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China Scuttling P3 Pact Seen to Hurt Shippers, Including Its Own

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June 19, 2014

File Photo Image (c) CMA CGM

By Clement Tan

June 20 (Bloomberg) — China rejected a global shipping alliance to protect companies navigating a choppy market. The decision will probably hurt cargo firms’ earnings, including its own.

The Commerce Ministry’s June 17 announcement spiking a deal between the world’s top three container carriers — known as the P3 and led by Copenhagen-based A.P. Moeller-Maersk A/S — may undermine recovery in an industry still reeling from the 2008 financial crisis. Overcapacity and low charter rates are likely to stay, jeopardizing earnings, including at China Cosco Holdings Co. and China Shipping Container Lines Co., the country’s two biggest.

China’s move “is a hollow victory for Asian liners,” said Paul Dewberry, an analyst at Bank of America Corp.’s Merrill Lynch, in a June 17 note. “This commoditized, fragmented and loss-making industry is in need of P3-type development to force consolidation. The resulting abandonment of P3 by its members will ultimately only prolong the current industry slump.”

Maersk, Mediterranean Shipping Co. and CMA CGM SA agreed last June to establish an operational pact with the aim of reducing costs on Asia-Europe, trans-Atlantic and trans-Pacific routes. Container lines have been battling industry overcapacity after a boom in ship orders collided with the global financial crisis, triggering the worst slump in prices for the carriage of cargo since containerization became global in the 1970s.

Global Rates

The price of transporting a 40-foot container from Shanghai to Rotterdam, Netherlands — a benchmark for Asia-Europe trade – – was $2,616, down 33 percent from a high of $3,878 on May 3, 2012, according to data compiled by World Container Index. An index for the Shanghai to Los Angeles route is 37 percent lower than it was in August, 2012.

“China’s rejection of the P3 network alliance may negatively affect global rates, especially in the Asia-to-Europe trade,” said Bloomberg Industries Analyst Lee Klaskow.

China Cosco, the country’s biggest container shipping company, and closest rival China Shipping Container both reported three annual losses in the past five years. Both companies are forecast to post losses this year, according to analyst estimates compiled by Bloomberg.

China Cosco and China Shipping declined in Hong Kong trading the day after the June 17 announcement. While Singapore- based Neptune Orient Lines Ltd. gained 0.5% on June 18, Hong Kong-based Orient Overseas International Ltd. slumped 7 percent.

Domestic Players

China’s Ministry of Commerce said the proposed P3 vessel- sharing alliance will “restrict competition” on the busiest Asia-Europe container routes. The “closely coordinated joint operations” proposed in P3 would also have been substantially different from the “loose cooperation” of current alliances, the ministry said.

Maersk accepted China’s verdict and will “give up” on P3, Chief Executive Officer Nils Smedegaard Andersen said. The company is considering options on how to cut costs and address overcapacity, said Vincent Clerc, chief trade and marketing officer at Maersk Line.

“This is less about the regulator trying to instill fair play in container shipping,” said Jon Windham, Barclays Asia transportation analyst. “It is a move to protect domestic players in China, vis-à-vis international players. The status quo in container shipping is not working.”

China’s rejection of P3 comes after the U.S. Federal Maritime Commission approved the alliance in March and the European Commission closed an EU antitrust probe this month.

Higher Scrutiny

Trade has been a mainstay of China’s economic development since former leader Deng Xiaoping first opened up the nation more than three decades ago. It entered the World Trade Organization in 2001, helping secure annual growth in excess of 10 percent on average in the following decade.

China’s decision also indicates that the country will closely guard its interests when foreign companies get together, said Lester Ross, a Beijing-based partner at the U.S. law firm Wilmer Cutler Pickering Hale & Dorr LLP, which advises clients on regulatory compliance in the world’s second-largest economy.

“Any alliance like this among foreign companies that affect China trade to a certain degree will be subject to higher scrutiny,” he said.

–With assistance from Chris Cooper and Kiyotaka Matsuda in Tokyo and Christopher Jasper in London.

Copyright 2014 Bloomberg.

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