Leviathans at the gates: container minnows beware

The last months of 2015 are confirming what everybody has long sensed, but hated to admit: the rates are not going to come back up this year and early in 2016. The Asia-to-Europe trade lane, where most of the mammoth ULCVs are being thrown into the rotations, is forcing the rates near US$1,000, nowhere near the breakeven point for all operators. The mighty Maersk admitted us much through decisions to lay up some vessels and let some of their workforce go on extended vacations.

The recovery in the Euro zone is taking its sweet time and the repercussion of that anemic performance are felt across export-oriented economies of Asia. That economic malaise will be felt across the mainlines and across their feeders. As there are no more savings coming from reductions in bunker costs, the lines will have to sharpen their focus on the sales & administration costs. Even that may not provide sufficient financial relief until the rates return to sustainable levels. What’s left then? Gaming the capacity. Expect mergers, shotgun marriages and acquisitions to become the primary instrument of competing in the shrinking pond brimming with more and more big fish. Expect also the fight for margins to shift from the Asia-Europe trade lanes to Asia-Americas trade lanes. This latter shift will be affecting every single carrier ploughing the Pacific waters.

Last year, Hapag-Lloyd AG fired the first shot by acquiring Chilean carrier CSAV. Their strategy was to offset falling Asia-Europe rates and steady, but low nonetheless, rates on the transatlantic trade lane, and build a beachhead for the trade uptick expected from passage of the Trans Pacific Partnership Agreement (TPPA). Smart move in the long term, but terrible in mid- and short-term. Unfortunately, it is the short term result that the markets expect. The lukewarm reception of the recent IPO confirmed that sentiment. Part of this is due to the structure and size of the combined entity. There are only small efficiency gains to be had from the combination of the existing fleets and trades. The major focus would have to be growth in fleet size and individual vessel capacity. And the larger Hapag-Lloyd will not have enough cash and credit to order a large fleet expansion.

The CSCL-COSCO shotgun marriage has no choice now, but to move full steam ahead. It is safe to ignore all the strategic synergies trumpeted by both lines. This is purely a life preserving step for two players, whose waning fortunes are tied mainly to Asia-Europe and Asia-North America trades. In the meantime, CSCL, not be outdone in the capacity game, placed a new order for eleven 20,000+ TEUs vessels. It is a warning signal to others. The new, combined entity will not be looking at major capacity reduction, but will fight by offering cheaper and cheaper rates on the expanded quantity of slots.

Those two combined entities will become large enough to pressure the top three lines: Maersk, CMA CGM and MSC. I expect that each one of the 3 to be loudly declaring cutbacks in general and administrative expenses. But below that noise, I expect them to make aggressive moves to bulk up on capacity, try to reduce the rates, and drive the less efficient operators out of business. The big 3 can take either or both paths to increase their capacity: the slower path of ordering more and larger vessels, or the faster path of acquiring someone with capacity and presence on trans-Pacific lanes. It looks like the latter approach is the path they will take.

Based on that assumption, let’s speculate now what that will mean for the other carriers in Asia. The next pair of potential acquisition victims are based on the Korean Peninsula. In my mind, neither carrier is attractive enough to the big 3. The perceived inefficiency of HMM is no match for perceived efficiency of Hanjin, but both carriers are too small and too undercapitalized to play the capacity game with ULCVs on their own. Given the pride of Korean people in having large carriers flying the Korean flag, it is entirely likely that the Korean government and the markets will soon coerce the two lines into a merger. Culturally, they are very different, but without their combined scale, Korean carriers will have no say in grabbing any more trade from the existing routes or from the new routes created by TPPA. So, this may be the case of “merge or bite the dust”. Neither carrier will be able to attract foreign cashed-up suitor on their own, so the Korean-Korean match is most likely.

Next on deck are the Japanese carriers: MOL, NYK and K Line. While I can imagine the Japanese carriers garnering some acquisition interest from the big 3, MOL is probably too large to be swallowed, and the other two too small and too local to be attractive. With the exception of MOL, Japanese carriers are weak and undercapitalized to make any major moves on increasing their scale. MOL fired an early salvo by announcing purchase of 5 new ULCVs, but that will not be enough to depress the competitors. More orders from MOL are possible, but realistically speaking, the growth at MOL should be coming from removing local competitors by buying them outright. If not, both NYK and K Line will be living very difficult lives fighting for smaller shipments at marginally profitable rates. OK to live, but not enough to grow and fight.

The Taiwanese carriers Evergreen and Yang Ming prefer strategy of small targets and sustainable growth derived from serving smaller ports, transporting smaller shipments, and profit taking on intra-Asia trade lanes. They will plod ahead with their current strategies, until they are pushed into growth, either in volumes or profits. One or the other, or even both pressures could push them to offer themselves to a foreign bidder.

The juiciest morsel, by far, is the Singapore-based NOL. It seems that Temasek is getting impatient with the returns on their investment. The deck was cleared earlier in 2015 by selling NOL’s logistics brand, APLL, to Kintetsu. Now is the time to cash in the chips. NOL was steadily chipping away at the losses by increasing efficiency and cutting expenses. They made right investments in optimization technology and got innovative around how they run their network. That innovation will create more room to maximize output from the current operations. But there is not enough cash in the bank to hit the majors where it could hurt them. The traditional kangaroo hops taking in the trade from the Chinese ports between Singapore and the West Coast of US will be under risk following the CSCL-COSCO merger. Thus being bought and merged into the operations of one of the big 3 is going to be the most likely scenario. With all 3 majors being possible bidders, NOL can extract the highest price possible. What I hope for, is that once bought, the winner will not abandon the innovations percolating at NOL, but rather takes them on board as their own. I would be a shame if buying NOL is seen by the winner only as bulking up on size and throwing more capacity out there to drive the competitors out of the market.

Kris Kosmala

Kris Kosmala is a partner at Click & Connect where he advises companies trying to leverage digitalization to change their business competitive position.
Back to top button