A slowdown in China has sent commodity prices swooning and dealt a blow to global growth. Now a stuttering recovery in the world's second-largest economy could spark the biggest shipping union in years.
Neptune Orient Line, owned by Singapore's state fund Temasek Holdings, over the weekend announced that it has entered exclusive talks with, France's CMA CGM—the world's third largest container shipping line—over a potential takeover.
If it goes through, NOL and CMA's merger would be the biggest container shipping deal in years.
Analysts say the deal is a sign of further consolidation in the global shipping industry on the back of a collapse in freight rates as growth in China slows, reducing the country's appetite for commodities just as a backlog of large vessels come into service.
"There is definitely a consolidation trend going on," Singapore Shipping Association's president Esben Poulsson told CNBC's The Rundown on Monday.
"At a difficult moment of the cycle, consolidation is obviously a way for these players to gain greater market share and greater strength toward the customers."
Even so, the price of the merger will "no doubt the price will reflect that we are in a difficult period," said Paulsson.The Baltic Dry Index (BDI), a measure of freight rates shipping bulk cargoes such as iron ore, coal and grains tanked to a new record low last week, reflecting slowing global trade.
"There's simply too much capacity and obviously at these current rates, it's not a sustainable business, it cannot continue on a long-term basis but it is a function of the market," said Paulsson.
In an report in October, London-based shipping consultancy Drewry said container shipping is set for another three years of overcapacity and financial pain due to slowing global trade and a bloated order book of large vessel capacity—placed when China was gobbling up large amounts of raw material imports that are now slowing.
China October imports fell 18.8 percent in value from a year ago, the General Administration of Customs said in early November. Exports also declined.
While import volumes for some commodities rose on stockpiling, iron ore import volumes fell 4.9 percent on year, hitting the BDI as dry bulkcarriers ship more iron ore than any other commodity.
Drewry said that an additional 1.6 million twenty-foot equivalent unit (teu) of capacity is being added to the world container fleet this year, which is equivalent to container shipping growth rate of 7.7 percent – far above its forecast of just 2.2 percent.
Another 1.3 million teu will be added to the global fleet in 2016, with over-capacity now tipped to exceed that during the global financial crisis in 2009, added Drewry.Last month, NOL reported a wider net loss of USD 96.1 million for the third quarter of this year – worse than the loss of USD 52.3 million in the same period last year – due to weak global demand and a steep decline in freight rates.
NOL, which is 66.9 percent owned by Singapore sovereign wealth fund Temasek Holdings, had said earlier in November that it was in preliminary discussions with CMA and Denmark's AP Moller-Maersk, the world's largest container shipping line, over a possible sale.
This came after China shipping giants Cosco Group and China Shipping Group are said to be in talks over a possible merger, Reuters reported in August, citing a source with direct knowledge of the discussion.
Share prices of NOL were jumped Monday after its weekend announcement.
OCBC Investment Research said in a note Monday that even though it thinks CMA could even be willing to pay a premium due to NOL's technologically up-to-date and operationally efficient fleet, investors should be cautious of the deal falling through given the poor industry outlook.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
