Cosco Shipping Holdings’ $1.95 billion share sale is a direct cash injection into the carrier by the Chinese government to support its expansion and finance the building of 20 new vessels to be delivered over the next 15 months.
In its latest newsletter, analyst Alphaliner said Cosco Shipping, which currently owns 45.47 percent of Cosco Shipping Holdings shares, will conditionally subscribe to 50 percent of the new shares, and the remaining 50 percent will be offered to a maximum of nine specific target investors that remain unnamed.
With Cosco Shipping a wholly Chinese state-owned enterprise, controlled by the State-owned Assets Supervision and Administration Commission, the move amounts to a direct cash injection by the Chinese government to support Cosco Shipping Holding’s expansion, the analyst said. Cosco Shipping’s shares in Cosco Shipping Holdings will increase to 46.22 percent after the new shares are issued.
It is an all-Chinese affair, with the total proceeds from the share issue to fund 20 of a total of 29 containerships of 13,800 to 21,250 TEU that were ordered in 2014 and 2015 by Cosco and China Shipping Container Lines (CSCL), which was subsequently taken over by Cosco. All of the newbuildings will be delivered in the coming 15 months, and they are all under construction at Chinese shipyards.
“The Chinese government has sent a clear signal that it will continue to support Cosco Shipping’s growth,” Alphaliner noted.
Cosco Shipping is steadily moving towards becoming the world’s third-largest carrier. Its total capacity will reach 3 million TEU by the end of 2018, boosted by the addition of OOCL’s 710,000 TEU fleet when the acquisition is completed by the first quarter of 2018, and by the 29 newbuildings with a total capacity of 520,000 TEU.
The carrier’s growth rate has been rapid. In 2009 its total capacity was just 500,000 TEU, but a steady influx of newbuildings and the 1.4 million TEU from CSCL and OOCL have ramped up the carrier’s scale.
Eleven of the 20 ships the government is helping purchase are ultra-large container vessels of between 20,000 and 21,000 TEU that will cost $140 million each. The 11 vessels will slot in well with the nine ships of 22,000 TEU ordered by Cosco's Ocean Alliance partner CMA CGM in September. That order — and Mediterranean Shipping Co.'s order for an additional 11 of the 22,000 TEU vessels — took the market by surprise after almost two years of nothing. At more than 1.2 million TEU, Cosco and its Ocean Alliance partners have the largest orderbook of the new alliances, according to IHS Markit data.
However, there are mounting concerns that with such an oversupply of tonnage in the market and a huge amount of new ships to be delivered between now and the end of 2019, for Cosco Shipping to rapidly increase capacity in a relatively low demand environment will limit the carrier’s ability to raise rates and improve profitability.
During the first half of 2017, carriers were successful in managing their capacity through scrapping, idling unused vessels and cancelling sailings, but by allowing capacity to build up through the peak season, deploying additional loaders, and appearing to undercut each other on price, the freight rate fell steadily week after week through the peak period.
And as both SeaIntel and Drewry have pointed out, there is still no indication yet from carriers of any void sailings planned for the slack period between now and Chinese New Year in early 2018.
“With the peak season now over, carriers will be looking back at a 2017 that promised a lot, but only delivered on volumes but not on rates,” SeaIntel said in its Sunday Spotlight newsletter. “Rates seem to have been anemic as the demand simply could not soak up the excess capacity, especially as carriers have almost completely avoided blanking sailings in 2017.”
Drewry agreed that there has been a complete lack of service suspension announcements for the traditional shipping slack season in the fourth and first quarters, and carriers were putting their annual Asia-Europe contract prospects at risk if they did not take measures soon on the supply side to arrest falling spot rates.