The latest container insight report released by Drewry Shipping Consultants details the potential ramifications of the newly proposed merger between Cosco and China Shipping, with the consultancy arguing that it could cause a domino effect on the industry, with further Asian carrier mergers potentially causing damage to the level of competition within the industry.
Details remain patchy but it appears that Cosco and CSCL are part of a much broader effort to consolidate China’s state-owned enterprises that was announced earlier this year.
Leading executives from the companies are understood to be working on a preliminary plan to be released before the end of 2015.
In the container market, Cosco and CSCL currently sit in sixth and seventh place, respectively, in the rankings of carriers by operated TEU.
Based on today’s fleet the combined entity would comfortably move into fourth place with a total fleet in excess of 1.5 million TEU, giving a world share of around 8%.
Drewry believes that 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.
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.
If combined, the carriers would be able to access better financing synergies from banks and capital markets.
The next question to ask therefore is: what will happen to the carrier alliances the two lines participate on the East-West trades? Cosco is a long-standing member of the CKYHE Alliance, while CSCL is a part of the O3 consortium.
Neil Davidson, Senior Analyst for ports and terminals at Drewry, said: “Basically if one of the alliances loses a Chinese carrier, then that will have to try and find a way to fill the void. The reason being that the primary purpose of the alliances is to have enough cargo collectively to fill the size of ships deployed by the alliance partners. So if you lose an alliance member, you lose that member's cargo – but you still have big ships to fill.
“It's also important to remember that even if the Cosco-China Shipping merger goes ahead, the number of container ships in the world fleet will stay the same. So although the number of players would reduce (and this would help to reduce the level of, arguably, excessive competition), the supply of ship capacity won't go down so there will still be pressure on freight rates.”
A merger of the O3 and CKHYE alliances would mean a combined market share above 40% and unlikely to be approved by regulators. Instead, both the CKYHE and Ocean Three will be faced with a major void to fill were they to lose either Cosco or CSCL to the other carrier group.
Depending on which alliance wins or loses its Chinese member, the O3 alliance and the CKYHE alliance will decline to a market share of just 13% or rise to a market share of 28%.
Drewry View: A merger between Cosco and CSCL makes sense for China, but the ramifications for the container shipping industry could be far-reaching.