Wednesday, November 30, 2011

Will the Maersk gambit succeed in gaining pricing power over the Asia-Europe head haul container route?

Whilst volume on the Asia-Europe container route is dropping off and competitors are struggling, Maersk is doubling up its efforts to dominate this trade in coming years by placing new building orders for large E class (15.000 TEU) and triple E class (18.000 TEU) ships. Maersk is highly dependent on its container division with almost 40% of its total volume carried coming from Asia-Europe trade. Its strategy is to benefit from better supply-demand fundamentals in late 2012 and into 2013.

Container shipping is increasingly a game of larger vessels with an emphasis on lowering slot costs. The one who has the lowest cost structure is able to garner higher volumes by out-pricing competition.

Maersk Line is the world’s largest container line. At the end of H1 2011 it controlled more than 600 vessels – 245 owned and 376 chartered container vessels – with a total capacity of 2.4m TEU. It also operates a major global port, terminal and inland services business – APM Terminals - operating a geographically diverse portfolio of 61 ports and terminals in 33 countries. It has 16 new terminal development or expansion projects underway and 132 inland services locations in 48 countries.

In the container shipping downturn of 2008-09, Maersk carried out a major restructuring drive in its container shipping division. The goal was to target more than $1 billion in cost savings to provide better operating efficiencies and minimize losses. Reduction and stabilization in unit cost is the key operating matrix in the container industry.

Maersk’s major competitors are Neptune Orient Lines (NOL), Hapag Lloyd and OOIL. Each has more than 7% of the greater than 12,000 TEU orderbook and stand to benefit as they are able to lower the slot costs and improve margins even if freight rates are just seen improving marginally. Maersk has the largest share at 13% whereas the each of competitors holds a 7% share. NOL, presently under pressure of earnings losses, is struggling with a very large capex budget and may be obliged to postpone some new buildings.

The second largest player, MSC, is more or less absent in the larger vessel category, which will help Maersk extend its lead further in coming years.

Hanjin Shipping, Hyundai Merchant Marine (HMM) and CMA CGM are highly leveraged. The two Korean line (Hanjin and HMM) have a gearing of three and two-times debt to equity, respectively. In Europe, the focus is on CMA CGM, which bond-market pundits expect to breach its debt covenants in the near future. It is undergoing considerable debt restructuring.

The long haul market will increasingly be dominated by fewer players with stronger standing and prowess, even in a depressed freight rate environment with very large containerships and low unit costs. The smaller peer operators do not have enough large vessels on order and will have to stick with smaller and less competitive tonnage or pull out of the trades completely.

Maersk Line is making an open gambit to gain the pre-eminent position on the Asia-Europe trade beginning in late 2012. It could out-price competitors and even potentially become a price setter on these trades.

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