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COSCO/OOCL merger inches closer

The COSCO Taicang in 2015. ( Photo: Wikimedia Commons )

The June 30 deadline for Chinese state-backed maritime carrier COSCO’s $6.3B acquisition of Orient Overseas Container Line (OOCL), based in Hong Kong, is quickly approaching even as some doubts remain about whether the deal can be closed in time. Protectionist policies and national security concerns may prevent COSCO’s attempt to further consolidate the Asia-North America export business and bring more efficiencies to the supply chain by operating a container terminal in Long Beach. 

The Committee on Foreign Investment in the United States (CFIUS) has yet to approve the deal, citing national security concerns relating to OOCL’s ownership of the Long Beach Container Terminal at the Port of Long Beach. While, by all accounts, OOCL has been a good steward of the port, the CFIUS is wary of allowing China to operate an American port so close to the Coast Guard, Navy, and Air Force bases in the region.

On June 18, the United States Senate passed the Foreign Investment Risk Review Modernization Act, which is embedded within the National Defense Authorization Act for the upcoming fiscal year. This piece of legislation expands the scope of CFIUS reviews, invites reviews on new threats, streamlines the review process, and adopts a risk-based approach to reviews that allows CFIUS to focus on investments from “countries of special concern.” 

The NDAA still has to be passed by a House-Senate conference before landing on President Trump’s desk, and there are some important differences in the Senate version of the bill with regard to sanctions on Chinese technology company ZTE. Originally, the Commerce Department banned ZTE from buying American products like semiconductors for seven years, in retaliation for ZTE’s violation of sanctions against Iran and North Korea. 

Chinese premier Xi Jinping personally lobbied President Trump to reverse the sanctions, and Trump agreed to reverse the ban on buying American products if ZTE paid a $1B fine, replaced its senior management, and integrated American compliance officers into its corporate structure. The Senate version of the NDAA upholds the harsher Commerce Department penalties, which Xi said would put ZTE entirely out of business. The Senate passed the NDAA 85-10, a veto-proof majority, but will still have to negotiate with House members led by Rep. Mac Thornberry (R-TX), chairman of the House Armed Services Committee.

It’s unlikely that the new NDAA and its beefed-up CFIUS will be signed into law in time to affect the COSCO/OOCL deal. What we find most interesting how the various players in the American government—Commerce, President Trump, and Congress—are struggling to come to agreement on the complex intersection of trade and national security. After all, though President Trump is trying to minimize the impact of the ZTE sanctions, his administration justified the steel and aluminum tariffs by appealing to national security, the same set of issues that pose a threat to the maritime mega-merger.

This morning, Splash 24/7 reported that OOCL has proposed a carveout for the terminal, offering to place the property in a year-long trust while it looks for a buyer. 

According to Alphaliner’s current statistics, COSCO is the fourth-largest container fleet in the world, maintaining 9.1% market share with a capacity of 2.024M TEUs, while OOCL holds the eighth position and a market share of 3.1% with a capacity of 688.9K TEUs. The capacity numbers combine owned, chartered, and ordered vessels. If the two companies complete their merger, the new fleet will supersede the French CMA CGM line as the third largest fleet in the world, after Maersk and MSC. The combined enterprise will also be the single largest carrier of US imports, with 13% of market share.

With or without OOCL, though, COSCO still has big plans to increase its fleet’s capacity. COSCO has a huge orderbook including eleven 19-21K TEU vessels and seven 13.8-14.5K TEU vessels due to be delivered by the end of this year, representing an additional 16.5% of its existing fleet.

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.