Cosco-OOCL merger ‘will further strengthen sea freight rates’

7/23/2017

The planned acquisition of OOCL’s parent group Orient Overseas International Ltd. (OOIL) by Chinese state-owned Cosco Shipping Holdings Ltd. (Cosco) and Shanghai International Port Group Co. (SIPG) will further limit customer choice and contribute to strengthening sea freight rates as the world’s top container lines continue to consolidate their grip on global capacity.

In its analysis of the effects on ocean freight customers of the planned acquisition following its announcement earlier this month, container shipping analyst Drewry said even though OOCL will remain as a separate brand upon completion of the deal, it is “questionable” just how independent Cosco and OOCL will be from one another. “Effectively, shippers will be losing yet another carrier from the pool,” Drewry said, a pool that has been shrinking so much recently that it “increasingly resembles more of a puddle”.

Drewry added: “After all of the latest M&A (merger and acquisition) deals have been concluded and the existing newbuildings have been delivered, by 2021 the top seven ocean carriers will control approximately three-quarters of the world’s containership fleet. Back in 2005 the same bracket of carriers held a share of around 37%.”

Drewry research shows that the number of vessel operators on the two biggest deep-sea trades, the transpacific and Asia-North Europe, has reduced significantly over the past two years. As of June 2017, there were only nine different carriers (eight if you discount OOCL) deploying ships in Asia-North Europe, compared to 16 in January 2015. In the transpacific, the number has reduced from 21 to 16 (15 without OOCL) over the same period, Drewy said.

“The accelerating trend towards ‘oligopolisation’ in container shipping will reduce shippers’ options and raise freight rates,” Drewry said. “It is the unfortunate price to be paid for years of non-compensatory freight rates that have driven carriers to seek safety in numbers, either through bigger alliances or M&A.”

In its wider analysis of the planned takeover deal, which values OOIL at around HK$49.2 billion (US$6.3 billion), Drewry noted that OOIL and its container unit OOCL have “a good track record for above-average profits in a challenging market and a reputation for being a very well-run company”, earning the moniker “The Perfect Bride” by Drewry Maritime Financial Research. “Retaining the management team, processes and systems is a wise move and could be of enormous value to Cosco, in our opinion,” Drewry said.

From a hardware perspective, OOCL has an owned-fleet of 66 containerships aggregating approximately 440,000 teu. Based on existing fleet and orderbooks, the combined Cosco-OOCL entity would become the world’s third-largest container carrier, overtaking its partner in the Ocean Alliance, CMA CGM, Drewry said.

Operationally, fitting OOCL into the bigger company “should not be too difficult, as both OOCL and Cosco already belong to the Ocean Alliance (alongside CMA CGM and Evergreen) that operates mainly in the East-West container trades”.

The biggest impact will be felt in intra-Asia, where both carriers already have a large presence, while the footprint in the Asia to Middle East trade will also rise significantly, Drewry added.

From a marketing perspective the acquisition of OOCL “will enable Cosco to broaden its customer base, having previously being perceived, rightly or wrongly, as China-centric”, Drewry noted. “OOCL’s reputation and history with global shippers will provide Cosco with an inroad to a wider selection of big Western shippers with volume.”

Drewry said it was initially unclear whether the planned deal would run into any likely regulatory obstacles. “But recent container M&A such as Maersk Line’s recent takeover of Hamburg Süd and the proposed ONE merger of Japanese carriers have all encountered minor issues; so the possibility of some conditions being applied by non-Chinese authorities cannot be entirely discounted,” Drewry said. 

On the question of who may be the next target in the consolidation process in container shipping, Drewry commented: “The sale of OOIL/OOCL means there aren’t many other takeover candidates left on the shelf. Such is the scale of the carriers within the ‘top 7’ that any merger within that group would find it difficult to pass regulatory approval. There could still be some minor regional acquisitions but the big wave of container M&A looks to have been concluded with this deal.”

And in terms of the wider impact on the container shipping sector, Drewry said carriers had moved “one step nearer to Liner Paradise” – or at least the larger carriers had.

“Where there are losers, there are winners. Notwithstanding any potential roadblocks to future M&A, the consolidation that has already occurred, plus much brighter market prospects and the moratorium on new ships, offers carriers a golden opportunity for far greater profitability in the near future.”

Drewry concluded: “With fewer carriers that in time will become financially stronger, the pendulum is swinging back towards those that have grown to survive.”