China-owned container carriers COSCO and China Shipping say a proposed merger, which they expect to complete within one year, will bring shippers an “optimal product offering,” but it leaves the future of the CKYHE and Ocean3 alliances unclear.
State-owned shipping conglomerates COSCO and China Shipping have released details about their proposed merger plans, which reportedly come at the behest of the Chinese government.
In various press releases and filings with the Hong Kong Stock Exchange, where both groups have listed companies, COSCO Container Lines Co. Ltd (COSCON) and China Shipping Container Lines (CSCL) will “restructure and integrate” to create the fourth largest container shipping company, smaller only than Maersk, MSC and CMA CGM, which recently revealed plans to acquire Neptune Orient Lines, parent of ocean carrier APL.
“As the leading companies in China’s shipping industry, COSCON and CSCL have cooperated with each other for years. By the restructuring and consolidation, we will greatly improve the new company’s core competitiveness,” COSCON said in a statement.
“For our investors, the integration of quality resources and capture of the synergies can bring better investment return; for our customers, expanded shipping capacity and widened scope of the business will optimize the route network, and improve the fleet structure, thus enhance our ability to deliver higher-quality customer services and meet more rigorous service standards; for our suppliers, it provides a better platform with even more cooperation opportunities. The restructuring and consolidation will also offer our employees more diversified career development opportunities.”
The two companies “expect to start the business integration at the beginning of next year and complete the transition within one year,” according to COSCON.
Combining the route networks of the two companies will “bring clients optimal product offerings,” added CSCL.
“At this stage, we are still planning routes and products, which we look forward to announcing when planning is done.”
For now, shippers should continue to “work with their current points of contact at COSCON and CSCL and their related businesses,” said CSCL. “We shall make our best effort to maintain continuity of customer-facing staff, ensure a smooth transition and avoid fluctuations in our customer service.”
According to COSCON, merging the companies will create a combined fleet of 288 containerships with 1.6 million TEUs of capacity. COSCON said 84 of those ships will have capacity for more than 8,000 TEUs.
(The Alphaliner Top 100 website says as of today, Dec. 14, COSCON has 85 owned containerships with 464,14 TEUs of capacity and 77 chartered ships with 388,089 TEUs of capacity, while CSCL has 60 owned containerships with 479,914 TEUs of capacity and 68 chartered containerships with 214,800 TEUs of capacity. COSCON has 22 containerships on order with 332,003 TEU capacity, while CSCL has 14 containerships with 233,928 TEU capacity on order, according to Alphaliner.)
One major detail revealed in the latest flurry of news surrounding the proposed merger deal is that it would cause CSCL to essentially exit the container shipping business entirely.
COSCON “will rent CSCL’s assets, including ships and container boxes, etc.,” the companies said, while CSCL “will achieve business transformation by leasing ships and container boxes; acquiring the leasing business held by COSCO and China Shipping; and injecting other ship financing business and assets.”
What this means is that CSCL is “turning primarily into a financial leasing company with ship chartering, container leasing and container manufacturing activities. CSCL will charter out the vessels and containers to COSCON. So CSCL will no longer be a container liner. CSCL will recover some value for its office network but seems to be paying dearly, in our view, for the container leasing, manufacturing and financial operations from its parent and the COSCO Group,” Johnson Leung, an equity analyst at Jeffries, said in a research note published Monday.
COSCO Pacific, the terminal arm of the COSCO Group, will buy the port assets of China Shipping and CSCL in order for COSCO to consolidate the container shipping and port business.
In addition, COSCO Pacific will transfer 100 percent of equity interest of Florens to CSCL (Hong Kong). Florens, is the fifth largest container leasing company with about an 11 percent share of the container leasing business. The only larger ones are Triton and TAL (which have announced plans to merge and become the largest), Textainer, and Seaco.
What will happen to the respective liner alliances to which China Shipping and COSCON currently belong as a result of a merger is still unclear.
China Shipping is, at the moment, a member of the Ocean3 Alliance with CMA CGM and United Arab Shipping Co. CMA CGM said that APL, which it is acquiring through the announced acquisition of NOL last week, will eventually become part of Ocean3, though APL noted last week that its acquisition is still subject to regulatory approvals and “Until there is
further development, the G6 Alliance assures that its current service
structure will remain stable, and expects to operate as aligned through
2016.”
COSCON is a member of the CKYHE Alliance along with “K” Line, Yang Ming, Hanjin, and Evergreen Line.
The London-based consultants Drewry said in the latest edition of its Container Insight Weekly, “Consolidation will not do anything to improve industry profitability in the medium term as it merely shuffles the excess number of ships into fewer hands. Further consolidation is a possibility as other lines decide they cannot keep up with the Jones’ but the challenging outlook will subdue valuations, making them less appealing to potential sellers.”
“The world economy has been significantly decelerating in the past few years and the Chinese economy is experiencing the ‘new normal’, stagnation continues in the container shipping market,” said CSCL in an article designed to explain the rationale behind the restructuring. “To counter this challenge and capitalize on the trends toward bigger ships, alliance-based operation, and industry integration; capture the ‘one belt, one road’ strategic opportunities; achieve synergies; and boost overall competitiveness, the companies decided to restructure now. The restructured COSCO will focus on the four strategic dimensions (anti-periodicity, profitability, globalization, and at-scale growth) to continue creating value.”
China COSCO Holdings Company Limited said it will transfer its 100 percent equity interest to China COSCO Bulk to COSCO Group, noting both a slowdown in the Chinese economy and the dry bulk shipping business.
“In recent years, the Chinese economy has been undergoing a structural transformation, which led to a slowdown in commodities such as iron ore and coal. The dry bulk shipping market continues to be weak and there is severe imbalance between supply and demand. Dry bulk shipping companies have been faced with serious challenges.”
The company noted in the first three quarters of 2015, the average Baltic Dry Index (BDI), which reflects dry bulk shipping charter rates “was 744, representing a 32.4 percent decrease compared to the same period of last year. The Company expects that in 2016, the ‘new normal; of the international dry bulk shipping market condition will not be changed significantly.”
Indeed, in the past month the BDI has ranged between 498 and 598.
The company said its board of directors thinks it is in its best interest to dispose of the dry bulk business and “focus on the container shipping business, since the customer base, market driver, shipping cycle and competitive landscape vary considerably between dry bulk shipping and container shipping. The market barrier for dry bulk shipping is significantly lower than container shipping. After the Dry Bulk Disposal, the company will be able to allocate its resources and prioritize the development of container shipping and terminal business, leading to a more refined business structure.”
COSCO, China Shipping merger would see CSCL exit container trade
