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This Company Looks Set to Benefit From the fall of A Proposed Mega Shipping Alliance

Ser Jing - Chinese Ship Builders in Trouble (pic)

A huge piece of news regarding the shipping industry broke through last week. The formation of the P3 alliance, which consists of three of the largest container shipping companies, namely A.P. Moller-Maersk, Mediterranean Shipping Company (MSC) and CMA CGM, has been shot down by Chinese authorities.

The alliance was supposed to pool together around 250 ships from the three companies in order to save costs. Although the P3 alliance had been given the go-ahead by authorities from USA and Europe, China’s Ministry of Commerce rejected the formation of the alliance.

As the P3 alliance, if formed, will control about 47% of the Asian-Euro container trade, Chinese authorities are fearful that it might give the alliance too much leverage and eventually lead to a “cartel-like” situation. There are currently two other major alliances in the shipping industry: the G6 and CKYHE alliances.

What does it mean for Neptune Orient Lines?

Singapore’s main container shipping company, Neptune Orient Lines (SGX: N03), might be quite delighted to hear the news that the proposed P3 alliance have fallen through. The company is already suffering from three straight years of operating losses and in fact, has managed to earn a profit in only one year between 2009 and 2013.

If the P3 alliance had been created successfully, it would have increased the level of competition in the industry and would almost certainly make it much harder for NOL to turn itself around. The company’s main shipping liner brand, APL, is under the G6 alliance. The company has been trying to streamline APL’s operations and reduce its cost structure, though progress on that front seems to be taking place a little too slowly.

Now with the formation of the P3 alliance delayed indefinitely, NOL might get the breathing space it needs to further improve its operational efficiency.

Foolish Summary

NOL does have a profitable division; its logistics business has been quite consistent in producing a profit for the company. On a side note, if NOL continues to experience losses in its liner division, maybe it could consider spinning off its logistic business so that it does not get dragged down by the liner business.

Either way, with or without the P3 alliance, NOL would still need to seriously restructure its liner business in order to stay relevant in this highly competitive industry.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.