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Shipping’s landmark deal – merger of Cosco and China Shipping

Shipping’s landmark deal – merger of Cosco and China Shipping
After months of speculation, rumours of the merger of China’s twin giant shipping conglomerates have finally been laid to rest. China’s powerful State Council officially announced last week that it has given the go-ahead for Cosco Group and China Shipping Group (CSC) to merge.

A share trading halt was called on 10 August on the listed units of both Cosco and CSG, pending news of the possible merger. By then, the likelihood of the merger can be said to be an almost confirmed deal, as Beijing had also already asked the two companies to draft a preliminary merger plan within three months starting from August.

The trading suspension has since been lifted after Cosco and CSG both revealed details of their merger, saying that their container shipping, ports and terminals, leasing and financial services, tankers, and dry bulk businesses will be grouped into separate entities.

Due to the complexities involved, as the two companies have businesses in several sectors, their merger is expected to be a challenging and difficult process, and scheduled to be completed in 2017.

Analysts were quoted in news reports saying that the merger would bring about larger economies of scale for Chinese shipowners to compete with foreign players such as Denmark’s Maersk Line and France’s CMA CGM.

According to shipping analyst Drewry, Cosco and CSG are currently the sixth and seventh in rankings of global carriers by operated vessel tonnage. Upon merger, their combined capacity would reach around 1.5m teu based on today’s fleet, repesenting 8% of global capacity and making them the world’s number four biggest carrier.

But Drewry also noted that the financials of the two shipping conglomerates are of concern. Since the post-Lehman Brothers crisis, the two groups have accumulated combined losses of around $911m over the last five years.

Back in March 2009, shipping firms Sinotrans and China Changjiang National Shipping Corp (CSC) merged to become the present day Sinotrans & CSC Group.

It is also worth recalling that almost a decade ago in 2006, China’s central government issued a plan to cut the number of state-owned enterprises it controlled from 161 to around 80-100 by end-2010. The merger of shipping companies was part of the plan.

Rumours of the merger of Cosco and CSG have been in the market since 2010, after several state-owned enterprises of other industry sectors have merged. Following a cooperation between Cosco and CSG’s bulk shipping unit China Shipping Development Co (CSDC) over the valemax business with Brazil’s Vale, the merger rumours surfaced again in earlier this year.

In mid-April, the two shipping groups dispelled the speculations and said they did not received any notifications from the relevant authorities regarding the merger.

It is also worth noting that more clarity would be needed on how Cosco and CSG intend to stick to their operational cooperation in their respective alliances, namely CKYHE for Cosco and Ocean Three for CSG’s China Shipping Container Lines (CSCL).

Drewry pointed out that the current market share of CKYHE and Ocean Three combined is around 40%, and for whichever alliance to lose Cosco or CSG, it would face a certain amount of pressure to replace the capacity gap.