CSCL marriage remains a “remote option”

06/05/2015

With container freight rates still heading south and costs pared to the bone, it is no surprise that ocean carrier merger rumours are back in the news and consolidation options back on the agenda for frustrated shareholders.

Indeed, the profitable first-quarter carrier results that have been posted so far should perhaps contain an outlook health warning: the fundamentals in Q2 are significantly worse now than in the first three months.

For example, spot rates between Asia and North Europe are around 70% lower than at the start of the year – and, in case you haven’t noticed, the low bunker fuel prices that underpinned improved results in the past six months have started to creep back up again.

Alphaliner has this week had another look at a carrier merger story that just will not lie down: that between China’s two state-owned megacarriers, COSCO and CSCL.

Both carriers have avoided the embarrassment of a stock market delisting only by selling their “family silver” – assets to prop up their balance sheets – and have been assisted by what Alphaliner describes as “an effective bailout” of significant ship scrapping state subsidies.

Moreover, in what (if the freight rate declines are not reversed) could end up being the best quarter of trading in the year for ocean carriers, CSCL managed to produce a Q1 net profit of $41m, while the COSCO shipping business, which also includes bulk, suffered a net loss of $167m.

Nonetheless, it seems that investors have taken April stock market denials from COSCO and CSCL that they have no intention to merge with a pinch of salt, given that their respective shares have surged in price on the prospects of substantial cost saving synergies between the two.

But Alphaliner notes that, despite the increased merger hype, previous attempts to forge a closer partnership between COSCO and CSCL have all “ended in naught”, adding that despite political pressure from Beijing neither carrier showed any inclination to push for a consolidation.

The recent central government push in China to consolidate state-owned conglomerates, and the respective lip service statements from COSCO and CSCL after Beijing’s ‘One Belt, One Road’ collaboration across the oceans of the so-called Maritime Silk Road, seems to have spurred a revival of merger gossip. Alphaliner, however, concludes that a potential consolidation “remains a remote option”.

Indeed, the loose ‘strategic co-operation framework agreement’ signed by COSCO and CSCL in February 2014 came to nothing of real substance, other than for a closer relationship for domestic services, and “failed to bring the two carriers any closer” said the transport consultant.

This management distancing was in evidence when CSCL agreed to form the Ocean Three alliance with CMA CGM and UASC, rather than join its compatriot within the CKYHE vessel-sharing group.

“Any moves to consolidate the container shipping activities of COSCO and CSCL would first need to start with untangling the complex web of public and private shareholding,” added Alphaliner.