No Obvious Benefits to Maersk and MSC, Drewry Says

Have all the major ocean container carriers finally found their seats as the music stops?

In mid-May, most thought the game of container shipping alliance musical chairs was about over with the announcement of "THE Alliance," formed by the Japanese trio of Nippon Yusen, Kawasaki Kisen Kaisha, and Mitsui O.S.K. Lines; Germany's Hapag-Lloyd; South Korea's Hanjin Shipping Co.; and Taiwan's Yang Ming Marine Transport.

Supply Chain Digest Says... Drewry notes "that "On the face of it, a 2M/HMM alliance would seem to have more value to HMM than to Maersk and MSC." What do you say? Click here to send us your comments Click here to see reader feedback

That latest alliance - in which a group of carriers agree to pool shipping assets while maintaining separate sales, pricing and marketing operations - was necessitated by the formation just a few weeks previously of the "Ocean Alliance," made up of France's CMA CGM, newly merged China Cosco Shipping, Evergreen and OOCL. That moved busted up three existing alliances, and left eight "orphans" - major carriers without an alliance - when adding in the M2 alliance involving the two largest container carriers, Maersk and MSC, which started in early 2015.

When THE Alliance was announced, combining most of the orphan carriers, most expected that financially troubled Hyundai Merchant Marine would later considered for membership if and when it could sort out its problems through a debt restructuring.

But instead, Hyundai has decided to throws its lot as the third carrier in the 2M alliance.

The carrier said in a statement that with this "announcement, HMM has successfully completed all conditions set out in the voluntary agreement with creditors from March 2016," adding that "in accordance with the completion of such preconditions, the planned debt-for-equity swap by creditors will be executed as planned."

HMM claimed that its financial structure will be significantly improved upon completion of the debt-for-equity swap.

The move will still have to be approved by various regulatory agencies in leading countries, but that is not expected to be an issue.

Part of HMM's financial troubles have come from the fact that it leases 83 of its 116 total ships. As container shipping prices have plummeted, Hyundai is paying far more in leases than it is bringing in from shippers, leading to heavy losses. It has lost money every year starting in 2011.

Last month, Hyundai obtained an agreement from foreign containership owners to slash charter rates over the next three and a half years by about 20%. The company has been paying close to $1 billion a year in charter fees recently.

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The 2M alliance already controls about one-third of the Asia-Europe trade route. The move will grow the share of business coming out of South Korea controlled by the 2M group. HMM is the second-biggest mover of goods between South Korea and the US, following fellow Korean carrier, Hanjin Shipping. HMM shipped roughly 14.5% of Korean imports and 18% of US exports to Korea in the first five months of 2016.

2M will gain from HMM's knowledge of the Asia market and a stronger trans-Pacific network, experts say.

But not all observers see the merit of the new arrangement.

"Both Maersk and MSC already have extensive liner service networks in South Korea; HMM's services would not appear to add anything to the 2M alliance, other than a bit more scale," commented the analyst at Drewry Shipping earlier upon rumors of the move. "The Korean line would very much be the junior partner to these two European heavyweights who have operating boxship fleets of roughly eight times as large."

It added that "On the face of it, a 2M/HMM alliance would seem to have more value to HMM than to Maersk and MSC."

But Drewry says there could be other factors at play. For example, has the Korean government, concerned for its ailing shipping and shipbuilding industries, called upon the 2M carriers to ride in and rescue HMM in return for favorable shipbuilding contracts or banks loans?

Another possibility, Drewry says, is that Maersk's aim is not actually having HMM as a junior alliance partner, but rather to prepare to acquire it or joint venture with it down the road, as it has done before other acquisitions, such as that of Sea-Land.

Regardless, Drewry notes that "What is clear is that the 2M carriers would not enter into something they didn't think would benefit them in some way."

As for shippers, assuming this move by Hyundai gains regulatory approval, the alliance situation should be settled now for quite some time.

Do all these alliance moves have much impact on shippers in the end? Are we done with all this for awhile now? Let us know your thoughts at the Feedback section below.

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