Thursday, April 21, 2016

NEW CONTAINER LINE ALLIANCES

Without capacity reductions and pricing discipline, what do alliances mean to financial instability of industry?






Container Operators China Shipping Group, CMA-CGM Form Ocean Alliance

New alliance would rival Maersk Line and Mediterranean Shipping in Asia-to-Europe ocean trade



Shipping containers in Rizhao, Shandong province, China. Alliances have taken on increased importance in a global-shipping industry that is buffeted by overcapacity and slowing volumes. ENLARGE
Shipping containers in Rizhao, Shandong province, China. Alliances have taken on increased importance in a global-shipping industry that is buffeted by overcapacity and slowing volumes. Photo: Reuters
Some of the world’s biggest container operators, including China’s Cosco Group and France’s CMA CGM, agreed to form a new shipping alliance that will rival the dominance of giants Maersk Line and Mediterranean Shipping Co. in the lucrative Asia-to-Europe ocean trade.
The new grouping, to be called the Ocean Alliance, also will include Hong Kong’s Orient Overseas Container Line and Taipei-based Evergreen Marine. 2603 0.00 %
The formation of the alliance is subject to regulatory approvals from the U.S., the European Union and China, all of which have closely scrutinized a series of full-blown tie-ups and looser partnerships recently in the container-shipping business.
The Wall Street Journal reported the formation of the alliance on Tuesday.
The Ocean Alliance eventually will make room for Singapore’s Neptune Orient Lines Ltd. NPTOY 1.81 % , which agreed to be bought in December by CMA CGM.
Cosco Group and China Shipping Group, meanwhile, recently agreed to merge, a deal that would bring the combined Chinese firm under the auspices of the new alliance.
The China Shipping-Cosco merger has been approved in Beijing but needs a regulatory green light in Europe and the U.S.
Such alliances have taken on increased importance in a global-shipping industry buffeted by overcapacity and slowing volumes. While freight rates have fallen sharply in recent years, the industry remains highly fragmented.
By entering into alliances—in which firms share everything from ships to port operations—companies can cut operational costs.
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Regulators, however, have studied recent consolidation efforts and the various alliances to prevent the domination of certain trade routes by individual players or small groups of them. Such concentrations could lead to pricing leverage when industry fundamentals pick back up, regulators worry.
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Some shipping customers have also raised concerns about the spread of vessel-sharing agreements in recent years, saying they make handling shipments at ports far more complicated and costly.
Tyson Foods Inc., which exports more than 50,000 ocean containers of frozen food and other animal products annually, asked the Senate Commerce Committee on Wednesday to press the Federal Maritime Commission for “a more thorough review of these foreign carrier alliances to ensure that their actions do not result in a logistics network within the ports that adds more truck trips and congestion to an already overloaded port infrastructure.”
Perry Bourne, director of international transportation at Tyson, who testified on behalf of the Agriculture Transportation Coalition, said customers often must move containers between port cargo terminals to get their goods to the right ships as carriers in alliances change the assignments for exports.
Container-ship operators say alliances offer better service through their combined network, compared to individual operators. Their shared resources give cargo owners more frequent sailings at the best price, they have argued.
Maersk, owned by Danish shipping and energy conglomerate A.P. Moeller-Maersk AMKBY 0.69 % A/S, MSC and CMA CGM—the world’s top three container operators by capacity, respectively—agreed two years ago to enter into a globe-spanning alliance called the P3 Network. But that partnership was rejected by Chinese regulators in 2014.
There is no doubt that we are in for a new round of liner shuffling and realignment with massive pressure on second-tier players
—Basil Karatzas of New York-based Karatzas Marine Advisors
Maersk and Geneva-based MSC, then, formed a less-ambitious alliance between the two, called 2M. That alliance controls roughly 34% of the Asia-Europe trade route, one of the world’s most lucrative.
The new Ocean Alliance would challenge that dominance.
Rodolphe SaadĂ©, vice president of France-based CMA CGM, said in a statement it was planned as “a very ambitious operational agreement,” that he expected would be up and running next April, assuming regulatory approval.
The Ocean Alliance will operate 350 ships across all ocean routes, and should have a 26% market share in Asia-Europe voyages, CMA CGM estimates.
“Ocean Alliance is a forced but necessary attempt to provide a market counterbalance to the massive market share of Maersk’s 2M Alliance with MSC,” said Basil Karatzas, who runs New York-based Karatzas Marine Advisors & Co.
The new alliance—coupled with the recent consolidation that has made it possible in the first place—also could force a new round of deal making, analysts said.
“There is no doubt that we are in for a new round of liner shuffling and realignment with massive pressure on second-tier players,” said Mr. Karatzas.
The world’s biggest operators already have been meeting in recent days with the Federal Maritime Commission, the U.S. watchdog, the European Commission and China’s Ministry of Transportation on possible new tie-ups.
“Chances are that the alliances you see today will change significantly,” William Doyle, a commissioner at the FMC, FMC 0.00 % told the Journal this month.
CMA CGM and China Shipping Container Lines, the container unit of China Shipping Group, currently belong to the Ocean Three alliance along with Dubai-based United Arab Shipping Co. The alliance handles 22% of all cargo moving between Asia and Europe.
Cosco currently belongs to a different alliance, called CKYHE, made up of Asian operators including Evergreen. CKYHE controls 25% of the Asia-Europe trade loop.
Regulatory reviews can take three months or longer. In the past, alliances typically expected approval from regulators if their combined market share was below 35%.
“I expect three main alliances instead of four going forward, and anyone not making it into those groupings won’t be able to survive in five years’ time,” said Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting. “No matter how this pans out…I expect more consolidation to come, which will again change the alliances landscape.”
Write to Costas Paris at costas.paris@wsj.com