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Dec.14, 2015

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TRADING PLACES 62 THE JOURNAL OF COMMERCE Peter Tirschwell DECEMBER 14.2015 CONSOLIDATION WON'T DENT COMPETITION IF CMA CGM acquires NOL and its APL brand, the new entity could be the new market leader in the eastbound trans-Pacific trade, the latest jolt to this market, which this year absorbed the frontal assault of a longshore labor meltdown. NOL and its largest shareholder, Temasek-controlled Lentor Invest- ments, granted the Marseille-based carrier exclusivity until midnight Dec. 7 to complete due diligence and negotiate a transaction. Whether a deal acceptable to Temasek, which is controlled by the Singapore government, is achievable will be known soon enough. The APL brand isn't what it used to be, in large part because its style of premium service to retailers no longer could command a premium price in the commoditized market that container shipping has become. The 2013 demise of the APL 53-foot ocean container, which it thought could command a premium among retail shippers, sums up how the market went against everything APL stood for. The combined APL-CMA CGM market share of laden contain- ers in the eastbound trans-Pacific through the first nine months of 2015 was 6.45 percent, derived from APL's 2.82 percent and CMA CGM's 3.93 percent, according to PIERS, a sister product of The Journal of Commerce within IHS. That would outrank the current top market sha re holder, Everg reen, wit h 5.55 percent during the same period, a nd the second-la rgest player, Maersk Line, with 4.11 percent. A combined CMA CGM and APL would top a merger of Cosco and China Shipping whose trans- Pacific eastbound share would be 6.07 percent. CMA CGM would end up as the market leader, of course, only by holding on to much of APL's market share, which is uncertain at best. Competing carriers are aggres- sively courting the APL customer base, according to sources at some of those carriers, attempting to play on the uncertainty associated with the future of the storied trans-Pacific carrier, especially if a deal with CMA CGM goes through and it gets absorbed in a complex, potentially time- and resource-consuming integration. APL's market share already had fallen from 3.36 percent in the first nine months of 2014. Given the track record of prior integrations, some of which have been relatively smooth while others have been disasters, those fears aren't hard to play upon, especially because the market is so competitive that there is no premium to be paid for such risk avoidance. CMA CGM-APL would be the largest consolidation in container shipping history based on the capac- ity of the targeted carrier, according to research analyst Alphaliner. APL operates a f leet with capac- ity of 541,000 20-foot-equivalent container units, compared with 460,000 TEUs operated by P&O Nedlloyd when Maersk acquired it in 2005, according to Alphaliner. Should a deal go through, the market would be affected, but by how much is an open question in the near term. Even if CMA CGM were to maintain APL's market share, the market share leader having 6.45 percent still means the trade would remain highly fragmented, much more so than container ship- ping worldwide. Consider that on a capacity- deployed basis worldwide, Maersk as the la rgest ca rrier controls 14.7 percent and Mediterranean Shipping Co. controls 13.3 percent. That isn't an apples-to-apples com- parison to actual market share in cargo carried, but the numbers are so vastly different as to underscore the uniquely competitive landscape of the trans-Pacific. Price competition has driven spot rates in the eastbound and westbound trans-Pacific to historic lows in recent weeks; the SCFI to the West Coast stood at $922 per 40-foot container in late Novem - ber, but some informed sources were saying the actual rate was $850. The competitive landscape would hardly be changed. The reality of the trans- Pacific is that ships are still relatively small — 44 percent of vessels in the market were still less than 7,500 TEUs as of October, according to Alphaliner — and most of these will be replaced by larger ships cascaded from Asia-Europe. That will only strengthen the hand of importers who, by virtue of the annual contracting structure and direct shipper-carrier nego- tiations that set pricing levels, will take full advantage in ensuring rates remain competitive. Despite the bloodshed in the trans-Pacific, CMA CGM would gain in two distinct ways from an APL acquisition. The APL Eagle Marine terminal in Los Angeles is a prize that would allow CMA CGM to reassure shippers that it exercises control over the terminal piece of the supply chain. At a time of mega- ships, cargo surges and delays, that's no small advantage. An acquisition also would add to the company's scale. Maersk has shown how scale can drive cost reductions, which is where true competitive advantage in the indus- try is found today. JOC Contact Peter Tirschwell at and follow him on Twitter: @petertirschwell.

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