LINER SHIPPING: Are ULCSs heralds of consolidation?

It is a proving a fruitful time for prophets of change in the liner industry.

Malaysian carrier MISC is pulling out of the boxship trades, Zim is considering consolidation or merger possibilities, and CSAV is seeking a partner in the restructuring of its container-shipping activities.

Mix in talk that the three major Japanese lines have considered a merger and it all points to a new phase of restructuring in the sector.

The new watershed for the industry has come just six years after the last major phase of consolidation in 2005, when AP Moller-Maersk acquired P&O Nedlloyd and Hapag-Lloyd took over CP Ships.

Some thought the industry would undergo structural change again in the crisis of 2009 but it failed to result in any consolidation. Instead, the bumper year that followed meant lines were able to postpone some tough decisions.

Operators are still living off the fat of those profits but their cash reserves are wearing thin. That is forcing lines to again consider the rationale for staying in the container trades at what seems a crucial juncture.

Lines operating in the Asia-to-Europe trade are approaching a crossroads where they need to make a strategic choice.

On the one hand, they have to consider stumping up cash to buy the new generation of ultra-large containerships (ULCCs). If they decide not to, it may mean retiring from the trades.

If they are to remain as players in the business, where ships of 16,000 teu to 18,000 teu will be deployed, at least a dozen will need to start ordering larger vessels.

When the first of these giant boxships are delivered in around three years’ time, operators using sub-10,000-teu vessels will be unable to compete on the Far East-to-Europe trades.

The orders for larger vessels have so far been dominated by Maersk Line, Mediterranean Shipping Co (MSC) and CMA CGM, which are committed to what has been described as “a game of scale”.

Others are weighing up the pros and cons of the move but the uncertain economic climate means it is a tough call.

In its November newsletter, Clarksons Research Services says players that have yet to make a move in the post-10,000-teu sizes are “still playing a wait-and-see game over the economies in the West”.

“It is still unclear whether these companies will play their hand and order to keep up with their competitors or if they will wait and see what the post-Lunar New Year brings,” the analyst added.

Yet events are moving remarkably rapidly and some of the top 30 lines have effectively already made their decision. MISC’s announcement that it hopes to be shot of its liner business by next June is a case in point.

Chief executive Datuk Nasarudin Md Idris spells out the reasons in no uncertain terms. It is not so much the losses — even though MISC is down $1.18bn since 2008 from container shipping. Instead, it is the “the radical change in the operating dynamics of the liner industry”.

“In view of the expected larger demand of investment in the liner industry, the cost for us to remain relevant in the liner business is untenable,” the MISC chief executive said.

This structural change clearly has implications for cash-strapped lines that will struggle to order big ships.

Chile’s CSAV, South Korea’s Hanjin Shipping and Zim of Israel have already announced equity-raising measures.

Yet there are signs that this is only a partial step in the trend toward industry consolidation. Zim is considering a merger, according to sources quoting chief executive Rafi Danieli.

“We are not ruling out a possibility of consolidation or a merger in the future but at the moment there is nothing on the table regarding this matter,” Zim said in a statement.

Elsewhere, there are reports that CSAV has appointed financial advisor Celfin Capital as part of a $1.2bn capital-raising exercise and to help the search for joint-venture partners for its container business.

This may be only the tip of the iceberg and the feeling is that a radical change in the industry could be imminent.



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2 responses to “LINER SHIPPING: Are ULCSs heralds of consolidation?

  1. Niall Hurley

    Not to be too critical, but ULCS is the more correct description of ultra large container ships. ULCC’s are better known as ultra large crude carriers.

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