China Shipping Merger Still Leaves Capacity Challenge in Place
China could be creating Asia’s biggest container shipping company through a merger of two titans. But the plan doesn’t address the central issue confronting the industry for at least five years now: too many ships, with too much cargo space, plying the seas.
Combining China Cosco Holdings Co. and China Shipping Container Lines Co. would create economies of scale allowing the merged company to compete with bigger rivals such as AP Moeller- Maersk A/S in the race to export sneakers and home appliances around the world. Globally, shipping lines have been cutting costs, selling assets and strengthening partnerships to curb losses amid a slump in rates since 2011 caused by too much capacity.
“Even with the merger, the overcapacity problem will still be there,” Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul, said of the China Shipping and China Cosco merger.
“It’s not like the number of ships in their fleet will be cut because of the merger. Rather, it’s probably going to delay a recovery even more.”
The shipping merger is part of a government-led overhaul of China’s state-run entities to make them more efficient and more competitive internationally. Ripe for consolidation are state- owned enterprises with overlapping businesses in competitive industries, CICC analysts led by Hanfeng Wang wrote in a research note Aug. 10.
Sectors likely to be overhauled include construction, defense, telecommunications, non-ferrous metals, tourism and other consumer service industries, the CICC team said.
On Aug. 12, four companies controlled by Aviation Industry Corp of China, the government-owned planemaker, halted trading of their shares pending announcements on “major items,” according to statements to the Shanghai and Shenzhen stock exchanges. AVIC Capital Co. has been halted since Aug. 6 awaiting news.
Mergers of shipping and aviation giants would follow the combination in May of state-owned CSR Corp. and China CNR Corp. to form CRRC Corp., a train equipment maker that dwarfs foreign rivals Siemens AG and Alstom SA.
China may combine China Shipping Group and Cosco Group or merge some of their operations, people familiar with the matter said Aug. 7. Trading of their subsidiaries, including China Cosco and China Shipping Container Lines, has been suspended since Aug. 10, ahead of “major transactions” by their parent companies.
China could set up a holding company that would own and provide funds to the shipping entities, which will be responsible for their daily operations, Barclays said in a report Aug. 11. There could be more consolidation in the industry, possibly including Sinotrans Group, CSC Group and China Merchants Group, it said.
Beijing-based China Cosco, which in recent years has been struggling to turn around its dry-bulk business, expects to show a 1.9 billion yuan ($300 million) profit for the six months ended in June, from a 2.3 billion yuan loss a year earlier, the company said in a July 30 regulatory filing.
Subsidies to decommission and upgrade vessels contributed to the profit, China Cosco said. The government has been providing tax breaks and other incentives to support China’s shipping industry.
“They’ve burned enough cash over the past few years and they needed to get their act together,” said Rahul Kapoor, a Singapore-based director at Drewry Maritime Services Pvt. The merger is “more about getting the capital set right than any other synergies.”
Shares of China Shipping Container have risen 77% in Shanghai and 27% in Hong Kong so far this year, compared to a 21% rise in the Shanghai Composite Index through Aug. 11 and a 3.8% gain in Hong Kong’s Hang Seng Index.
Shares of China Cosco are up 62% this year in Shanghai and 29% in Hong Kong.
