Cosco, China Shipping Form Strategic Alliance

February 27, 2014 – As many global shipping lines band together to counter the market’s prolonged downturn, China’s two dominant shipping operators are putting behind their dueling past to form a strategic alliance.

State-owned giants China Ocean Shipping (Group) Co (Cosco) and China Shipping (Group) Co, have agreed to cooperate and share resources in crucial business areas, including ports, logistics and shipbuilding, in addition to actual shipping, reported The Wall Street Journal.

The arrangement between the formerly intense rivals underscores the significant financial pressures they face at a time of rock-bottom freight rates.

With the pact, signed earlier this month, the companies said they hope to “improve the influence of Chinese shipping companies in the world shipping industry”.

The global shipping market is entering its sixth year in the doldrums as many large ships ordered during the industry’s heydays were put into service just as the economic slowdown slashed cargo demand. Traffic on Asia-Europe routes was particularly weak over the past few years.

Overcapacity has meant that freight rates remain subdued, despite a pick-up in some key routes, hurting profits of major shipping companies.

Beijing-based Cosco is the world’s fifth biggest container shipping company, based on fleet size, and China Shipping the ninth largest.

The deal between Cosco and China Shipping comes just as a major route-sharing alliance between the world’s three biggest container shipping operators gets set to launch in the second quarter. Denmark’s Maersk Line, France’s CMA CGM and Switzerland’s Mediterranean Shipping Co are expected to receive approval on their tie-up from the US Federal Maritime Commission, people familiar with the matter said earlier this month, though the commission will likely attach conditions to ensure fair treatment for smaller competitors, freight forwarders and fuel providers.

“It is increasingly challenging for a standalone shipping operator to operate on international trade lanes,” said Zhang Yongfeng, deputy director at the Shanghai International Shipping Institute.

For China Shipping, the tie-up with Cosco raises expectations that the Shanghai-based company will pool its international container shipping capacity by joining an alliance led by Cosco.

Members of that alliance, called CKYHE, include Japan’s Kawasaki Kisen Kaisha, Taiwan’s Yang Ming Marine Transport, South Korea’s Hanjin Shipping, and its newest member, Taiwan’s Evergreen Line, which joined last week.

Guo Huawei, board secretary at Cosco’s listed shipping unit, declined to comment on any changes to the international alliance. China Shipping couldn’t immediately be reached for comment.

Some analysts say that the closer collaboration between Cosco and China Shipping could be seen as a partial step toward a merger.

“The agreement does not constitute merger talks, but it represents a solid step towards becoming a consolidated Chinese container carrier,” said Alan Murphy, chief operating officer at container shipping consultancy SeaIntel Maritime Analysis.

Still, many industry experts say that both companies wouldn’t benefit significantly from an all-out merger, because of the difficulties for state-owned companies to cut staff and reduce overlaps in order to improve efficiencies.

China’s transition toward a free-market economy had encouraged competition among state-owned enterprises, pitting Cosco – which was established more than five decades ago – against the smaller China Shipping. The companies have competed on international routes, benefiting from the earlier robust demand from the West for Chinese-made consumer goods. The companies had even poached employees from each other, a sign of intense rivalry.

Cosco’s significant port and bulk-shipping assets have helped it build a more significant global profile than China Shipping. But Cosco made bad bets on China’s continued expansion, boosting capacity just as the shipping market was collapsing, sinking the firm in deep losses.

China Cosco Holdings, Cosco’s publicly listed arm, said earlier it expects to return to profit in 2013 but only with the help of large asset sales. Meanwhile, China Shipping Container Lines says it will likely swung to a 2013 net loss of US$431 million because of market competition.

Source: Cargonews Asia