Fitch: M&A Not Alliances to Help Revive Container Shipping

Cosco Shipping International (Hongkong)

28/04/2016 10:59

(The following statement was released by the rating agency)

LONDON, April 28 (Fitch) Mergers and acquisitions, rather than the historically 
more popular alliances, are inevitable to address chronic overcapacity and drive 
further cost savings in container shipping, Fitch Ratings says. The merger talks 
between Hapag-Lloyd and United Arab Shipping Company (UASC) announced last week 
demonstrate that full-blown M&A deals are gaining momentum.

Although capacity on the Far East to Europe trade routes is dominated by just 
four alliances - 2M (36% of the total fleet capacity in September 2015, 
according to A.P. Moller-Maersk), CKYHE (24%), Ocean Three (21%) and G6 (18%) - 
container shipping remains effectively fragmented, highly competitive and 
plagued by overcapacity. This is because alliances operate within a limited 
scope and lack full coordination of networks and fleets, and exploitation of 
resources. This limits their ability to manage capacity and cut costs.

Alliances have proved popular because of their flexibility and because many 
shipping companies are either family- or state-owned. But market conditions are 
now unsustainable, with freight rates falling below operating unit costs for 
many companies and bank loans increasingly difficult to obtain. 

This will continue to drive M&A, which can more effectively reduce costs, 
increase utilisation rates and support more disciplined capacity management. 
Examples include the recent merger between China's COSCO and CSCL, creating the 
world's fourth-largest container shipping company, and the planned acquisition 
of NOL by CMA CGM, which would strengthen CMA CGM's position as the global 
number three. 

The potential merger between Hapag-Lloyd and UASC would create the fifth-largest 
container shipping company with a 7.2% share of global fleet capacity. 
Hapag-Lloyd is expected to receive 72% of the merged entity and UASC the 
remainder. Hapag-Lloyd is mostly focused on Transatlantic and Latin American 
trade, and the merger will strengthen its position in Asian and Middle Eastern 
routes. Hapag-Lloyd will also gain access to UASC's ultra-large 18,000 20-foot 
equivalent unit (TEU) and 15,000TEU vessels, which are essential for competing 
on Asia-Europe routes. 

Hapag-Lloyd reported operating profit of EUR310m in 2015. If the merger goes 
ahead, operational integration and reorganisation will be crucial to keeping the 
combined entity profitable.

The recent M&A activity is also prompting a significant shake-up of alliances. 
Last week, CMA CGM, COSCO Container Lines, Evergreen Line and Orient Overseas 
Container Line announced a plan to create Ocean Alliance, which is intended to 
begin operations in April 2017 for five years, subject to regulatory approvals.

The new group is formed from the main, and in most cases financially strongest, 
entities from the G6, Ocean Three and CKYHE alliances, and will have a market 
share to rival the 2M alliance between Maersk Line and MSC. We believe it is 
likely to put further pressure on the financially weaker companies and result in 
a reshuffle of the remaining alliances. However, the long-term agreement between 
UASC and CSCL for deployment of mega ships on certain trades is expected to 
remain in place.

Contact:  

Angelina Valavina

Senior Director

Corporates

+44 20 3530 1314

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Raman Singla

Associate Director

Corporates

+44 20 3530 1728

Simon Kennedy

Director

Fitch Wire 

+44 20 3530 1387

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

Related Research 

2016 Outlook: Global Shipping 

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875089

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