It's Official: China Confirms COSCO, China Shipping Merger

By Bloomberg News

(Bloomberg) — China announced plans to reorganize two major shipping groups with combined revenue of more than $40 billion, paving the way for the creation of one of the world’s largest container lines and demonstrating the country’s intent to create national champions that are globally competitive.

China Ocean Shipping Group and China Shipping Group will consolidate operations, the State Council’s State-owned Assets Supervision and Administration Commission said in a statement on its website Friday. That involves the creation of four listed entities that will each focus on an aspect of the shipping business: container shipping, shipping financing, oil-and-gas shipping and the global terminal business, according to the official Xinhua News Agency. The various units have yet to make any announcements.

China is overhauling inefficient state-run companies to bolster an economy headed for its slowest growth in 25 years. The plan aims to cut down sectors plagued by overcapacity while creating globally competitive firms in high-value sectors such as aerospace and advanced rail technology.

Bloomberg News reported the possible combination of the two Chinese companies Aug. 7. Three days later, at least eight listed units of China Shipping Group and Cosco Group suspended trading in Hong Kong and Shanghai, citing possible “major transactions” by the parent companies.

Four Areas

After the completion of restructuring, China Cosco Holdings will be the listed entity for container shipping, taking over container ships and containers from China Shipping Container Lines, also known as CSCL, on a leased basis, according to Xinhua.

A combination of the two container line businesses would give the combined entity a 7.7 percent share of the container market, overtaking Hapag-Lloyd AG to become the fourth biggest in the industry, according to Alphaliner. CMA CGM, which earlier this week bought Singapore’s Neptune Orient Lines Ltd., would retain its third spot with 11.5 percent market share, Alphaliner said.

CSCL will assume the mantle of shipping financial services, while Cosco Pacific Ltd will front the combined global terminal business after acquiring wharf assets held by China Shipping CSCL. China Shipping Development Co. will be the focal point for oil and gas transportation business.

Rail Precedent

Friday’s shipping deal follows the merger in May of CSR Corp. and China CNR Corp. to create CRRC Corp., a train equipment maker that dwarfs foreign rivals Siemens AG and Alstom SA. That step signaled China’s intent to create huge companies whose economies of scale would allow them to compete more aggressively for overseas deals.

Earlier this week, China Minmetals Corp., the country’s biggest metals trader, agreed to buy China Metallurgical Group Corp., a government-owned engineering and mining group. SASAC is setting up a state-owned fund to absorb bad debt in the mining sector, people familiar with the issue said Wednesday.

China set earlier on Friday a two-year deadline for loss- making enterprises owned by the central government to improve their performance, with firms that suffer losses for three straight years liable to be shut down, while sending a signal to firms controlled by provincial governments to step up their act.

Shipping Woes

Combining the operations could help the shipping companies enlarge their presence and improve bargaining power, but wouldn’t immediately address the overcapacity the industry has faced in recent years. Ships with a combined capacity of about 2.9 million 20-foot containers are expected to be delivered this year and next, according to Drewry Shipping Consultants Ltd., even as lines are removing vessels on some trades to lift rates during the slow winter season.

Spot rates to haul a 20-foot container to Europe from Asia fell to $275 for the week ended Dec. 4, down 50 percent from a week earlier, according to the Shanghai Shipping Exchange. Rates to the U.S. West Coast dropped to $891 per 40-foot box.

On Dec. 7, CMA CGM offered to buy Neptune Orient for S$3.38 billion ($2.4 billion), a deal aimed at solidifying CMA CGM’s position as the world’s third-largest container shipping company and narrowing the gap with market leader A.P. Moeller-Maersk A/S. The companies need antitrust approval from the U.S., Europe and China to complete the purchase by August.

China Shipping Container Lines, the world’s seventh-largest container line, according to the Alphaliner website, is in an alliance with CMA CGM and United Arab Shipping Co., while Cosco, the world’s sixth largest by capacity, is part of CKYHE. Both Chinese companies have port-terminal operations as well as container shipping and dry-bulk shipping businesses.

China Shipping Group had revenue of 82.8 billion yuan ($12.8 billion) in 2014, while Cosco Group had revenue of 169.3 billion yuan, according to its website.