Japan Seeks Shelter From Riptides of a Supersized Ship Industryby and
Three-way container ship tie-up will form No. 6 global player
Industry shakeout borne of over-investment in supersized ships
In this era of supersized shipping, in which the length of some mega-container carriers eclipses the height of the Empire State Building--scale matters.
The same holds true for shipping companies, now facing a hurricane-force gale of declining shipping rates, a massive capacity glut and a wave of defensive mergers.
Hence, the news on Monday that Japan’s three biggest shippers--Nippon Yusen KK, Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd.--will merge their container operations, creating the world’s sixth-largest box carrier with a 7 percent share of the market. When the deal is consummated next year, the new entity will have about 2 trillion yen ($19 billion) in sales, trailing only China Cosco Shipping Corp. in size in Asia, according to a joint statement in Tokyo.
"We saw that a number of companies were collapsing or merging and the size of firms was increasing," Tadaaki Naito, president of Nippon Yusen, told reporters in Tokyo Monday. "If we don’t have scale, then things aren’t going to look pretty."
Merger discussions started in the spring, according to Naito, in the wake of a decision late last year by President Xi Jinping’s government to merge two shipping groups, China Ocean Shipping Group and China Shipping Group, into an entity that has a combined revenue of more than $40 billion.
The commercial shipping industry is paying a huge price for misreading the direction of trade volumes following the 2008-2009 financial crisis. Expecting the global economy to bounce back smartly, ship owners kept commissioning more and bigger boats. Starting around 2014, however, "the shipping company bosses realized that world trade growth, which they had taken for granted to grow 5 percent to 7 percent, now had changed to the low single digits," said Rahul Kapoor, a director at Drewry Financial Research Services Inc.
Sluggish world economic growth and container ship over-capacity have led to a plunge in shipping rates since late 2010--and four straight punishing years of losses for the industry.
Some lines have responded by driving their vessels more slowly to save fuel and by scrapping older, less efficient ships. Others have decided to go as large as possible to cut costs by as much as 30 percent per voyage.
In August, South Korea’s largest container-shipping line, Hanjin Shipping Co., applied for court receivership, leaving more than 80 ships marooned on the high seas as port operators in the U.S., Asia and Europe turned away the carrier’s vessels over worries it wouldn’t be able to pay the bills.
In September, a top executive at the world’s largest container shipping line, A.P. Moeller-Maersk A/S, whose Maersk Line had 27 ships in its order book, said it would stop ordering newly built vessels and instead pursue takeovers in an industry that has been plagued by overcapacity for almost a decade.
“If Maersk Line needs to grow, it doesn’t make sense to order new ships as there are already too many ships in the market,” Chairman Michael Pram Rasmussen said in a interview at the company’s Copenhagen headquarters. “So if we want to grow, we need to do it through acquisitions so that we don’t flood the market with more ships.”
The Japanese ship tie-up, though defensive in nature, could deliver substantial cost savings. "It makes a lot of sense," said Andy Lane, a partner with CTI Consultancy and a former Maersk executive. "The potential cost-saving could be at least tens of millions of dollars a year, which can be easily run into hundreds of millions, depending on the result of back office integration and network optimization."
While there have been some cross-border mergers such as France’s CMA CGM SA’s acquisition of Singapore’s Neptune Orient Lines Ltd., the Japanese shipping companies may have been concerned about the difficulties of integrating a foreign company with a different business culture, according to Lane. "With similar culture and background, it makes things a lot easier when the three Japanese shipping lines decided to come together."
Nippon Yusen shares closed up 6.4 percent, the most in almost eight weeks, at 215 yen after earlier surging as much as 11 percent in Tokyo trading. Mitsui OSK ended up 5.6 percent, also the most in eight weeks, at 263 yen, after earlier jumping as much as 15 percent. Kawasaki Kisen edged up 0.4 percent to close at 260 yen.
"The companies needed to make this decision to survive global competition," said Takuma Matsuda, a container line researcher at the Tokyo-based Japan Maritime Center. "The focus now is on what level of synergies can be expected and the details of the plan."
In a note to clients, Greg Knowler, a shipping analyst with IHS Markit, pointed to potential takeover targets in Taiwan, home to three major carriers: Evergreen Marine Corp. Taiwan Ltd., Yang Ming Marine Transport Corp. and Wan Hai Lines Ltd.
"The quest for scale and expectations that weak demand and excess capacity will continue for at least another two years are driving the wave of consolidation that’s swamped the liner shipping industry this year," Knowler said.