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All change as container lines play musical chairs

All change as container lines play musical chairs
The panel on alliances at the Marine Money Hong Kong Ship Finance Forum proved omniscient with CLSA transportation and materials analyst Daniel Meng commenting that with the merger of Cosco and China Shipping, the alliance that would face the most challenge would be the CKYHE grouping.

Meanwhile HSBC regional transport director Paresh Jain offered various permutations of how further developments will play out.

Just last week, four carriers from three different alliance groupings announced they were forming the new Ocean Alliance, putting together CMA CGM, Cosco Container Lines, Evergreen Line and Orient Overseas Container Line against the might of the dominant 2M alliance while at the same time further weakening the already tottering G6 and CKYHE alliances and essentially decimating the O3 and leaving United Arab Shipping Company (UASC) holding the parcel.

With the combined Chinese group tending to gravitate towards other bigger players, Meng said: “That means there could be a hole left for the CKYHE that would make them face more challenges than others and the guys that China Cosco chooses will be in a relatively better position.”

Jain pointed out that alliances particularly of the most recent Ocean Alliance type may not necessarily lead to more restructuring or mergers as they are a cost-side solution while they still compete on the freight rates side.

He said for example the only commonality the four partners share is their balance sheet and their orderbook. CLSA’s Meng meanwhile added that the most likely candidates for mergers were publicly listed companies with a PE ratio of around 0.6 to 0.7 times but ruled out those with a strong family background such as OOCL and Evergreen.

Jain also noted that with the Ocean Alliance, the combined market share of the eight other main lines across the three remaining alliance groups will not be bigger than either the top two in the 2M or the four in Ocean.

This will put them in a tight spot, he said, as they will not have the option of regrouping themselves into two or more alliances since even as a group they are already smaller than the leading six. “For the first time the top six shipping lines will have a categorical edge over the other eight,” Jain said.

Looking beyond the changes in the alliances, he analysed the options for the players left and came to the conclusion that they have one of two options: to merge or to shrink.

This is already happening among some of the stragglers, with UASC and Hapag-Lloyd confirming merger talks, essentially forcing a shakeup of the G6 alliance, with only the two bigger Japanese lines (MOL and NYK) and Hyundai Merchant Marine (HMM) remaining and the CKYHE with only K Line, Hanjin and Yang Ming left.

More mergers may yet transpire with the two major Korean lines, Hanjin Shipping and HMM, seen having to come to some kind of arrangement to survive despite official opposition to merge.

The remaining Japanese lines and the Korean lines however are seen as a different kettle of fish, ultimately being state-supported in some way, thus giving them greater financial strength than their European-based competitors. But if the Korean lines are forced to merge, it seems not unlikely that the Japanese may be forced to make similar moves as well.

Meng however said that while the European lines may not be privileged with the same level of state or quasi-state support, they are relatively strong companies in their own right and should be able to survive without having to merge.

Instead it will be smaller companies that will be in the worst position, he noted. “I think the ones to lose out will be the smaller ones because they don’t have government support and many of them have really stressed balance sheets; these ones will be the first to be phased out of the market,” Meng concluded, while declining to name specific companies that would be vulnerable.

The other option to shrink and make a strategic retreat to focus on a specific market segment where there is a competitive advantage, in the same way that Zim Shipping is doing, is a strategy some of the remaining players in the container line musical chairs may have to consider in the wake of the inevitable demise of the G6 and CKYHE alliances. This would be especially true of Taiwan-based Yang Ming, who after the music has stopped, might find itself being the one without a chair.