Cosco Shipping Holdings plans to buy Orient Overseas Container Line (OOCL) with the help of Shanghai International Port Group (SIPG) for $6.3 billion, in a deal that would maintain the Hong Kong carrier’s brand and marks a new chapter in ongoing industry consolidation.
The deal, subject to regulatory approvals, culminates long-running speculation that Cosco would purchase OOCL, a carrier seen by some analysts as the only attractive takeover target of substantial size remaining in the market following rapid carrier consolidation over the past year and a half.
The combined Cosco Shipping, a subsidiary of Cosco Shipping Holdings, and OOIL would have a fleet of more than 400 ships and a total capacity of 2.9 million TEU including the orderbook. Together, Cosco and OOCL would operate the third-largest mega-ship fleet and be the second-largest mover of US containerized goods would be created, according to an analysis of PIERS data and the IHS Markit orderbook.
Under the deal, OOIL would keep its Hong Kong corporate headquarters and the independent share listing. It would also put off any headcount reductions at OOIL for at least 24 months, Cosco said in a statement. Cosco acknowledged the separate and distinct culture that has led OOCL to become of the industy’s best performing and highest regarded carrier in the eyes of BCOs, and clearly indicated that was an important part of the value it was acquiring.
“We respect OOIL’s management team and its expertise, not to mention its people, brand and culture,” said Wan Min, chairman of Coscol Shipping Holdings.
By leveraging the strengths of each company and achieving synergies, the businesses aim to enhance their operating efficiencies and competitive positions to achieve sustainable growth in the long term. Both companies are members of the Ocean Alliance, and will continue to work together under this framework.
“We are proud of the business we have built and the people who have been building it. This decision has been carefully considered and we believe it helps ensure the future success of OOIL. We are confident that Cosco Shipping Holdings is the right partner for us,” OOCL CEO Andy Tung said Sunday.
It came as little surprise that Cosco would maintain OOCL as a standalone brand. OOCL is known for a high quality of service relative to many of its competitors, as well as strong BCO relationships, and CMA CGM and Maersk Line have maintained the APL and Hamburg Sud brands, respectively, after their acquisitions. Given legacy cultural differences — Cosco being a Beijing state-owned enterprise and OOCL a fully commercial, standalone business — a full integration would be seen as extremely difficult. Even prior to the acquisition, Cosco and OOCL were drawing increasingly closer particularly in their participation in the Ocean Alliance.
Breakneck pace of container shipping consolodation continues
The deal continues what has been a breakneck pace of consolidation in container shipping and raises further questions about the surviving carriers’ ability to parlay that concentration into pricing power. Rates overall have been on the upswing this year, but that can be easily attributed to capacity dislocations as the new alliances phased into service in April, as well as accelerating trade growth driven in part by Europe's economic recovery, the sustained US recovery, and economic growth in many developing markets, bolstering the slowing but largely uninterrupted growth in China.
Given carriers’ history of predatory rate wars with the ultimate — in some cases overtly stated — purpose of knocking competitors out of a market or out of business entirely, a cultural shift by carriers into an oligopoly environment will not occur overnight or easily, especially under the harsh gaze of antitrust regulators, principally in the United States and Europe.
In maritime analyst Drewry’s analysis of rates across the first half of the year, it found that its Global Freight Rate Index across a wide spectrum of trades was 36 percent higher after six months of 2017 versus the same period in 2016. However, Drewry did note that last year was exceptionally poor for carriers trying to secure compensatory rates, and when compared with the first half of 2015, spot rates for the first six months of 2017 were still 4 percent lower.
Nevertheless, rate increases on the spot market have been more muted in the eastbound trans-Pacific, where spot rates are up 33 percent from last summer, compared to the Asia-Europe trade lane, where the increase is 61 percent. Other, smaller trade lanes such as Asia to Brazil have seen huge increases in recent months.
There is little evidence thus far that industry concentration by itself is has translated into any kind of unspoken truce by carriers in pricing. But that said, carriers’ vessel ordering has slowed significantly and industry analysts are predicting that by 2019 the market could turn decisively in carriers’ favor, again not due to concentration by itself, but rather a slowdown in capacity additions combined with stronger trade growth driven by healthier economies in Europe and North America, and a steadily growing middle class in China.
Cosco, for example, earlier this month told its investors they can expect a $272 million profit for the first half, turning around a $1 billion loss recorded in the first six months of last year as the carrier benefits from rising container volume and freight rates. Cosco said its average freight rates in the container shipping business increased in the first half year over year, with cargo volume growing by 34.72 percent, driving up profitability.
OOCL reported a $273 million loss in 2016 as weak freight rates dragged down the average revenue per TEU by almost 19 percent to just $774 per container. Although it did not disclose earnings for the first quarter, Cosco on April 28 reported volume rose 7 percent year over year, while revenue increased 6.4 percent, to $1.18 billion. Overall revenue per TEU, however, slipped 0.6 percent from first-quarter 2016.