France’s CMA CGM Tipped as Favorite in Neptune Orient Lines Bid

Any acquisition of Neptune Orient Lines (NOL), regardless of whether the buyer is CMA CGM SA (CMA) or A.P. Moller-Maersk A/S (Maersk), another potential party, will likely be a huge positive for the embattled shipping company, which has sold its headquarters building in recent years and spun off a logistics business to raise capital and endure what has turned out to be a protracted slowdown in the shipping sector.

As reported by the WSJ, CMA CGM SA is emerging as an early favorite to buy Singapore’s Neptune Orient Lines Ltd., according to people familiar with the negotiations, in what would be one of the biggest tie-ups between container shipping lines in recent years.

An acquisition of the $1.9 billion shipping company, which handles about 3% of global container volumes, would be the latest move among the world’s biggest container-shipping firms to cope with a downturn. CMA CGM’s main competition for NOL is A.P. Moller-Maersk A/S, the world’s largest container line by volume.

Drewry Shipping Consultants Limited (Drewry) is more pessimistic and says that an acquisition of Singapore-based NOL by CMA CGM or A.P. Moeller-Maersk A/S (Maersk) would likely not be a financially advantageous move for either company.

“In a rational world, neither A.P. Moller–Maersk or CMA CGM should put their balance sheet at risk in buying NOL at a time when container shipping is expected to stay challenging for the next three years”

Drewry says that it remains firm on its financial assessment of NOL, explaining that “the company lost another $66 million in Core EBIT in the third quarter and is on course for five-year operational losses from its liner division of over $1.1 billion.”

However, Drewry admits it had misjudged the willingness of shipping industry suitors to pass on the opportunity to acquire their competition at a potentially reduced price.

“Any deal will be motivated by opportunity rather than logic,” reasons Drewry, who believes that, of the two, “CMA CGM is the better fit, but Maersk has the deeper-pockets.”

The two container giants are aware of the “big risks attached to any takeover” and are unlikely to enter into a bidding war.

As a result, NOL’s owners, Temasek Holdings Private Limited (Temasek), may have to settle on a lower price that it might otherwise expect if it wants to push through a sale.

Ocean Cargo Carriers Face Rising Costs
This forecast comes at a time when supply chain managers are concerned about further consolidation in the industry.

The cost of operating cargo ships is forecast to rise over the next two years after falling in 2015, according to the latest Ship Operating Costs Annual Review and Forecast 2015/16 report published by global shipping consultancy Drewry.

Nigel Gardiner, Managing Director at Drewry

“When markets improve we expect some ‘catching up’ to take place”Nigel Gardiner, Managing Director, Drewry

This forecast comes at a time when supply chain managers are concerned about further consolidation in the industry. As reported in SCMR recently, ocean carriers are facing a variety of over-capacity issues.

Also, several carriers are in various stages of talks aimed at consolidation, including NOL with both Maersk Line and CMA CGM, Cosco and China Shipping Container Lines, and Hanjin and Hyundai Merchant Marine.

Meanwhile, the average decline in ship operating costs across the sectors covered in the report in 2015 was 1.0 percent, but for ships that are big consumers of lube oils, the decline in overall costs was closer to 2 percent. Weak freight markets have forced ship owners to trim costs, while they have also been able to take advantage of falling commodity prices and lower insurance rates.

According to Nigel Gardiner, Managing Director at Drewry, operating costs are likely to rise in the future, as the scope for further cost cutting is in most cases quite limited.

“However, the expected increases in 2016 and 2017 are likely to be modest in nature as we anticipate only small rises in the cost of lube oils and other commodities, with a relatively weak global economy inflation is also expected to remain low”

Modest increases in manning costs are in the pipeline given the uplifts that have been agreed in International Transport Workers’ Federation (ITF) wage scales for 2016 and 2017. If freight markets improve hull values for modern vessels will rise and this should lead to higher hull and machinery (H&M) premiums, but only small rises are expected in 2016 and 2017, contend Drewry analysts.

“Over the past few years of low economic growth, expenditure on repairs and maintenance (R&M) has for many owners been cut back and when markets improve we expect some “catching up” to take place,” adds Gardiner.

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