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Nov.14, 2016

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INTERNATIONAL MARITIME IMPORTING | EXPORTING | PORTS | CARRIERS | BREAKBULK | GLOBAL LOGISTICS 14 THE JOURNAL OF COMMERCE www.joc.com NOVEMBER 14.2016 JOC Staff W I T H N O T U R N A RO U N D for conta iner shipping in the foreseeable future and cost-cutting the only means of survival, Japan's three largest shipping companies are merging into a new company that will launch in 18 months. The deliberate pace of the merger of the container operations of NYK Line, MOL and "K" Line into a single, yet-to-be named company should be a comfort to shippers. The plan to create a new company in July and commence operations in April 2018 is an island of stability in swirling seas of over- capacity and fi nancial uncertainty over the health of shipping partners in the wake of Hanjin Shipping's collapse and poorly imple- mented mergers. The risk of another Hanjin — among these three Japanese carriers, at least — is next to zero. The three carriers said they signed a contract agreeing on the establishment of a joint venture company to integrate their container shipping business and the termi- nal-operating segment, excluding Japan. But the scale of the announced plan — to create a wholly new company out of three his- torically competitive organizations that are part of different keiretsu — is sobering in its ambition. MOL traces its roots to 1878, NYK to 1885, and "K" Line to 1919, and all three have long competed intensely on their home turf. To "establish a culture that will wel- come and rise to any challenge," "utilizing the best practices of the three companies," as they jointly announced on Oct. 31, will be an extraordinary challenge that requires a highly disciplined integration and neutral leadership, because all three will be minor- ity shareholders. But the alternative was a drain on cash, profi tability and shareholder value in per- petuity for the parent companies. The Big Three noted that demand has exceeded supply only twice in the past 12 years, and that an imbalance is forecast through at least 2018. They stated the obvious in noting that only through scale — that is, a competitive cost structure that can withstand relent- less rate competition — will it be possible to compete with the increasingly large-scale operations that now dominate the industry. Japan's Big Three carriers downgraded their full-year earnings forecasts and said they expected record losses as their fi scal first-half results illustrated the financial problems that motivated their merger plans. NYK Line, "K" Line, and MOL recorded a collective half-year operating loss of $484 million for the fi scal year beginning in April and see no relief in sight. In an over- supplied market where carriers can only compete through scale of operations, the only viable option was merging, the three said. NYK Line now expects to post a net loss of 245 billion yen ($2.3 billion) for the current fi scal year, compared with its previous fore- cast of a 15 billion-yen loss. It will be NYK Line's fi rst full-year net loss in fi ve years. "K" Line, which is particularly depen- dent on the container shipping business relative to MOL and NYK, expects a net loss of 94 billion yen for the current fi scal year, compared with its previous estimate of a 45.5 billion-yen net loss. MOL still expects to swing back into the black in fi scal 2016 after suffering a net loss of 170 billion yen in fi scal 2015. Still, it slashed its net profi t forecast by more than half, from 15 billion yen to 7 billion yen. "The three Japanese companies have made efforts to cut cost and restructure their business, but there are limits to what can be accomplished individually," they said. With 1.4 million 20-foot-equivalent units of current capacity in place, the new company will be the sixth-largest container line in terms of capacity deployed. MOL, NYK, and "K" Line are currently ranked at No. 11, No. 12, and No. 15, according to mari- time analyst Alphaliner. It wasn't just the need to become larger and more cost-efficient that drove the JAPAN'S BIG 3 TO BECOME BIG 1 "K" Line, MOL and NYK will merge in a deliberate process that should help settle shippers' nerves W I T H N O T U R N A RO U N D for conta iner shipping in the foreseeable future and cost-cutting the only means of survival, Japan's three largest shipping companies are merging into a new company that will launch in 18 months. The deliberate pace of the merger of the container operations of NYK Line, MOL and "K" Line into a single, yet-to-be named company should be a comfort to shippers. The plan to create a new company in July a joint venture company to integrate their container shipping business and the termi- nal-operating segment, excluding Japan. But the scale of the announced plan — to create a wholly new company out of three his- torically competitive organizations that are part of different keiretsu — is sobering in its ambition. MOL traces its roots to 1878, NYK to 1885, and "K" Line to 1919, and all three have long competed intensely on their home turf. To "establish a culture that will wel- Japan's Big Three carriers downgraded their full-year earnings forecasts and said they expected record losses as their fi scal first-half results illustrated the financial problems that motivated their merger plans. NYK Line, "K" Line, and MOL recorded a collective half-year operating loss of $484 million for the fi scal year beginning in April and see no relief in sight. In an over- supplied market where carriers can only compete through scale of operations, the only viable option was merging, the three said. NYK Line now expects to post a net loss of 245 billion yen ($2.3 billion) for the current fi scal year, compared with its previous fore- cast of a 15 billion-yen loss. It will be NYK Line's fi rst full-year net loss in fi ve years. "K" Line, which is particularly depen- dent on the container shipping business relative to MOL and NYK, expects a net loss of 94 billion yen for the current fi scal year, compared with its previous estimate of a 45.5 billion-yen net loss. MOL still expects to swing back into the black in fi scal 2016 after suffering a net loss of 170 billion yen in fi scal 2015. Still, it slashed its net profi t forecast by more than half, from 15 billion yen to 7 billion yen. "The three Japanese companies have made efforts to cut cost and restructure their business, but there are limits to what

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