Patrik Berglund, Author at Global Trade Magazine

“In 2016, most probably, none of the 20 top companies will be profitable, consolidation will continue because small shipping lines will not be able to survive; the small to medium operators will be looking for a big brother to acquire them,” said Vice Chairman for CMA CGM, Rodolphe Saadé.

Indeed, CMA CGM has followed suit this year and reported a financial loss of over $260 million for third quarter with average revenue per TEU down 13.9 percent excluding NOL’s contribution. Plus, it made its largest acquisition to date by acquiring Neptune Orient Lines (NOL) and also signed up as a member of the Ocean Alliance. Has it bitten off more than it can chew?

NOL Acquisition

2016 has proven to be a busy year for the French carrier as it works to integrate NOL and trim costs. As part of the acquisition, CMA CGM agreed to move about one-third of its traffic from the Klang port in Malaysia to Singapore and has also moved its regional headquarters from Hong Kong to Singapore.

In addition, CMA CGM and PSA Singapore Terminals have formed a joint venture to operate and use four container berths at Pasir Panjang Terminal Phases 3 and 4. Estimated handling capacity of three-million TEUs annually, the facilities will be used as dedicated container terminal for the group and its shipping affiliates in the region.

There were rumors that CMA CGM could have been a potential buyer for Germany’s Hamburg Süd. Now, that it is confirmed that Maersk Line will be the proud owner of Hamburg Süd, that could actually be a blessing for CMA as it is working hard to make the NOL acquisition a smooth and positive one.

Trimming the Fat

Since the finalization of the NOL acquisition in June, CMA CGM’s focus has been to turn the loss-making NOL around with plans to sell $1 billion in assets to strengthen the balance sheet. As such, CMA CGM announced it would sell its APL container terminals. As of the first of November, first-round bids remain outstanding. Furthermore, details of the terminals for sale have not officially been released either. But, APL owns terminals in Los Angeles, California; Dutch Harbor, Alaska; Kobe, Japan; Yokohama, Japan; and Kaohsiung, Taiwan. Even though the sale of APL’s terminals is officially a strategic move to reduce debt, it is also reflects the company’s involvement in the newly established Ocean Alliance, which means the shipping line will be able to reduce route redundancies and therefore diminish the need for owning as many terminals.

Another cost-cutting measure is its outsourcing some of its global feeder operations. As of September 16, CMA CGM cut its fleet of ships between 600 to 1,750 TEUs from 171 to 133 units in the past six weeks as it shifts certain feeder services to third parties. Beneficiaries include specialist feeder lines such as X-Press Feeders, Unifeeder and Unimed Feeder Services which are chartering ships to handle the French carrier’s cargo.

Ocean Alliance

In April, the CMA CGM Group, COSCO Container Lines, Evergreen Line and Orient Overseas Container Line announced the formation of a new alliance. In general, by entering into alliances companies can cut operational costs. This alliance will have the largest market share on the Asia-Europe lane with 35 percent and 38.9 percent market share on the Asia-North America route.

CMA CGM is considered the main contributor to this alliance. It will have the largest share within the alliance, deploying a fleet of 119 vessels with a 35 percent capacity share. Having received approval from U.S. regulators, the members announced their proposed network in November.

Together, the partners will operate 40 services on the east-west trades, with around 100 ports of call and almost 500 port pairs. The alliance will be supported by nearly 350 vessels with about 3.5 million TEUs in total capacity.

The Outlook

Saadé seems to have written off 2016 as he looks forward to improving market conditions in 2017. Rates do appear to be trending upward as capacity continues to be removed. As such, many carriers are cautiously optimistic for the new year and in particular have set high expectations for the launch of the alliances in Spring 2017.

Patrik Berglund is CEO of Xeneta, a company which provides a database of ocean freight rates.

We’re a few business days past the Hanjin bankruptcy and the shipping market has changed 180 degrees. The ramifications extend far beyond the dry legal negotiations of the courtroom; we’re now looking at drastically reduced retail inventories for the Christmas season which affect the amount of retail sales hiring, and subsequent corporate profits. South Korea is equally affected, as the thousands of containers carrying (not now!) electronic products from Samsung and LG will affect the country’s trade balance and foreign exchange reserves.

Three Hanjin ships are reported arrested (in Long Beach, Shanghai and Singapore), with another 44 of their 98 vessels refused entry at ports worldwide (including such major ports as Shanghai, Hamburg, Long Beach, and Sydney), putting forwarders, manufacturers, and traders at risk for their cargoes, while 36 percent to 51 percent spikes in ocean freight rates promise record losses once their containers are located, released, and eventually re-shipped.

These are serious issues. With 540,000+ TEU’s worth of cargo either shipped or loaded-to-be-shipped for the upcoming Christmas holiday season, no retailer who stocks Korean, Chinese, or products of any country serviced by the CKHYE alliance, of which Hanjin was a member and who might be carrying Hanjin boxes, knows when these boxes might be released to the consignees. However, it seems that Hanjin’s parent company is looking to step in and remedy any way possible to unload these containers to minimize the damage to exporters and importers. That said, no one knows when these boxes might be released to the consignees and what will be the extra costs for companies of getting Christmas-oriented items delivered during the February-March-April time period.

Not a Surprising Demise

The demise of a major carrier was no surprise. Three years of dropping ocean freight rates resulted in losses estimated in the $16 billion range. With the majority of the carriers except Maersk and Hapag-Lloyd not regularly offering financial results, one must look at the forced Cosco-CSCL merger, the Zim restructuring, or the rapidly-arranged Hapag-UASC merger to understand the severity of the bleeding.

The carriers also bear some responsibility for Hanjin’s demise. While Maersk’s Triple was an important step in the evolution of container ships, Maersk had both the customers and the financing to make them financially viable. However with UASC and others quickly engaging to also follow suit, there are now 104 megaships in-service or due to be delivered in the next 18 months—and the Chinese economy collapsed in 2014 to 2015.

Let’s not forget Hanjin leased the majority of their containers. As Hanjin defaulted on its vessel contracts ($18.6 million to Seaspan), the likelihood is the debt for these containers will be litigated before the containers—and their cargoes—are released.

For all this to happen in a world economy as thinly-balanced as today’s, these consequences have the potential to be catastrophic. Let’s see how things unfold.

Patrik Berglund is CEO of Xeneta, a company which provides a database of ocean freight rates.

CMA CGM: Has the NOL Acquisition Come at a Heavy Price?

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