Monday, October 31, 2016

Hanjin Collapse Spurs Big Three Japanese Container Freight Carriers into New Joint Venture

MOL, NYK and K Line to Operate as One Box Carrier from 2018
Shipping News Feature
JAPAN – WORLDWIDE – In a move which not so long ago would have been unthinkable, Japan’s big three container shipping lines have set aside differences stretching back decades to address the problem of overcapacity in the freight market and join forces as one company from July 2017, subject of course to global regulatory approvals. The seismic shock and horror at the collapse of South Korean rival Hanjin recently has seemingly focused the collective minds of the senior executives at Kawasaki Kisen Kaisha (K Line), Mitsui O.S.K. Lines (MOL) and Nippon Yusen Kabushiki Kaisha (NYK) and pushed them to take drastic action.

As from 1 July 2017 the three will operate a joint venture company which plans to begin operations as from 1 April 2018. MOL and K Line will each hold 31% shares with NYK having the remaining 38% and the deal applies only to the container operations, not the RoRo auto shipping arms nor any of their respective short sea and domestic, oil and gas carrying or dry bulk divisions or heavy lift and logistics operations.

Alongside the operation of a combined fleet totalling 256 vessels capable of carrying around 1.4 million TEUs, all container terminal operations will also come under the management of the new company in a move clearly designed to stave off the potential, if not likely, collapse of one or more of the collaborators. With analysts putting the predicted losses of the three during the current financial year at between $180 million and $360 million the deal should also please one or more of the new partners’ bankers. The joint statement issued by the companies sums up the current state of the box industry quite succinctly saying:

”Although growing modestly, the container shipping industry has struggled in recent years due to a decline in the container growth rate and the rapid influx of newly built vessels. These two factors have contributed to an imbalance of supply and demand which has destabilized the industry and has created an environment that is adverse to container line profitability. In order to combat these factors, industry participants have sought to gain scale merit through mergers and acquisitions and consequently the structure of the industry is changing through consolidation.”

Changing structure is exactly right, in the past months we have seen Hapag Lloyd and UASC tie the knot whilst CMA CGM swallowed NOL and the two major Chinese carriers, COSCO and China Shipping merge, not to mention the host of vessel sharing agreements and alliances, including the OCEAN Alliance in which the Japanese lines (and latterly Hanjin) are three of the partners. This latest deal is as a direct result of the financial squeeze on the box carriers, many of whom misread the signs as to the short term future of world trade. When the biggest carrier, Maersk, launched plans for its super-sized Triple E series in 2011 most other box lines followed instantly, swamping the market with overcapacity.

Predictions for future trade are always a minefield for analysts and, if the bulk of the latest predictions are to be believed, the Maersk move was the right one, but perhaps a decade too soon, cold comfort for the NOL, K Line and NYK shareholders. The value of the reformed Japanese fleet will be around $2.8 billon with annual box operation revenues of circa $19 billion and estimates say the new company will make savings of up to $900 million to $1.1 billion annually, something which will doubtless mean a shedload of redundancies across the three operators.

This is not a deal made for profit, it has been spawned by the need to consolidate three previously successful ventures into a world ranked carrier with 7% or so of all container trade carried on its vessels. The pain however is likely not over yet as the new conglomerates struggle to come to terms with the fact there are too many ships and not enough cargo – as yet. Now eyes turn to Taiwan to see if that country's big players, Evergreen, Yang Ming and Wan Hai look for a similar solution to their own problems as that of their Japanes competitors.