Cosco, CSCL merger to shake up East-West box trades—Drewry

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CoscoThe possible merger of box shipping lines China Cosco and China Shipping Container Lines (CSCL) could cause a domino effect on existing carrier alliances and promote carrier mergers in Asia that could weaken industry competition, according to maritime consultancy Drewry.

There have been sketchy rumors that Cosco and CSCL are part of a government drive to consolidate China’s state-owned enterprises, and that executives from the two companies are working on a preliminary plan to be released before the year ends.

In the container market, Cosco and CSCL are currently in sixth and seventh place, respectively, in the rankings of carriers by operated TEU (twenty foot-equivalent unit). If the merger pushes through, the combined entity would move into fourth place with a total fleet in excess of 1.5 million TEUs, giving a world share of around 8%.

“The rationale for a merger is entirely sound from a financial viewpoint and calls into question why China has persisted with the two-carrier strategy for so long. It makes little sense to have two national (ie state-controlled) carriers competing fiercely against one another and against non-Chinese carriers in the same markets,” said Drewry.

Both China Cosco and CSCL have seen their financial performance deteriorate since the global financial crisis. Overcapacity in the underlying markets didn’t help either, but their individual operating and financial performance has been far worse than their peers. Between them the two carriers have lost US$911 million in operating losses from container operations in the previous five years.

A merger would likely entail much better financial efficiencies and prudent use of the capital. The combined entity will be able to get access to better financing synergies from banks and capital markets.

But it will also have a ripple effect on the industry, particularly on the carrier alliances the two lines participate in on the East-West trades, said Drewry. Cosco is a long-standing member of the CKYHE Alliance alongside K Line (Japan), Yang Ming (Taiwan), Hanjin (South Korea) and Evergreen (Taiwan).

CSCL, on the other hand, is a part of the Ocean Three consortium alongside CMA CGM (France) and UASC (Qatar) that was set up at the start of this year.

Since a merger of the Ocean Three and CKHYE alliances would not likely to be approved by competition regulators, both alliances will be faced with a major void to fill were they to lose either Cosco or CSCL to the other carrier group. Based on the deployed vessels in the East-West container trades (Asia-Europe, trans-Pacific, and trans-Atlantic) as of July 2015, both Chinese carriers contributed about one-quarter of each alliance’s fleet in TEU.

“As the smallest of the existing alliances the remaining carriers in the Ocean Three grouping, CMA CGM and UASC would find themselves even further down the pecking order were CSCL to abandon them,” said Drewry.

While both carriers between them have around 570,000 TEUs of newbuilds on order they will most likely look to find a replacement carrier to bridge the shortfall.

Drewry speculates that “this maybe explains why UASC is now considered the front-runner in the speculated sale of APL, as purchasing the Singapore-based carrier would nearly cover CSCL’s share.” It would also reduce the share of the G6 Alliance that APL is currently a member of.

Depending on which alliance wins or loses its Chinese member, the Ocean Three alliance and the CKYHE alliance will decline to a market share of just 13% or rise to a market share of 28%.

If the merger occurs, Drewry believes this could force other countries to consider consolidating their shipping lines as well. For Asian countries over the previous five years, only the Taiwanese carriers (Evergreen, Yang Ming, and Wan Hai) have returned an operating profit ($1.2 billion) in that time frame, whereas the Big 3 Japanese lines (MOL, NYK, and K Line) have lost about $550 million, and the South Koreans (Hanjin and HMM) nearly $400 million. None though match the $900 million deficit of Cosco and CSCL.

“A merger between Cosco and CSCL makes sense for China, but the ramifications for the container shipping industry could be far-reaching,” said Drewry.

Photo: Katy