Top three operators say they will combine container businesses to fight global slump

By Alexander Martin and Costas Paris

TOKYO -- Japan's three largest shipping companies said Monday they would merge their container-shipping operations to create the world's sixth-largest competitor in an effort to cope with a global decline in the container business.

Nippon Yusen K.K., Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd., Japan's top three shipping companies in terms of revenue, said they agreed to form a joint venture that they estimated would save them a combined total of Yen110 billion, or $1.05 billion, annually through synergies.

The downturn has led to an increasing number of alliances and moves toward consolidation in the industry, while also leading to the bankruptcy of a global ocean carrier. In late August, South Korea's Hanjin Shipping Co., one of the world's largest shipping lines, filed for bankruptcy protection, sending shock waves through the global supply chain.

The three Japanese shipping companies said they plan to put Yen300 billion into creating the joint venture, including the value of ships and terminals that will be transferred to the venture. They said the combined operation would hold a 7% global market share. They plan to establish the company in July and start operating from April 2018.

Shipping executives said the merger didn't come as a surprise, given that the world's 20 biggest container operators are in the midst of a wave of consolidation. Over the past two years China's two shipping giants, Cosco Group and China Shipping Group, merged their operations; France's CMA CGM, the world's third-biggest container operator, bought Singapore's Neptune Orient Lines Ltd.; and Germany's Hapag-Lloyd AG merged with Dubai-based United Arab Shipping Co.

Container ships move 98% of the world's manufactured goods, from iPhones and toys to designer dresses and heavy machinery. But a glut of shipping capacity in the water, estimated at 30% above demand, has pushed freight rates to levels barely covering fuel, driving most operators deeply into the red.

"It's another example of consolidation in a distressed market, which makes economic sense and checks several boxes, including accommodating the shipping concerns of a major exporting economy," said Basil Karatzas, of Karatzas Marine Advisors & Co., based in New York. "But the market still remains oversupplied and still fragmented."

Added Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting: "The pressure on smaller lines is tremendous. They have been losing money for years and at some point you will either go belly up or be swallowed up by a bigger fish."

Mr. Jensen expects the world's 20 biggest container operators to post losses totaling between $8 billion and $10 billion this year.

Most of those companies were deeply in the red in the second quarter.

Shipping executives say Orient Overseas Container Line Ltd. of Hong Kong and Yang Ming Marine Transport Corp. of Taiwan will likely be in the crosshairs of bigger competitors in coming months.

News of the Japanese combination sent share prices of the three companies up, even though all released weak earnings results on Monday.

Nippon Yusen and Kawasaki Kisen both reported operating and net losses for the April-September period, while Mitsui O.S.K. reduced its forecast for the year ending in March. Mitsui O.S.K. now expects a net profit of Yen7 billion for the year, compared with an earlier forecast for a net profit of Yen15 billion.

Nippon Yusen finished trading in Tokyo up 6.4% on Monday, while Mitsui O.S.K. ended up 5.6% and Kawasaki Kisen closed up 0.4%.

Under the plan, Japan's largest shipping company in revenue terms, Nippon Yusen, would hold a 38% stake in the joint venture. No. 2 Mitsui O.S.K. and No. 3 Kawasaki Kisen would each have a 31% stake.

Investment firm Jefferies said in a research report on Monday that it retains a negative outlook on the shipping industry, adding that the lengthy timetable for consolidation of the Japanese carriers means the merger "is unlikely to change sector fundamentals" in the near term.

Jefferies expects the supply of new ships to continue outpacing demand in 2017, with net capacity growth of 5.1%.

Write to Alexander Martin at alexander.martin@wsj.com and Costas Paris at costas.paris@wsj.com

(END) Dow Jones Newswires

November 01, 2016 02:48 ET (06:48 GMT)

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