The acquisition by CMA-CGM of APL and the merger of COSCO and China Shipping sent shivers through the marketplace. Is this the start of another round of ocean carrier consolidations or a far more complex market shift?
In the past few months, two major mergers have shaken up the shipping industry: In December, French container line CMA CGM announced it would acquire the Singapore-government owned APL for $2.4 billion. Two months later, under intense pressure from Beijing, China’s two biggest shipping lines - COSCO and China Shipping - combined to form one of the world’s biggest fleets, China COSCO Shipping Corp.
The question now is whether these two events signal the beginnings of a merger-driven consolidation within the industry. The answer isn’t necessarily straightforward.
All things considered, consolidation should take place, much as it has in other areas of transport. But despite a depressed shipping market that shows no signs of recovery, consolidation probably won’t happen quickly. And it will take place only when creditors pressure distressed owners to sell and for a price that is attractive to potential buyers. Those are big unknowns.
The real truth behind all M&A activity in the containership sector is that they are arranged marriages generally with a highly motivated “matchmaker” bringing the two sides together. Often the broker is a State interest as was the case for both COSCO-China Ship and CMA-CGM-APL.
“I do think there’s more to come,” said Brett Esber, a Washington-based partner with Blank Rome LLP, with a focus on the maritime industry. “The container sector in particular is in real need of consolidation. It will happen,” he said, “but slowly.”
Liner owners so far have resisted merging interests for a variety of reasons. That includes everything from the family ownership structure to a still widely held belief in shipping as a national interest, with governments aiding in the propping up of an industry, even one that loses lots of money. Add to that banks which have been far too willing to finance expansion instead of demanding sales.
Why hasn’t there been more consolidation? “I honestly don’t know,” Esber said. “Players have tended to hang on.”
Thomas Söderberg leads Hong Kong-based ship investor Tribini Capital and expresses a more skeptical point of view. “In very simple terms, [a merger] makes sense,” Söderberg said. “There are millions of other reasons why it doesn’t make sense.”
One of the reasons a merger or acquisitions “makes sense” is the time honored ocean carrier concepts, scale and market share. Ocean carriers feel the need to be large to compete – a cursory view at the big three mega-carriers, Maersk, MSC (Mediterranean Shipping Company) and CMA-CGM illustrates the disparity in size between mega-carriers (all over 2 million TEUs), large carriers and everybody else. And one way to build scale and market share is to buy it.
Right now there are plenty of rumors swirling about that support the thesis. For example, Hapag-Lloyd, which bought CSAV (although merged may be more appropriate), is rumored to be in the hunt for another acquisition because shareholders/management believe the carrier needs more size (171 ships – 930,514 TEU) to effectively compete.
Lars Jensen, the CEO of Copenhagen-based, SeaIntelligence Consulting, has long advocated the need for industry consolidation. He has over the years predicted the 16 or 17 global carriers of today will be reduced within a decade to six to eight. “Everyone on that list is a potential candidate to not being around,” he said. “The next merger will not be a surprise,” Jensen said.
Many of the smaller lines will suffer a different fate, Jensen continued, and will probably just go out of business. “One by one, they will disappear.”
On the world’s main shipping routes, “you can’t have this degree of fragmentation and be profitable,” he said. “Too many players start competing on price.”
It’s a race to the bottom and Jensen maintains the “key competitive factor” is access to capital, the “ability to get a cash injection before you run out of money.”
Creditors hold the key, Jensen and others believe. And Jensen, for one, believes these banks will finally force the issue. “This year, you’ll see pressure magnify,” he predicted.
Part of this pressure, Jensen maintains, is because shipping lines face an even tougher slog in 2016. Carriers last year benefitted from falling oil prices and the lag between rate cuts and what they were paying for bunker fuel. For the major lines, that amounted to a one-time profit totaling more than $4 billion. That won’t happen in 2016. “Carriers face a very bad situation,” he said.
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