although Maersk lost the chance to negotiate exclusively, it has improved its financial health by selling non-core operations in recent years. Andersen said his company has more leeway to build scale than its rivals, suggesting that Maersk is looking for other targets.

Experts say it is about time the industry got serious about realignment. "For the past several years, the industry has been crying for a meaningful consolidation," Kapoor said.

If mergers and acquisitions gain momentum, "it will certainly have an impact on existing alliances, so we will need to re-examine whether the ongoing partnership is a viable solution," Mitsui O.S.K. President Junichiro Ikeda said. Vessel-sharing through alliances has helped companies cut costs, but "the fact that financial results and rates are so poor proves that alliances have not been able to achieve what they were designed for," Kapoor added.

"You will see more changes in the marketplace," Marcus Hand, Asia editor of U.K. industry publication Seatrade Maritime Review, predicted. He foresees mergers between midsize companies as well as "midsize ones being swallowed up by the bigger guys."

END OF AN ERA? While there is no doubt shipping companies are under a lot of pressure, the Neptune Orient talks do raise a question: Why has Temasek, essentially the Singaporean government, decided to let go of the business now?

Neptune Orient was established as the national shipping line in 1968, three years after the city-state gained sovereignty. While the manufacturing and finance sectors were finding their feet, shipping was a key source of income for the young nation. After the company's privatization in 1981, Temasek continued to hold a majority stake and pushed for the acquisition of APL, an American container shipping line, in 1997.

In 2008, Temasek and Neptune Orient sought to acquire Hapag-Lloyd, only to give up because of the global financial crisis.

Singapore surely wants to maintain its status as an Asian shipping hub. But Hand suggested a country does not need a state-owned shipping company to have a strong shipping industry.

He said the Singaporean government probably decided it can divest from Neptune Orient because it still owns port operator PSA International, the "land-side infrastructure part of the equation." PSA, which is wholly owned by Temasek, runs the world's second-largest container port facilities in the city-state; Shanghai ranks No. 1. The company's global network spans 40 terminals in 16 countries. And since it is profitable, PSA makes a better candidate for further investment than the continuously bleeding Neptune Orient.

Others read Temasek's move as a change in national strategy. Hozefa Topiwalla, head of ASEAN research at Morgan Stanley, sees the planned divestment from Neptune Orient as part of a broader restructuring of government-linked companies. He said Temasek no longer plays the role of "caretaker for government assets" -- the fund's focus has shifted to creating value through investments in promising unlisted businesses and foreign companies.

An equity analyst at a Singapore-based bank said that in terms of the national economy, the relative importance of shipping has diminished, in comparison to finance.

Temasek has a history of pulling out of industries that were losing competitiveness and, thus, their role in Singapore's economy. The sale of NatSteel to India's Tata Steel in 2004 is one example. In 2009, it unloaded Chartered Semiconductor Mfg. to GlobalFoundries, a joint venture between U.S. and United Arab Emirates companies.

Nikkei staff writers Takayuki Kato in Frankfurt, Tetsuya Abe in Beijing and Yasuteru Shimomura in Tokyo contributed to this article.

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