Drewry: Cosco, CSCL Merger to Shake up Container Shipping
Industry analyst Drewry believes that the proosed merger between Chinese state-owned companies, Cosco and China Shipping Container Lines (CSCL), could cause a domino effect on existing carrier alliances and further carrier mergers in Asia damaging to industry competition.
China is said to be planning to merge is two container shipping majors China Cosco and CSCL within efforts to consolidate state owned enterprises.
Although merger talks between the world’s fourth and eighth largest container carriers are unlikely, Drewry expects that both will have to take radical remedial action this year.
After two consecutive years of losses, ‘special treatment’ was enforced last week on China Cosco Holding’s A shares by the Shanghai Stock Exchange. This means, among other things, that daily trading of the company’s A shares (not voting H shares) has been reduced from 10% to 5%, and the flotation of additional shares will be more expensive.
Moreover, should China Cosco lose money again this year, it could result in a complete suspension of the listing.
It is taking the danger seriously. Remarking on the first remedial step taken to ensure a profit this year, involving the ‘internal’ sale of Cosco Logistics to Cosco Group for RMB 6.7 ($1.1) billion, China Cosco Holdings said: ‘The disposal is expected to improve the earning performance of the Group in 2013, thus reducing the risk of the shares being suspended from trading on the A-share market, which is in the best interests of the shareholders as a whole.’ The deal is still subject to shareholder approval on 26 April.
If agreed, it is expected to raise a pre-tax profit of RMB 2 billion ($311 million). However, assuming that the shipping market remains flat in 2013, this will not be enough to produce a net profit, so further restructuring and asset sales seem probable.
China Cosco’s total loss for 2012 reached RMB 8.1 ($1.3) billion, which was slightly higher than the previous year’s loss of RMB 8,885 million.
Rationalisation of services offered by Cosco and CSCL seems inevitable in the long term as they both provide similar functions in the same market segments, and one bleeds the other. Assets sales are only a short-term solution.