NOL

Shipping / NOL: More competition ahead for the smaller players, after the three largest container shipping lines in the world Maersk Line, Mediterranean Shipping and CMA CGM, announced plans to set up an operational alliance called the P3 network on the three busiest trade routes of the Asia-Europe, trans-Pacific and transatlantic routes. The three groups, which combined operate about 37% of global container capacity are seeking regulatory approval and aims to start operating in 2Q14 with an initial capacity of 255 vessels, or 2.6m 20-foot equivalent units (TEU). The move underlines how badly the industry is struggling with overcapacity and volatile rates, which have fallen by as much as 70% in the past 12 mths. Drewry research note that the tie-up should get the green light from regulators as there are still more than 15 competing carriers on most trade routes and the combination of Maersk/MSC/CMA CGM in an operating alliance will not damage competition. The top three European liners together account for 45% and 23% market share in Asia-Europe and Transpacific route, respectively. They already have a significant advantage over their peers in terms of average vessel size, particularly in the Transpacific route (32% higher than peers). CMA-CGM and Maersk reported much-stronger results in 1Q13 vs peers. HSBC note that in theory, the aim of such an alliance is to reduce the operating costs in the industry. Note however that one of the liners house spoke with remains of the view that these European liners will take this opportunity to consolidate the main-lane trade and push inefficient, weaker liners out of the business. JP Morgan conclude that the P3 alliance would be the market leader, with 45.0% capacity share, way ahead of CKYH (Cosco, K Line, Yang Ming, Hanjin) alliance’s 17.4% and G6 alliance’s 19.2% (Grand Alliance’s 10.7% comprising Hapag-Lloyd, OOIL, NYK + New World Alliance’s 8.5% comprising NOL, Mitsui OSK, HMM). The flipside is that the alliance could crowd out the smaller players given the cost advantage of their larger-sized vessels, which would be negative for the Asian liners. This could force proper consolidation through alliances and/or M&A. House Stay cautious and stick with quality names: Top picks are Evergreen Marine and OOIL, which have lower exposure to Asia-Europe trade, stronger balance sheets and attractive valuations. Asian liners with the largest capacity exposure to Asia-Europe are CSCL, K-Line, Hanjin, HMM and Yang Ming, while the least exposed are SITC, Wan Hai, MOL, NOL and OOIL.