china cosco cscl

Chinese Shipping Rivals Cooperate Amid Global Downturn

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October 17, 2012

china cosco cscl

SHENZHEN–Shipping giant China Cosco Holdings Co. (1919.HK, 601919.SH) is teaming up with its Shanghai-based archrival to jointly operate major domestic routes amid the global downturn, fuelling speculation that a merger between the two state-owned firms is in the works.

In their first domestic tie-up, Cosco and China Shipping Container Lines Co. (2866.HK, 601866.SH) will pool capacity on container routes operating to and from the eastern Fujian province, with plans to further expand domestic cooperation in the future. On Wednesday, Cosco Vice Chairman Ma Zehua said the firms are also looking at jointly operating international routes.

“As an individual company we won’t be able to fight the downturn…so we’ll forge more cooperation with China Shipping,” Mr. Ma said on the sidelines of a shipping conference in the southern city of Shenzhen.

China’s transition into a more market-based economy has encouraged competition among state-owned enterprises, pitting Beijing-based Cosco–the nation’s shipping icon with a 51-year history–against the smaller China Shipping. For years, the two companies competed directly on major international shipping routes, benefiting from robust demand from the West for Chinese-made consumer goods.

Though Cosco, with its vast ports and bulk-shipping assets, has built up a more-significant global profile than its main competitor, it made bad bets on China’s continued rise, boosting capacity just as the shipping market collapsed, sinking the firm deep in losses.

Cosco, the world’s fourth-biggest container shipper by shipping volume, reported a first-half net loss of 4.87 billion yuan (US$779 million), far underperforming eighth place China Shipping’s CNY1.28 billion loss, as the global industry suffered from low shipping rates with demand, particularly on European routes, remaining lackluster.

Cosco is on track to report a second consecutive annual loss, adding to last year’s loss of CNY10.5 billion yuan. If losses extend into a third year, the company would be delisted in Shanghai, under the exchange’s regulations. Cosco’s shares also trade in Hong Kong.

Cosco’s financial weakness is raising concerns that the company will need additional capital from the market or even a bailout from the government, which controls more than half its stock. Cosco’s difficulties are also bringing forth speculation among analysts that China may want to combine the nation’s two main shippers.

A high-profile courtesy visit this year to China Shipping’s headquarters by Cosco’s charismatic chairman, Captain Wei Jiafu, as well as numerous middle- and senior-management swaps between the groups, further drummed up expectations of a possible merger.

Cosco’s Mr. Ma on Wednesday acknowledged that the merger speculation is rife. “Since the beginning of this year, senior executives of the two companies have had more communication,” the executive said, though he stopped short of denying the merger plans.

“I’m aware of the rumors of a possible merger, but it’s just speculation and I’m afraid I won’t be able to give you any satisfactory answer,” he said, while to declining to comment on a possible government bailout.

An executive at China Shipping, who declined to be named, said Wednesday that any decision on a potential merger between the two companies will need to be made by China’s State-owned Assets Supervision and Administration Commission, or Sasac, which oversees the nation’s key state-owned enterprises. The executive declined further comment.

Sasac controls China Ocean Shipping (Group) Co., the parent of listed Cosco Holdings, as well as China Shipping Group, the parent company ofChina Shipping Container Lines.

“There is no economic rationale for China to have two large carriers that compete with each other in both international and domestic markets,” said Tan Hua Joo, executive consultant at ship consulting firm Alphaliner, on the sidelines of the Shenzhen conference.

Mr. Tan said he believes the recently disclosed domestic cooperation between Cosco and China Shipping was driven partly by excessive competition that has hurt both companies, noting it makes sense to have one big national player.

Still, analysts said political hurdles in China may hold back any merger in the foreseeable future, as the operations of many state-owned firms are intertwined with regional political interests.

“From an overall perspective, the merger would be a perfectly logical move to do,” said Lars Jenson, chief executive at consultancy SeaIntel Maritime Analysis. “But the caveat here is whether or not the Chinese [government] is politically willing to let this happen. That would be the major obstacle.”

By Joanne Chiu and Colum Murphy

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