Container Analytics
with Ben Meyer
Last month, this column examined the possibility of Singapore-owned investment company Temasek Holdings selling Neptune Orient Lines, parent company of ocean carrier APL (“Who wants to buy NOL?,” page 48). Now, COSCO Container Lines and China Shipping Container Lines (CSCL) are reportedly in talks to merge at the request of the Chinese government.
An unnamed COSCO executive told Beijing-based Caixin Media that the central government has “urged the two companies to draft a preliminary merger plan within three months starting from August.” In the midst of these discussions, both carriers suspended trading of their shares on the Hong Kong Stock Exchange and then extended the suspension indefinitely while they contemplate their next move.
As with a potential NOL sale, combining the two Chinese giants would not be simple. It would require an immense integration of networks and systems, including COSCO’s ship repair and conversion, shipbuilding, offshore marine engineering, container manufacturing and leasing, and terminal operator subsidiaries.
Further complicating matters is the fact that each carrier is a member of a different large-scale vessel alliance, cooperating with fellow alliance carriers on the major east-west trades. COSCO is a member of the CKYHE Alliance, which includes “K” Line, Yang Ming, Hanjin Shipping and Evergreen Line, and CSCL is a member of the Ocean3 Alliance along with CMA CGM and United Arab Shipping Co.
Both COSCO and CSCL have struggled to turn consistent profits in recent years, which is a concern long-term for China in an industry where there doesn’t seem to be such a thing as a “small loss.”
Since reporting meager profits in 2008, COSCO’s container-shipping and related businesses have posted annual losses totaling $2.03 billion and CSCL has only fared slightly better, accumulating combined losses of $684 million during that time. It’s not all doom and gloom, however, as COSCO and CSCL reported respective profits of $164 million and $316 million for fiscal 2014 and $252 million and $3 million in the first half of 2015.
This raises many questions: Will the short-term return to profitability scuttle, or at the very least, delay such an agreement? How would a merger affect alliance operations? In other words, would either COSCO or CSCL consider leaving their respective alliances in a merger deal? Or would a merger allow either carrier access to the alliance capacity of the other, meaning COSCO would have the ability to purchase slots on any Ocean3 service and CSCL would have the same rights regarding CKYHE loops?
If the latter is the case, this could potentially be a very beneficial move for both the carriers and their customers as each would almost double the number of service options and available capacity it can offer to shippers. On the other hand, this may not sit well with other members of those same alliances, not to mention regulatory authorities, as the combined company would potentially be in a position to outmaneuver its competitors in terms of service offerings.
The chart below, built with data from BlueWater Reporting’s Carrier Ranking Report, compares the combined overall deployed capacity of COSCO and CSCL with the other top lines by individual capacity.
Source: BlueWater Reporting.
Ranked sixth and seventh in the world in terms of deployed fleet capacity at 838,720 TEUs and 761,605 TEUs, respectively, COSCO and CSCL have a total deployed fleet capacity of 1,600,325 TEUs. A merger between the two would immediately vault the combined company to the No. 4 spot behind Maersk Line (3,150,567 TEUs), Mediterranean Shipping Co. (2,600,369 TEUs) and CMA CGM (1,855,962 TEUs), and just ahead of Hapag-Lloyd (1,023,128 TEUs) and Evergreen (969,831 TEUs).
Normally, a merger of this size would likely necessitate the disposal of some containerships as part of a general rationalization of shared assets. For COSCO and CSCL though, this may not be the case as both are expected to take delivery of several ultra-large containerships they have on order in the next year or two. And The Wall Street Journal reported just last week CSCL is considering ordering an additional 10 vessels with capacities of over 20,000 TEUs each, so these numbers could actually continue to grow post-merger. Whether or not a tie-up would result in long-term financial stability, however, is another question entirely.
Meyer is web editor of American Shipper and a research analyst with BlueWater Reporting. He can be reached by email.
This column was published in the August 2015 issue of American Shipper.