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Brief Analysis of the Container Swap Market

This is a special guest post by Mr. John Mckinstry. John’s bio follows at the end of the analysis.

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The container swap market is a relatively new derivatives market designed to reduce risk associated with volatility in the container freight market. In theory it is designed to allow shipping lines and operators to hedge the risks of freight rates falling and conversely allows shippers and consignees to hedge the risk of freight rates rising over a given period. A simple enough concept and one familiar to many managers in companies trading internationally that regularly hedge against the risk of currency fluctuations. In essence this is a new tool to manage business risk in the container shipping market.

The first of these container swaps took place in January of 2010 between Morgan Stanley and Delphis, a regional European container ship operator. This new risk management tool appears to be gaining traction with CSAV, a South American container carrier that nearly failed in the depths of the 2009 recession, executing a swap in August with Morgan Stanley as the counter party. The stated aim of these swaps is to begin to develop a fully functioning liquid container derivatives market. The new derivatives are an over the counter (OTC) cash-settled swap that are settled against the newly created weekly Shanghai Composite Freight Index (SCFI). This index is comprised of weekly freight rates assessed on an “all-in” spot basis on various major global trade lanes. The rates are assessed by 30 panelists comprising shipping lines, NVOCCs and freight forwarders.

This move towards the further commoditization of container freight rates mirrors the establishment and growth of other derivatives markets from the 1990s onwards. The largest derivatives market by far is that for Interest rates with other major derivatives markets being those for foreign exchange, equity, various commodities and credit. The rampant and largely unregulated expansion of the last of these being one of the underlying causes of the recent financial melt-down.

The container swap market is the newest addition to the overall global freight derivatives market. These global freight derivatives are financial instruments derived on the future value of freight rates such as dry bulk and oil tanker rates and currently tend to be used most often by end users such as ship owners and commodity traders as well as by suppliers such as integrated oil companies. The purpose of these well established derivatives markets is to mitigate risks against price spikes in the supply chain. These derivatives now include Exchange Traded Funds (ETFs), swaps and futures as well as the older “Freight Forward Agreements” (FFAs) which were sold over the counter and based on a model popularized in the agriculture and commodities industries. They are still relatively new products in the global marketplace and the advent of clearing services has brought increased safety and with it liquidity into the business.

Putting this market into the context of the overall derivatives market, the Q1 2010 OCC report, a department of the US Treasury, indicates the total notional value of all derivatives in the United States at US$216.5 trillion, of which 84% is made up of interest rate products with the balance being currency, commodity and equity based products. The Financial Times, in a recent article in July, states that the global market in freight derivatives was US$155 billion in 2008 although this may have dropped by half in 2009 due to the downturn. This indicates that the global freight derivatives market represents only around 0.03%-0.07% of the total US derivatives market. Tiny by all accounts.

In the past the liner conference system was the main mechanism regulating the price of container freight rates. This system functioned as a kind of clearing house whereby liner operators looked at overall supply and demand and offered pricing to the shipping community based on their forward assumptions. These conference operators never controlled freight rates on trade-lanes in their entirety and new entrants to the shipping market often tended to be outside the conference system, at least initially. However they often represented the lion’s share of capacity on individual trade-lanes. The purpose of this system was to regulate supply and to mitigate the risk of rate volatility, although this was done internally within the industry and came to be seen by shippers as a cartel.

However shippers failed to take into account the fact that overall demand in the short run at industry level is in fact quite inelastic. In effect X number of shippers need to ship their cargos to their customers and this amount was growing annually at an average of 10% p.a. Conversely demand at the firm level was elastic due to the fact that the services of each carrier were relatively homogeneous and switching costs of shippers changing carriers were very low. This resulted in a prisoner’s dilemma situation for carriers, similar to the oil industry, whereby it is in the interests of individual carriers to cut prices, regardless of the conference system, as this will result in increased revenues for the carrier due to the flat slope of the demand curve. Conversely, if all carriers follow suit this will result in a fall in total revenues at the industry level due to the steep (inelastic) industry demand curve.

The reasoning behind the conference system was that freight rates, like many commodities, had a high correlation to the business cycle. Given the high level of capital investment needed to maintain adequate services to accommodate a 10% p.a. growth in international container trade, carriers looked to this system to maintain stable cash flows despite the industry’s cyclicity. This system was largely dismantled throughout the last decade and the advent of the financial crisis in 2008 clearly demonstrated that the container freight market was as volatile as the business cycle itself – the conference system was dead. However the huge swings in 2008/2009 in demand and the consequent mothballing of ships to reduce supply has inevitably led to extreme price volatility and thus higher risk to both carriers and shippers over this period. Lines bore huge losses on the down turn and shippers faced huge hikes in rates in the recent recovery. This also had the knock on effect of dramatically reducing the planning and budget horizons of all parties concerned.

Therefore it is inevitable that the financial services industry sees an opportunity to add container freight rates to its lists of derivatives products to assist in managing these risks. The question is whether this will actually deliver benefits in terms of cost and efficiency to the industry as a whole. In addition to this, will these benefits outweigh the costs incurred by the industry in the form of profit and commissions levied by the clearing houses and financial institutions for providing this service? Put differently, will this simply add additional cost to the global supply chain and if so is it offset by increased efficiency and reduced cost in the global supply chain?

It seems that there may well be a battle developing here as to which way freight rate risk is seen and managed in the global supply chain. The clearing houses, London Metals Exchange (LME) and financial institutions appear to be moving in the direction of a commodity style market in freight rates while many major shipping lines and the Baltic Exchange remain opposed. Eivind Kolding, the CEO of MaerskLine recently described the fledgling container swap market as “a freight rates casino” and “the wrong avenue” for the industry. In addition, the Baltic exchange is involved in countering an attempt by the LME to have its trading platform used for the current FFA market as well as the fledgling market in container swaps. Jeremy Penn the chief executive of the Baltic Exchange was also recently quoted as saying “We will not offer our support for changes in the marketplace which potentially threaten the existing and sometimes fragile FFA liquidity”. In effect the major carriers and Baltic exchange are adopting a “business as usual” or “wait and see” approach rather than countering with any proposals of their own to mitigate risk in the newly volatile container freight markets.

Going forward, it will be interesting to see if these new derivatives become common practice amongst carriers, shippers and also speculators or whether they will remain simply another exotic financial tool on the  eriphery of the industry. In fact the introduction of speculators to the container freight market may well result in more rather than less volatility in the market by decoupling pricing from the supply and demand for capacity. Pricing could in fact become more a function of supply and demand of swaps, and therefore the future expectation of prices rather that the underlying supply and demand within the industry itself. How this develops at a macro level will likely be determined by the structure and characteristics of the industry itself. While the container shipping market has some characteristics in common with other commodity markets it also has a number of similarities to other markets within the global supply chain. There does not yet appear to be any sign of a derivatives market in airfares or trucking rates for example.

Carriers usually hold one of several relationships with shippers. In increasing levels of depth these are – basic, which are largely transactional; co-operative; interdependent and integrated. The largest shippers tend to hold interdependent or integrated relationships. Container swap derivatives may well remain an attractive option where the relationship is basic or cooperative but carriers may well be able to agree a joint response to manage volatility where they hold interdependent or integrated relationships with shippers. This could potentially counter the need for the use of container swap derivatives for the bulk of container volumes.

In conclusion, the financial services industry clearly sees an opportunity to profit from risk management in the container freight market but it remains to be seen if their products will increase the efficiency of the overall global supply chain. This may in fact simply be an additional cost in the total supply chain. On the other hand there is clearly a demand for risk management in the newly volatile container freight markets, so it may be useful for the  parties involved in the container market to look at alternative models for managing price volatility rather than simply continue business as usual. In short a structural change in the container market pricing mechanism occurred with the demise of the conference system, and the financial services industry is responding to it. It will be interesting to see how the response of carriers and large shippers develops in the near term.

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For more information on Mr. John McKinstry click here

Breakthrough Box Design II – Response from Manufacturer

Our post today on Staxxon Technology’s Vertical Folding Container contained varioius questions on the new product. Mr. Tom Smit of Staxxon was kind enough to contact us and answer all five questions addressed in the previous post.

Here they are in case you’ve missed them.

1) What is the cost of retrofitting?

Staxxon’s preliminary target for bill of materials and (US) labor cost for retrofitting a 20′ container is currently estimated to be about $2,500 (USD) with labor being the majority of the cost estimate (assumes reuse of the existing plywood floor.) The expectation is that, over time, the cost of materials will fall as folding container volumes increase and parts are standardized.

The first question that any container fleet owner/operator considering retrofits needs to evaluate is: what the operational costs savings will be (and over what period of time) if empty containers on highly imbalanced closed routes were folded for repositioning? In some cases, retrofitting existing containers may make economic sense. In other cases, having new containers manufactured with folding technology may be a more cost effective approach.

At Staxxon, we used a retrofit approach to prove the concept of vertical folding. Our business model is based on licensing the know-how for folding steel containers to container fleet owner/operators and materials vendors, all of whom have access to state-of-the art manufacturing and repair facilities that could optimize the work flow and deliver materila cost reduction for a retrofit approach.

The cost target we’ve set for retrofit, as best we can determine, is in line with the combined materials and labor costs to replace a plywood floor in a typical 20′ container. We’d like feedback on our business approach to retrofitting which assumes that instead of going through a full floor replacement cycle at roughly the mid-point of a container’s useful life, the container gets retrofitted for vertical folding, existing marine plywood for floors gets recycled and the useful life of the container is extended 3-5 years. Is our thinking on target?

Manufacturing new steel containers with folding technology will have a lower incremental cost than a retrofit approach but require manufacturers to make minor modifications to production lines, quality assurance and testing/acceptance processes. Staxxon’s target bill of materials and labor cost for the incremental cost of making a new 20′ container fold is currently estimated at 20% of the quoted costs for manufacturing a new 20′ container (e.g. $2,800 cost of a new container, folding version target cost is $3,360.)

2) How much time/money is lost folding and unfolding containers?

Staxxon’s current target time to use a labor intensive process to go from unfolded to folded is 10 minutes with 2 people. Unfolding time targets are slightly lower. To be clear, this is the target time for the entire folding or unfolding process, not the single step of folding the container to 19″ using a fork lift (20′ container) or a yard crane (40′ container.) Our competitors tend to focus on the time required for the final step to collapse their plastic containers to the ground. Our best guess today is that folding will occur primarily at off-port container storage depots (not at terminals or docks) and that unfolding will also occur at off-port storage or staging depots (though unfolding location and labor will vary by port and country.) Folding may generate new jobs and additional hours in some terminals and depots.

The related question is how much money can be saved by container fleet owners/operators from reduced storage costs plus fewer picks, moves, lifts and touches for empty containers? Will the operational cost savings offset any increased labor expense related to folding or unfolding? Will off-port storage centers offer better rates for folded containers that occupy less real estate? Will “wheeled ports” be able to operate more efficiently by using folded empty containers? Will folding reduce the load/unload/vessel turnaround time in port enabling more vessels to be served by the terminal operator in the same time?

2.a) How long to unlash the supporting bars running across the tops and bottoms of the container which allows it to fold up like a toddler’s playpen?

The time required to adjust (unlock pins, adjust, re-lock pins) the top and bottom beams is currently about 4 minutes. This is included in our target fold/unfold time of 10 minutes. Our next prototype will incorporate some changes that may reduce the labor time associated with locking and adjusting the beams. The beams address important safety issues during folding/unfolding and add structural integrity to the container. The beams also support lashing or “ganging” up to 5 folded containers to be moved as one container in groups of 2, 3, 4 or 5. Unlike the collapsible methods used by our competitors which requires matched sets of folded containers, the Staxxon folding technology allows as few as 2 containers to become a folded set by folding to a width of 48” instead of 19″.

3) Are inland depots and terminals (for that matter) able to set aside the containers and prepare them in their open state for truck pick up? What is the cost of that preparation?

Yes, inland depots and terminals will be able to fold/unfold using equipment and labor skills that exists today. Our target time is approximately 10 minutes using a labor intensive process to fold/unfold. We look forward to working in a trial/test phase with inland depot and truck terminal operators to determine the best methods for folding, unfolding and moving folded containers.

4) Can the containers be lashed together safely in bunches to allow gantry cranes to pick up five at a time? ship for sale Izifix

Yes, lashing or ganging up to 5 containers to be moved as one container by a gantry crane is a design objective. The Staxxon design adds more vertical load bearing capacity than is present in a regular empty or full container Later this year, Staxxon will be demonstrating a group of five containers that can be moved in the same space as one container. The top and bottom beams are used to connect and stabilize the group of 2, 3, 4 or 5 containers. The weight of 5 folded and lashed empty containers is still below the total weight capacity of a full container. The existing vertical beams and corner boxes are always maintained in the Staxxon design making the use of existing gantry cranes possible.

After we succeed with CSC evaluation in the unfolded state, our next set of tests will focus on safety, workflow, regulatory compliance and performance in the folded state at ports, terminals, depots and on vessels. We are actively seeking test and trial partners from the sea/rail/truck carrier, container fleet owner/operator, port, terminal and inland depot segments to work with us on a wide variety of issues, including adapting terminal management systems to identify and manage folding container fleets. We would also welcome feedback from health and safety regulators and look forward to working closely with the standards committees involved with sea containers.

5) Currently empty containers are generally loaded on top of loaded containers to maintain the stability of the ship. What effects will the weight of five boxes in one slot have on ship planning and stowage?

Great question – Folded empty containers lashed in a group can now be planned for stowage anywhere in the vessel cell system, including at the bottom or in the outer side cells. By folding and grouping empty containers, more vessel loading optimization scenarios are available. The weight of five containers is less than the weight of one fully loaded container. Some have theorized that having a set of 5 folded containers placed in the outer ring of vessel cells above the deck would be a benefit in terms of protecting cargo from wave action.

For further information on future demonstrations, please contact us at Container Shipping Canada, or Staxxon Technologies directly.

Breakthrough Box Design: Vertical Folding Containers

Way back in the 1950’s when container shipping was in its infancy, the container itself had yet to be standardized. Indeed, the definition of a container at that time ranged from Europe’s 4 to 5 feet tall wooden crates with a steel reinforcing frame to Sealand’s and Matson’s containers, most of which were 8 square feet at the base. The Marine Steel Corporation of New York manufactured over 30 different types of containers. As written by Marc Levinson in The Box “This diversity threatened to nip containerization in the bud. If one transportation company’s containers could not fit on another’s ships or railcars, each would need a vast fleet of containers exclusively for its own customers.” It was not until 1958, when the United States Marine Administration, or Marad, formed two committees to recommend container size standards and study container construction.

In late 1959, Marad’s committee agreed on the 20’ and 40’ container size standard which prevails in the industry today. While there have been a few advances in the structure and design of containers since, until now the basic box has not changed. One of the great challenges in the industry since the inception of the container has always been the cost of moving empty containers from surplus to demand areas. This is particularly true at inland depots.

With one-third of Canada’s population living in south western Ontario, most carriers are challenged with surplus equipment which has to be moved out at great expense by truck or rail. Efforts to reduce costs have centred on export match back strategies and the use of boxes in domestic freight moves, which have had, at best, inconsistent results. One interesting development, which may prove useful in cost reduction, is the Vertical Folding Container by Staxxon Technologies out of Dayton, Ohio.

Staxxon says that by retrofitting boxes with its patented technology 5 20’ containers can fit into the space of one. The company claims that the design approach honours existing IMO, ISO and CSC industry standards, and, even more critical, maintains the structural integrity of the 25 MT steel containers in use today.

Staxxon Founder and CEO, George Kochanowski says, “ While others have focussed on the use of horizontal collapse methods or use composite materials in containers, Staxxon’s designs are laser focussed on the top business issues facing carriers, ports, terminal operators, and container fleet operators….” Staxxon product it claims will assist in faster vessel turns and better container and vessel utilization.

The video available on the Staxxon blog (no website yet.) shows the container from a semi-folded state then pushed fully together, which takes less than 20 seconds. What is missed, however, is the work involved (how long?) to unlash the supporting bars running across the tops and bottoms of the container which allows it to fold up like a toddler’s playpen.

While the prospect of fitting five containers into the space of one has to be intriguing for carriers, at this point there are more questions than answers.

1) What is the cost of retrofitting?


2) How much time/money is lost folding and unfolding containers?

3) Are inland depots and terminals (for that matter) able to set aside the containers and prepare them in their open state for truck pick up? What is the cost of that preparation?

4) Can the containers be lashed together safely in bunches to allow gantry cranes to pick up five at a time?

5) Currently empty containers are generally loaded on top of loaded containers to maintain the stability of the ship. What effects will the weight of five boxes in one slot have on ship planning and stowage?

 

According to a reliable source, a single major carrier in Vancouver moved over 6000 empty containers to back to China and the Far East in June and July of this year. Like many others, the carrier is under tremendous pressure to move empties back to China. The 6000 containers would have moved over 10 ships for an average of 600 per ship. Imagine the benefit to the carrier if they could load four or five times more empties without increasing lift costs?

Intermodal benefits are obvious. What if five empty containers could move in equivalent of one rail slot from Toronto to Vancouver?

The box has changed little in 50 years; perhaps Staxxon’s Vertical Folding design will be the breakthrough the industry needs.

Time Running Out for CMA-CGM

It appears CMA-CGM may be running out of time.

In a report today from Lloyds List, talks between Belgian billionaire investor Albert Frere and the shipping line have collapsed. News Agency Wansquare claimed that negotiations had been broken off over differences between the two sides concerning such matters as corporate governance and the appointment of senior personnel.

In this blog, we wrote a column entitled Five Reasons Maersk Line Should Buy CMA-CGM. At the time, the idea was more than a little far-fetched. However, with CMA-CGM past it’s July 26 due date for outstanding loan payments along with the breakdown of talks with the Qatar Group last month, there cannot be too many options left for the beleaguered carrier.

Saddled with over $5 billion in debt due to new building orders, CMA-CGM has to pay for deliveries this year or face possible default. Despite the turnaround in the box industry this year, the French carrier appears to be in so deep that even the vastly improved cash flow cannot help their fortunes. Without badly needed financial restructuring, banks could begin foreclosing on loans and seizing assets.

The carrier was not available for comment in the Lloyd’s report.

Global Container Volume to top 545 million TEU in 2010 – Alphaliner

From Alphaliner News Summary Issue 31(1)

Global container port handling volumes are expected to grow by 11.6% in 2010 to 545 Mteu, with a strong first-half performance tempered by slower growth in the second half. Full-year volumes are expected to exceed the pre-crisis volumes of 535 Mteu recorded in 2008. Last year, global container port handling is estimated to have dropped by 8.6% to 489 Mteu, the first annual decline recorded in history.

The robust 2010 growth projections come on the back of a strong first half. Global handling volumes in the first six months to June are estimated to havegrown by 18%. The full-year growth forecast takes into account a slowdown in the second half of the year due to the uncertainty over the sustainability of
global demand. Handling volumes are expected to grow by 6% in the second half, reflecting partly the higher base seen in the second half of last year, as well as the anticipated slowdown in trade volume growth.
The growth will be led by China, with total handling volumes at Chinese ports (including Hong Kong) expected to reach 165 Mteu this year. In the first six months of the year, Chinese ports handled 80 Mteu compared to 66 Mteu in the same period of 2009 and 74 Mteu a year before that 2008.

The full newsletter is available by subscription. Please contact data@alpaliner.com

Port of Metro Vancouver box business records 12% increase

Container throughput at the Port of Metro Vancouver surged in the first half of the year thanks in large part to Canada’s economic recovery. The port recorded a 12% increase year on year in the six month period from January to June.

Imports swelled 27% over 2009 to 581,328 twenty-foot equivalent units (TEU), while exports shrunk by 2% year on year at 446,661 TEU. The total throughput year-to-date including empties stands at 1,163,959 TEU.
The increase is misleading as it draws a comparison to the low base year of 2009. When compared to the record setting year of 2008, the port of Metro Vancouver is down 5%. During the same period that year, the port of Vancouver moved 1,223,390 TEU

Results can be viewed on this link to the Port of Metro Vancouver website, or click on the table below.

PORT OF Vancouver YTD stats June 2010

Guaranteed Pay Clause Must End at Montreal Port

As the truce settles in between the Employers and Longshoremen at the Port of Montreal, after last week’s lockout, both sides will be contemplating their positions when contract talks resume later this year. The Union has been without a contract since December 31, 2008. At issue is the so called guaranteed pay program for 107 workers which cost the MEA C$ 12 million last year. The program effectively pays the workers even when they are not working. The MEA wants to drastically reduce guaranteed pay. In today’s ultra competitive world of container shipping, the Canadian Union of Public Employees 375 representing the dock workers have to agree to the reduction the MEA is seeking, or risk shrinking the business moving through the Port of Montreal. The greatest threat to the port will likely be the new Melford Container Terminal in the Strait of Casno, Nova Scotia.

The Melford Terminal has been in the planning stage for years now and in October of 2009 overcame a significant hurdle by receiving environmental assessment approval from the governments of Canada and Nova Scotia. The development will include a 315 acre terminal and a 1500 acre logistics park in Melford. The project is 100% private equity funded and, refreshingly, investors are not asking for taxpayer dollars. The project is due to be completed in 2013. Earlier this month, Melford announced an agreement with Maher Terminals to jointly run MIT.

Dan Bordessa of project backer Cyrus Capital Partners LC said that the Maher decision provides immediate credibility. Maher operates a container terminal in New Jersey and the new container terminal in Prince Rupert. Melford has stated on its website that it is modelled after Prince Rupert and aims to be a “Canadian Northeast Gateway.” MITI has set the bar high with its strategic goals

  • Employ state of the art and supply chain technologies
  • Set new standards in North American security practices and technologies
  • Lead the industry in terminal efficiencies for vessel to vessel, vessel to rail and vessel to logistics park transfers. 

Longshoremen at the Port of Montreal ought to be worried. Business moving to the new container port at Melford will likely be drained off Halifax and Montreal. While Montreal’s throughput growth rate in the past five years has been positive (see chart below) with the exception of 2009, Halifax has been steadily losing ground each year since 2005. Montreal’s close proximity to a large population base in South West Ontario along with a quick transit to the Midwest has given the port an advantage over Atlantic Canada for years. However, the port should not get complacent. In early 2009, the port of Charleston, SC lost world number one carrier Maersk Line mostly because of the inflexibility of the ILA.

An article on Jan 23, 2009 in World Trade Magazine explains

“Four weeks after Maersk Line, the world’s largest shipping company, announced it is abandoning service to the Port of Charleston, little progress has been made in getting the port’s largest customer to reconsider, despite extensive efforts by state and local maritime officials.

 
The shipping line, which has been a customer of the South Carolina State Ports Authority since the early 1950s, announced its decision on Dec. 18 after it couldn’t get longshoreman to agree to a cost-cutting plan that would have had its moved by non-union state employees.
   
It also announced plans to move its South Atlantic Express service—which represents 25 percent of its port calls—to Savannah, Georgia, Norfolk, Virginia and other nearby ports.
 
The phasing out of that service—which had been making about 104 calls on Charleston a year—began earlier this month. Maersk said it would fully discontinue using Charleston’s port after its contract expires at the end of 2010….
 
 Shortly thereafter the line said that unless it could find a way to save money using ILA members at the dedicated terminal it operated in Charleston, it would have to switch to a non-union section of the port’s Wando Welch terminal in Mount Pleasant, South Carolina.
 
At the time, ILA Local 1422 president Ken Riley said the request would be in violation of an international contract between labor and shipping companies, and would potentially jeopardize the relationships between Maersk and the ILA up and down the coast. «    

Maersk, like every other shipping line in 2009, desperately needed to cut costs. The Charleston example demonstrates clearly how inflexible union policies can drive carriers to greener pastures. The Melford Terminal in Nova Scotia is a threat to growth in the Port of Montreal. An inflexible union insisting on keeping uncompetitive clauses in the new contract will assuredly drive business away.

US/Canada Ports Throughput 2005 to 2009 (TEU)

LA/LB Port clerical dispute hits a rough patch

According to a report today from Containerisation International, negotiations between employers of the ports of Long Beach and Los Angeles and office clerical workers have hit a rough patch.

In a statement written by the Los Angeles/Long Beach Harbour Employers Association (LALBHEA), the union representing the clerical workers were accused of ‘remaining on strike at the negotiating table.’

“Despite resolving issues on minor contract provisions during the past week, negotiations over core issues remain stalled after yesterdays bargaining sessions between harbour employers and the OCU,” said the LALBHEA in its press statement.

The walkout began when the clerk’s contract expired on July 1. A key issue in the dispute is the introduction of new technology and its potential impact on job security. In addition, there is a wide gap between workers salary demands and the terms offered by employers.

Cargo flow has not yet been affected by the dispute as the arbitrators have refused to recognize the legitimacy of the strike action judging that the OCU had not negotiated in good faith.

The OCU, however, is in the process of appealing the arbitrator’s decision. A ruling in favour of the OCU could cause the dispute to spread to dock workers thereby affecting cargo flows.

Over 40% of U.S. imports move through the ports of Los Angeles and Long Beach.

Five Reasons Maersk should buy CMA-CGM

 With the deadline hanging squarely over their heads, CMA-CGM will scramble this week for an angel investor(s) to avoid insolvency. While the Saade family desperately tries to keep a controlling interest in the company, banks may force the issue. Short of a government bailout, CMA-CGM may well become insolvent, at which time the entire company could be for sale.

What follows is the top five reasons CMA-CGM would be an attractive acquisition for Maersk Line.  

1. Bargain Basement Price

 The offer from Qatari Holdings was reported to be $1 billion for 49% of the company. At issue for CMA-CGM was not the size of the offer but the fact that the Qatari group wanted options to take a controlling interest. This makes the valuation roughly $2 billion. Maersk bought P&O Nedlloyd for $3 billion. CP ships was sold to the TUI Group for $2 billion. Both companies had far fewer assets than CMA-CGM has today.

2. Fit  

Maersk Line and CMA CGM operate many joint services on major trade lanes. Maersk would have knowledge of CMA-CGM’s liftings by way of terminal departure reports on joint services. Unlike the P&O Nedlloyd buyout, Maersk would not have to cancel any major consortium service agreements. P&O Nedlloyd was part of the global consortium Grand Alliance, which has a different service schedule and port rotation than Maersk Line. During the integration, several customers who did not, or could not, switch services were lost to other Grand Alliance partners. A combined Maersk Line/CMA-CGM would likely retain much more business than they did with the P&O Nedlloyd.

3. Assets

With 278 ships owned and on long term charter, CMA-CGM controls over one million TEU in standing slot capacity. This added to over 400 Maersk ships would create a behemoth shipping line. A carrier of this size would be able to withstand market fluctuations and have better control over supply side issues which have plagued the industry in the past few years. MSC with 1.7 million TEU is quickly gaining on Maersk (2 million). Perennial number one Maersk Line will want to put some breathing room between it and MSC.

4. Deep pockets

 Put simply, A.P. Moller is the only company in the industry that can afford the purchase. There can’t be too many options left for CMA-CGM. Banks in Europe are under pressure to pass so called “stress tests”. Investment in a risky business like container shipping with a company that has allowed its debt to get out of control cannot be tempting for even the most well capitalized banks. Without some form of government bailout or backing, CMA-CGM will have a difficult time servicing this debt in the future. The A.P. Moller group with diversified holdings (particularly oil) has access to the capital to restructure that debt.

5. Experience

The Sealand and P&O Nedlloyd purchases give Maersk the experience necessary to handle the size and scope of an acquisition as large as CMA-CGM. Senior Managers at Maersk Line have direct a track record navigating the complexities of integration. Maersk Line’s long term strategy has been growth through acquisition. 

Of course this post is pure speculation. Maersk stated publicly earlier this year that it is not looking for any buyouts at this time. However, sometimes timing is just right. If CMA-CGM comes up for sale, it just might be too difficult for Maersk to resist.

Comments/criticisms are welcome.

Ships diverted to Halifax during lockout returning to Montreal

Expect a busy week at the port of Montreal as some of the ships which called Halifax during last week’s lockout are returning.  

According to the Port of Montreal website the OOCL Montreal and the Hanjin Montreal are expected to arrive on July 26. The Valencia Express returned to the port on July 25. The Maersk Petreas discharged cargo at Halifax on Friday was not scheduled to return to Montreal to pick up exports and will return to Europe.

The returning ships along with the regular schedule and backlog of over 1400 containers are likely to cause delays at the port. The Port of Montreal has not confirmed whether they will work later gates to clear containers off the terminal and normalize operations as quickly as possible