Shipping Alliance Set to Make Waves; Maersk and Two Other Container Shippers Aim to Cuts Costs Amid Overcapacity

Shipping Alliance Set to Make Waves

Maersk and Two Other Container Shippers Aim to Cuts Costs Amid Overcapacity

COSTAS PARIS

March 21, 2014 3:40 p.m. ET

LONDON—After sailing past U.S. regulators, a major shipping alliance is on course to roil the global container business, by reducing costs for the world’s biggest operators, while squeezing smaller shippers.

Denmark’s A.P. Moeller-Maersk‘s MAERSK-B.KO +1.23% Maersk Line, France’s CMA-CGM and Swiss-based Mediterranean Shipping Co.—the world’s three biggest container-shipping companies by capacity—won approval for their proposed P3 Alliance from the U.S. Federal Maritime Commission late Thursday. European and Chinese regulators still have to sign off, but executives viewed the U.S. regulatory review as the alliance’s biggest obstacle. The three partners say they want to start operating the alliance this year.

If approved, industry executives estimate the three companies will control up to 40% of total cargo moved in containers from Asia to Europe, and across the Pacific and Atlantic oceans. Stopping short of a full-blown merger, the shippers agreed to jointly deploy 255 vessels between the three of them, sharing capacity of 2.6 million containers along some of the world’s busiest sea routes.

Akin to a code-sharing deal between airlines, the alliance will allow the three to cut costs by using each other’s ships and port facilities. It will also play on each shipper’s geographic strengths to move cargo faster and more cheaply.

Analysts at Macquarie Research estimate Maersk Line alone is expected to cut its costs by $1 billion annually along the Asia-to-Europe trade route because of the new network’s efficiencies.

Though such alliances are not new, smaller shipping companies, cargo forwarders and fuel suppliers have pressed regulators to rule against this much larger combination, worried they will lose leverage when negotiating their rates.

“The P3 is very close to being a monopoly,” said John Lu, chairman of the Asian Shippers Forum, which represents Asia’s biggest cargo owners and forwarders. “Such a concentration of capacity is untenable.”

The U.S. maritime commission, in its statement approving the deal, said it had determined the alliance isn’t likely “at this time, by a reduction in competition, to produce an unreasonable increase in transportation cost or an unreasonable reduction in transportation service.”

The container-shipping industry has been plagued by overcapacity after record orders of new vessels in 2007, just before the financial crisis slammed global trade. Freight rates between Asia and Europe have fallen nearly 50% since the beginning of the year. Still, stubbornly high fuel prices have increased demand for bigger and more fuel-efficient designs, adding ships in an already glutted market.

Analysts estimate that capacity in the sector is currently 22% above demand. Amid those conditions, “it will be difficult for other alliances to match the efficiencies of the P3, so it could be a game-changer in the shipping industry,” said Lars Jensen, chief executive of Copenhagen-based SeaIntel Maritime Analysis. “Over the next five years, we could see a wave of consolidation, which nobody wants but will no longer be able to resist.”

Big mergers are rare in the container-shipping industry, which moves 95% of all manufactured goods. The industry is dominated by closely held firms controlled by families or sovereign-wealth funds, typically better equipped than publicly traded firms to endure years of losses during long down cycles. Nonetheless, some first steps toward consolidation are under way.

Germany’s Hapag-Lloyd is in advanced merger talks with Chilean peer Compania Sud Americana de Vapores SA VAPORES.SN -2.88% . The deal is expected to be sealed by late April, people involved in the talks said. If successful, the combined entity will become the world’s fourth-biggest container shipper in terms of capacity, behind the P3 partners.

“The Hapag-Lloyd-CSAV marriage was partly prompted by the expected dominance of the P3,” said Jonathan Roach, senior container analyst at London-based Braemar Seascope. Executives from both companies, while not specifically citing the P3, said their proposed merger would allow them to compete more effectively.

The P3 partners will share ships and facilities in some of the busiest ports on some of the world’s biggest trade loops: from Shanghai to Rotterdam in the Netherlands and Bremerhaven in Germany; trans-Atlantic routes from Newark, Norfolk and Baltimore in the U.S. to Rotterdam and Felixstowe in the U.K.; and in the Pacific, from Shanghai and Dalian in China to Los Angeles, Oakland and Seattle.

The partnership will also have the world’s biggest, most-efficient vessels at its disposal. Maersk Line recently spent $3.7 billion ordering 20 “Triple-Es,” ships with the capacity to carry 18,000 containers. The giant ships, consume 35% less fuel on average than other ships in the company’s current fleet.

Brussels and Beijing officials are expected to complete their own review of the P3 alliance by the middle of the year. Officials there have been awaiting a ruling from the U.S. before they weighed in, but were inclined to approve the deal if Washington didn’t raise objections, according to officials involved in those deliberations.