Merger talks between CMA CGM and NOL highlight consolidation
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n the Bayonne Bridge, high above the water that connects New York harbour with New Jersey’s Newark bay, workers are starting to build a new roadway 64 feet above the existing one. This ambitious construction project will clear the way for the new generation of giant container ships to reach New Jersey’s bustling terminals, part of the US east coast’s busiest port complex.
The need to raise the Bayonne Bridge highlights how container shipping lines are betting on scale to solve their deep-rooted problems — partly by investing in bigger vessels and, in some cases, by embarking on mergers. The latest evidence of this came on Sunday when France’s CMA CGMannounced it was in exclusive talks to buy Singapore’s Neptune Orient Lines, a lossmaking line that operates under the APL brand name.
Many analysts say that a purchase of NOL — operator of just 2.6 per cent of the world’s fleet — might provide CMA CGM with little respite from these tough conditions.Yet the question for the industry is whether the quest for scale will alleviate or exacerbate a looming crisis resulting from the collapse in demand to ship goods to China, container shipping’s biggest single market. Average freight rates to move a forty-foot container on the world’s main east-west trade routes have nearly halved since August to about $840, as the industry’s capacity growth far exceeded demand.
Simon Heaney, research manager for Drewry Supply Chain Advisors, a London-based consultancy, says that container lines’ revenues are “absolutely tanking” as the rate to move a container plunges to the lowest level since the financial crisis of 2008-09. “We don’t see a lot of logic in this deal,” he says of the talks between CMA CGM and NOL. “APL is a chronic lossmaker.”
The thinking behind the expansion of both container ships and lines is nevertheless clear — both are ways of minimising the fixed costs of moving a container, and hence boost profit margins in a volatile, highly cyclical industry.
Big ships that are as long as 400m still require only one crew to operate and their fuel requirements and construction costs have risen far more modestly than the largest vessels’ capacity, which has doubled to 19,000 twenty-foot equivalent units of containers over the past 10 years. Such ships, when operating full, should be able to make money more easily even when freight rates are low.
“Big ships enable carriers to reduce their break-even level,” says Mr Heaney.
Similar logic applies to some companies’ determination to increase their share of the market. Shipping lines have formed alliances — similar to those between airlines — to pool cargo and ensure they can operate their vast new vessels as close to full as possible.
Company mergers should achieve a similar effect. Germany’s Hapag-Lloyd last year bought Chile’s CSAV, while China’s China Shipping Container Lines and Cosco — both state-controlled — are in talks about merging their companies to become the fourth-biggest line by capacity.
CMA CGM on Sunday said that, if it acquired NOL, it would contribute to the consolidation of container shipping “at a time when scale is more critical than ever”.
“It would further reinforce CMA CGM as a global force in container shipping, leveraging the strong geographic and operational complementarity of both groups,” said the company.
Yet the steady stream of mammoth new ships from shipyards in Korea and China may be helping to create the dire conditions from which CMA CGM and others are seeking protection. While Drewry forecasts a sharp fall in container trade growth because of China’s economic slowdown — from about 5 per cent in 2014 to 2.2 per cent this year — many in the industry see the flood of new ships as a still bigger problem. Drewry forecasts container ship capacity will increase 7.7 per cent this year.
Paul Slater, chief executive of First International, a ship finance consultancy, says the influx of huge, new vessels has increased the number of spaces available to containers on ships by an “extraordinary percentage”. “This is excess capacity driven,” he says of the slump in rates.
The rate decline prompted Denmark’s AP Møller-Maersk, owner of Maersk Line, the world’s biggest container ship operator by capacity, to last month issue a profit warning.
Harry Theochari, global head of transport for Norton Rose Fulbright, says CMA CGM — the number three container line — may be acting primarily from concern over Maersk’s market power. Alphaliner, an information site, estimates Maersk controls 14.7 per cent of container ship capacity. It has formed an alliance with Mediterranean Shipping Company, the market number two.
Maersk, which was initially competing with CMA CGM to buy NOL, has pulled out. CMA CGM originally wanted to form a three-way alliance with Maersk and MSC but it was rejected on competition grounds. “I think they’re just protecting their position,” says Mr Theochari, referring to CMA CGM.
There remain some positive reasons for CMA CGM to pursue a merger with NOL. Peter Tirschwell, editor of the Journal of Commerce, a trade periodical, points out NOL has a strong reputation in Southeast Asia and a powerful position in trans-Pacific routes.
Yet, according to Mr Heaney and many others in the industry, container shipping lines may, as the market slows, have far bigger things to worry about than continuing the dash for larger ships and companies.
“Being big as the market heads for a downturn is not a great position to hold,” says Mr Heaney. “By virtue of the fact that you’re moving that many boxes, the risk is magnified.”
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