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  August 23rd, 2015 | Written by

Possible Merger of China Ship Lines: The Good News and the Bad

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  • The Cosco-CSCL merger is part of a broader effort to consolidate China’s state-owned enterprises.
  • Drewry: “A merger would likely entail much better financial efficiencies and prudent use of the capital.”
  • Drewry: A domino effect caused by a Cosco-CSCL merger would be “damaging to industry competition.”

The possibility that China could merge its two national carriers China Ocean Shipping Co. (Cosco) and China Shipping Container Lines (CSCL), could have positive effects on China’s shipping picture but negative effects globally. That, according to recent analysis from Drewry, the London-based shipping consultancy.

The merger may be part of a much broader effort to consolidate China’s state-owned enterprises that was announced earlier this year.

Cosco and CSCL currently occupy sixth and seventh place in the container market. A combined entity would move into fourth place with over 1.5 million TEUS, and a world market share of eight 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,” says the Drewry report. “It makes little sense to have two national (ie state-controlled) carriers competing fiercely against one another and against non-Chinese carriers in the same markets.”

Both Cosco and CSCL’s financial performance have deteriorated since the global financial. Overcapacity didn’t help, Drewry noted, but their “operating and financial performance has been far worse than their peers.” The two carriers have lost $911 million from container operations in the last five years.

“A merger would likely entail much better financial efficiencies and prudent use of the capital,” says Drewry. “The combined entity will be able to get access to better financing synergies from banks and capital markets.”

Another question is what will happen to the two carriers’ alliances. Cosco belongs to CKYHE while CSCL is a part of Ocean Three. “A merger of Ocean Three and CKHYE would mean a combined market share above 40 percent and unlikely to be approved by regulators,” Drewry concluded. “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.”

Another ramification of the merger is whether countries will consider similar consolidations. The largest Japanese and South Korean container lines have lost nearly a billion dollars in the last five years.

A domino effect caused by a Cosco-CSCL merger would be “damaging to industry competition,” according to Drewry.

The consultants also noted that governments often discourage carrier alliances on competition grounds, as did China with the rejection last year of the P3 alliance, even though alliances “arguably maintain competition and help reduce costs…A more serious competition risk – the reduction in the number of carrier competitors (APL is also up for sale) seems to be encouraged by governments.”