A.P. Moeller-Maersk A/S and its two main rivals may have their best chance yet to boost profit, say European shipping investors and banks. The key: joining forces to create the largest container alliance in history.
Maersk Line teamed up with Mediterranean Shipping Co. and CMA CGM SA last month to pool 255 vessels on 29 loops covering the world’s three biggest trade lanes. The goal is to cut costs and end five years of overcapacity.
The alliance, which starts in the second quarter of 2014, may boost freight rates as early as this month, sending a “clear message” to customers that the price war is over, according to Deutsche Bank AG. ATP, Denmark’s biggest pension fund, with $140 billion in assets, said it expects its Maersk stake to grow in value because of the deal.
“The hope is that this will make a big difference and the industry has really needed something to happen,” Jonas Bhatti, a portfolio manager at ATP, said in an interview. “This means that Maersk Line will become more profitable. This is positive for Maersk as an investment.”
Even the shipping industry’s users say rates may rise. The Asian Shippers’ Meeting and the European Shippers’ Council said in a joint statement that they have “deep concern” over the alliance. Among the European council’s members: Ludwigshafen, Germany-based chemical company BASF SE and Munich, Germany-based engineering company Siemens AG.
The group is seeking to ensure that the deal doesn’t “jeopardize or impair the free choice of shippers and fair competition based on price, service level and routing,” the groups said June 18.
The container industry is suffering from overcapacity after a boom in ship orders coincided with the worst slump in freight demand since the 1970s. Vessel supply exceeds demand by about 30 percent and much of the boxed freight being shipped is unprofitable, according to BIMCO, the world’s biggest international shipping association.
The Shanghai Containerized Freight Index, a weekly measure of box rates out of China, dropped 21 percent in the three months before the announcement as industry efforts to boost prices earlier this year failed to yield results. The index jumped 22 percent on June 28, indicating container company announcements of rate rises starting July 1 will be successful.
The alliance, to be called P3, still needs to win approval from competition authorities. The partnership probably won’t damage competition because there are still more than 15 rival carriers on most trade routes, London-based Drewry Maritime Research said in a note last month.
European Commission competition spokesman Antoine Colombani said he couldn’t comment on implications of the container accord. In general, he said by e-mail, companies themselves should “to verify that such cooperation between competitors is in line with EU antitrust rules. Of course the Commission may also decide to examine an agreement of this type to see whether it raises competition concerns.”
“The initiative could certainly entail antitrust risks,” said Alfonso Lamadrid, a lawyer specializing in EU antitrust law at law firm Garrigues in Brussels, in an interview. “Avoiding antitrust exposure would normally require prior complex and thorough discussion with the relevant competition authorities.”
Investors are rewarding Maersk, the only company in the alliance whose stock is publicly traded. Its shares have gained 1.7 percent since the June 18 announcement, compared with a 2.7 percent decline in the Stoxx Europe 600 Index in the period.
Deutsche Bank analyst Jose-Francisco Ruiz Solera said the box alliance was a “clear” indication that “the times of irrational competition could be over,” according to a June 20 note. He’s advising clients to buy Maersk shares. Of the 32 analysts covering Maersk, 23 recommend either buying or holding on to the stock, data compiled by Bloomberg show.
Bhatti of ATP, which held about 1 billion kroner ($175 million) in Maersk shares at the end of 2012, said the purpose of the arrangement is to lower costs rather than raise freight rates. Bhatti declined to say whether ATP has bought more Maersk shares since the deal was announced, citing the state-backed fund’s disclosure policy.
“The supply/demand balance has been very undesirable for the industry for a long time,” he said. The accord “will improve utilization of the ships and lower costs as the alliance will be able to better manage the supply side,” he said.
Container lines had failed in five previous attempts to raise rates on Far East to Europe trade this year, according to industry consultant Alphaliner. The July 1 rate increase proposals, which ranged from $750 per 20-foot container, or TEU, to $1,000 per TEU, were the biggest ever announced on the trade, Paris-based Alphaliner said in a note last month.
Spot freight rates on Far East-to-Europe trade plunged to about $550 per TEU in the beginning of June from about $1,800 a year earlier, according to Alphaliner. Rate increases have failed as some shipping lines choose to prioritize filling up their vessels rather than sticking to the higher prices as overcapacity gives customers bargaining power.
Managing supply amid overcapacity has proven “extremely difficult” in the last few years, said Peter Sand, a Bagsvaerd, Denmark-based analyst at BIMCO, whose members control 65 percent of the world’s tonnage. With fewer operators, striking that balance may become easier, he said.
“The elephant in the room that everyone is afraid to be talking about is that overcapacity is so severe that it may take many years before it disappears,” Sand said in a phone interview. “Previously, there were expectations in the market that the smaller container lines would disappear. That development hasn’t really happened.”
The container lines will cooperate on routes covering Asia to Europe as well as transpacific and transatlantic routes. P3 will have a combined market share on Asia-to-Europe of about 42 percent, Maersk Line Chief Trading and Marketing Officer Vincent Clerc said in an interview. The market share on transpacific routes will be 24 percent; on transatlantic it will be between 40 percent and 42 percent, Clerc said.
The alliance “marks a major departure for all three member carriers, who have historically eschewed formal alliance arrangements,” Alphaliner said. “The P3 carriers will enjoy the lowest unit costs and provide the widest east-west trade coverage through the arrangement, which will also coordinate future capacity introduction by its members on the three main trade lanes.”
Maersk Line will contribute about 42 percent of the network’s capacity, including its so-called Triple-E ships, the world’s largest container vessels. They carry 18,000 boxes. Geneva-based MSC will provide about 34 percent of the capacity and Marseille-based CMA CGM will contribute about 24 percent.
Deutsche Bank’s Solera said the alliance will make price wars among the largest players less likely. In addition, he wrote in the note: “The flexibility provided by a huge common network will make it easier to adjust capacity to demand, avoiding punctual oversupply problems and making it possible to reach higher load factors.”