M&A activity in ocean cargo carrier sector has shippers concerned

In the wake of one government-backed carrier being reportedly being put up for sale (Singapore’s NOL), China is preparing to merge two of its state-owned shipping entities, China Cosco and China Shipping Container Lines (CSCL).

Cosco and CSCL currently sit in sixth and seventh place respectively in the rankings of carriers by operated twenty-foot equivalent units (TEUs).
Based on today’s fleet the combined entity would comfortably move into fourth place with a total fleet in excess of 1.5 million TEUs, giving a world share of around 8 percent.

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. Between them the two carriers have lost approximately $900 million in operating losses from container operations in the previous five years. It makes little sense to have two national (i.e. state-controlled) carriers competing fiercely against one another and against non-Chinese carriers in the same markets
Drewry researcher Simon Heaney, notes however, that there is a hint of “double standards” about this story.

“It was Chinese competition regulators that blocked the proposed P3 alliance between the world’s three largest carriers Maersk Line, MSC and CMA CGM last year. After blocking P3 on competition grounds, it seems now that China is happy for the number of major carriers to shrink by one.

Shippers should also be wary that if the merger goes ahead it has the potential to cause a domino effect on existing carrier alliances and inspire further carrier mergers in Asia that will be damaging to industry competition.

The first question to ask 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 alongside K Line, Yang Ming, Hanjin and Evergreen; while CSCL is a part of the Ocean Three consortium alongside CMA CGM and UASC that was set-up at the start of this year.

A merger of the Ocean Three and CKHYE alliances would mean a combined market share above 40 percent unlikely to be approved by regulators. Instead, both will be faced with a major void to fill were they to lose either Cosco or CSCL to the other carrier group as each carrier provides around one-quarter of their respective alliance’s fleet. Depending on which alliance wins or loses its Chinese member, Ocean Three and CKYHE will decline to a market share of just 13 percent or rise to a market share of 28 percent, based on today’s vessel deployment.

Drewry maintains that any sale of NOL-APL – part of the G6 Alliance – would also adjust the market shares, depending on who buys it.

Heaney says the next question to consider is: if and when the merger occurs, will other countries be forced to consider similar consolidation of their shipping lines?
“While none can match the operating losses of the two Chinese carriers, carriers from other Asia countries have struggled more than their European counterparts in recent years. A merger between Cosco and CSCL makes sense for China, but the ramifications for the container shipping industry could be far-reaching,” concludes Heaney.

Eli Dolgansky,  a member of the Business Development team at LILLY + Associates in Miami, says the potential merger “puts competition on high alert.”