Transportation & Logistics Analysis

Top three shipping companies end the year under pressure

December 03 2019

New management for the Maersk/MSC alliance partners, the sale of port terminal holdings for CMA CGM. Container shipping has been given a heavy weather warning. The European Commission, meanwhile, has come to the companies’ rescue by proposing to extend the consortia block exemption regulation.

“What’s going on…”, went the Marvin Gaye song in 1971. The title could not be more appropriate to talk about the current situation in the container shipping line sector…Maersk, MSC and CMA CGM are under particularly heavy pressure in this end-of-year period. The sector’s big three are facing major challenges as they close their accounts for the year, some of which they share. They have high liquidity needs to meet the requirement of the IMO 2020 sulphur cap and their operating results are below expectation, except in the trans-Atlantic trade, which, on the transport side, was the only happy surprise in 2019.

Extension of the block exemption

Against this stormy background, the European Commission has come to the rescue of the shipping companies by offering to extend the block exemption for four more years starting in April 2020. But it was met immediately with a sharp, “Atlantist” riposte from shippers and forwarders. With a unanimity which was sufficiently rare as to warrant attention being drawn to it, Americans and Canadians joined their opposite numbers in Europe in rejecting the extension in its existing form.

Under pressure, the commission has been forced to re-open talks on the subject for a month to clarify the situation and decide how to proceed. In practice, however, Brussels has rarely gone back on a ruling of this sort. The affair is ongoing, therefore, even if a reaffirmation of the current position is the most likely outcome.

In any case, a temporary extension of the exemption seems to be the least bad solution to safeguard the interests of market operators both in the West and Asia. It would be an illusion, particularly now with China openly in conquest mode, to believe that progress can be made in resolving this problem without it having an impact on states’ national sovereignty. Whether we like it or not, states are playing a role in the governance of the giant shipping groups.

A strategic issue

Behind this debate is the major issue of how, in the years to come, to maintain a geopolitical, economic and strategic balance among the different forces in presence in global maritime trade.

The East/West balance must necessarily remain “acceptable” to avoid any further weakening of the existing status quo, which is tested daily by numerous micro shocks of different varieties (Hormuz, Djibouti, Hong Kong, Iran, Iraq, the Kurds in Syria, Russia’s position on the Artic shipping route and, shortly, Taiwan, where elections are due to take place in January).

From this point of view, it is easier to understand the move towards closer governance links between Maersk and MSC, which are already partners in the 2M alliance. The extension of the block exemption for four more years corresponds – by happy coincidence! – to the end of the existing 10-year contract tying the two market leaders together in 2M. The bitterest “pill” to swallow remains the definition of what is an acceptable limit on market share. Brussels fixed the limit at 30%. Excluding Hyundai, which is shortly due to join The Alliance, 2M’s market share will automatically come close to 30%.

CMA CGM is looking to free up close to $2 billion

What the market did not need, against the background of this sudden and unexpected instability within 2M, is for CMA CGM, the third-ranking company on the market, to start to have difficulties as well. As CMA CGM said in its third quarter financial results presentation, “…the significant investments made to transform CEVA Logistics are also weighing on margins in the short term”.

CMA CGM is looking to free up close to $2 billion, of which $860 million from ships sales and leasebacks and $968 million from the sale of its holdings in 10 of the 13 terminals owned by Terminal Link.

Should the French state intervene? Will it allow China to gradually take control of France’s leading shipping company and part of its terminals? If such is the case, we will be witnessing the collapse of a certain idea of France’s role on the world stage. It would be a high price to pay, in my view, for the CMA CGM/Ceva Logistics one-stop-shop, the economic case for which has not yet been made. The precedent set by Maersk and Damco did not give decisive proof of its pertinence to the market, according to the analysts.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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