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May16, 2016

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12 THE JOURNAL OF COMMERCE MAY 16.2016 COVER STORY is being acquired by CMA CGM, and China Shipping, which merged with Cosco in Feb- ruary to create China Cosco Shipping. The 2M controls 33.4 percent of the Asia- Europe trade and 15.6 percent of trans-Pacific trade, according to Alphaliner. The regulatory outlook for the Ocean Alliance is bright, considering only one major vessel-sharing agreement has been rejected, and that came when China nixed a tie-up of the top three global container lines, which the U.S. and European Union had approved. U.S., Chinese and European regulators will zero in on the Ocean Alli- ance's market share in major east-west lanes to determine whether the partnership could reduce competition. Reg ulators, however, will consider more than just market share in determin- ing whether to approve or reject the alliance. Because U.S. regulators consider whether alliances could cause an unreasonable decrease in service, the impact the alliance will have on port congestion will be one of the many factors the U.S. Federal Maritime Commission considers. Although they coop- erate operationally, alliance members still compete on price and are forbidden to mar- ket services together. Container lines whose place in alliances are certain "may temporarily benefit from any customer apprehension over those in limbo, but if this does occur, it will only be a brief side-benefit," London-based research and consulting firm Drewry said in a recent Container Insight Weekly. For now, shippers are taking a longer- term view, knowing that any major impact won't come until next year. "With its stated startup time of early 2017, there may not be an immediate consequence for the current round" of trans-Pacific contract nego- tiations, said Jennifer Hedrick, executive director of the National Industrial Trans- portation League, the United States' largest shipper group. "Going forward, an individ- ual shipper will likely see a change in some schedules, port pair alignments and the lineup of carriers offering service." The alliances enable carriers to use the latest generation of massive container ships in the most effective way, while reducing the slot costs. With global trade growing at middling rates, with freight pricing in the basement and with virtually all carriers losing money, however, those efficiencies clearly haven't protected carriers. What alli- ances have done is helped to keep smaller carriers afloat, an important outcome for shippers who value competition and options among service providers. "Essentially, we know the carriers need to form these alliances to survive the current climate, however, today with four big alliances it really means we have four choices as to how we move our goods. We will have to see what comes out of the wash, and if it results in fewer, bigger alli- ances, then that means fewer choices for us," a major U.K. retailer told The Journal of Commerce. The NITL has generally supported the pacts as long as they don't hurt competi- tion on service and price. Other shippers have been less sanguine. "The blurred lines in carrier accountability hurts, especially when it comes to visibility, EDI (electronic data interchange) compliance, EDI normal- ization, timely response to booking requests, normalized vessel string sizing, etc.," a transportation executive for a major global retailer told The Journal of Commerce. How the eight container lines orphaned by the creation of the Ocean Alliance will respond is also murky. UASC has lost its two partners in the Ocean Three, CMA CGM and China Shipping, to the Ocean Alliance. The G6 will lose APL and OOCL to the new alliance, leaving the former with Hapag- Lloyd, Hyundai and Japanese carriers MOL and NYK Line. If the Ocean Alliance takes effect, the CKYHE will lose Cosco and Evergreen, leaving the third Japanese carrier, "K" Line, Taiwan's Yang Ming and Hanjin. The G6 says it will stay intact through 2016, while the CKY HE confirmed its partnership until March 2017 when it announced a reorganization of members' U.S. East Coast service network. If Hapag-Lloyd and UASC merge, the German carrier would get the 20,000 20-foot-equivalent container units it needs to better compete in the Asia-Europe trade, and UASC would be able to expand its reach into the north-south trade serving South America, said Lars Jensen, CEO of Copenhagen-based SeaIntel Consulting. A merged UASC and Hapag-Lloyd could tie up with Hamburg Sud, another German carrier that operates primarily in the north-south trades, Alphaliner sug- gested. MOL has ordered six 20,000-TEU ships and expects to receive them next year, but it needs an alliance partner's mega-ships to put together a full weekly string, a shipping analyst said. A possible good fit would be in an alliance with UASC, Hapag-Lloyd and NYK, he said. "You need some stability and like- minded carriers. You have the ability with those four lines," the shipping analyst said. "They could mount a 20,000-TEU weekly sling and three to four 13,000-TEU ship slings." If that merger comes about and if NYK and MOL find a new alliance partner in the new entity, the big question is where Hanjin and Hyundai go. Considering both are ailing and are owned by the Korean Development Bank, they could be merged, he said. The new alliance of UASC, Hapag- Lloyd, NYK and MOL might be loathe to invite the Korean carriers into an alli - ance because the bank ownerships could make coordination tricky. If South Korea decides to further subsidize its troubled shipbuilding industr y with orders for new mega-ships for one or both national carriers, they might look more attractive. Essentially, the potential alliance wouldn't want to add capacity just for capacity's sake because it only makes filling the ships harder, the shipping analyst said. Another scenario, as Alphaliner sug- gested, is for the remaining members of the CKYHE and G6 to band together. Because Hamburg Sud has VSAs with UASC, the former will be "concerned" with the poten- tial new tie-up, the analyst said. UASC operates six 19,000-TEU ships, while the other carriers, except MOL, don't have any ships that large on order. Of the 51 vessels in the 13,800-15,000-TEU range deployed or on order by the potential alli- ance orphans, Yang Ming has 20, UASC has "ESSENTIALLY, WE KNOW THE CARRIERS NEED TO FORM THESE ALLIANCES TO SURVIVE THE CURRENT CLIMATE."

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