Daily Management Review

New Shipping Giant Launched by China to Battle Downturn


A challenge was launched to global shippers AP Moller Maersk and Mitsui OSK Lines by China on Thursday. However analysts feel that in order to weather one of the industry's worst-ever slumps, the giant company must slim down its workforce and order book.
China Cosco Shipping Corporation which was created from the state-driven merger of former rivals China Ocean Shipping (Group) Company and China Shipping Group, will control one of the world's largest fleets of dry bulk vessels, container ships and oil tankers.
Maritime consultancy Drewry forecasts the global container shipping industry will make a combined loss of $5 billion this year due to lackluster freight rates and cargo volumes, ship lay-ups and higher operating costs and the debut of the new company coincides with some of the leanest times for shipping firms already mired in the longest downturn in three decades.
"Few liner companies are set up at the moment to handle current challenges. Perhaps the first challenge is to shrink the new combined company. Without that, the bleeding will continue at a faster pace," said veteran shipping analyst Charles De Trenck.
As new vessels ordered before the downturn created an oversupply and depressed freight rates to record lows, the shipping firms have endured years of losses since the global financial crisis brought the shipping boom to an end.
The industry was experiencing its worst downturn since 2008 acknowledged the company chairman Xu Lirong at the COSCOCS launch event adding that mergers were key to riding out slump.
A policy of many Chinese state-owned firms but which industry insiders said made little sense is the policy of not making salary cuts or ordering lawoffs and Xu Lirong followed this policy as he announced that the COSCOCS had told staff that there would be no salary cuts or layoffs.
"To me they're missing a huge opportunity there to improve their competitiveness," said a China-based shipping executive at a rival firm, who wanted to remain anonymous due to the sensitivity of the matter.
With more than double the workforce of Maersk, COSCOCS currently employ 180,000 workers.
Apart from the huge manpower, the newly formed Chinese company also has  almost twice the combined fleet of Maersk and Mitsui O.S.K Lines with more than 830 vessels including container ships, dry bulk vessels and tankers, according to data from ship valuation firm VesselsValue. The valuation however does not take into account the chartered-in vessels.
Experts say that the newly formed company stands at an advantage compared to the situation if it had remained two separate, loss-making companies as the sheer size of COSCOCS allows it to better compete for market share.
"The merger gives them a fighting chance. If they didn't merge the status quo would have remained the same," said Shanghai-based Essence Securities analyst Jiang Ming.
However experts claim that the current make up of vessel-sharing alliances on container routes, which firms entered to lower costs is threatened by the size of the company.
In the biggest-ever acquisition by the French container shipping giant to help it to ride out the severe downturn, two months ago CMA CGM proposed to buy Singapore's Neptune Orient Lines for $2.4 billion and the COSCOCS launch comes two months after that incident.
"While the latest mergers should further consolidate market share, pricing competition typically intensifies post mergers, based on prior experiences," Deutsche Bank analysts Sky Hong and Joe Liew said in a research note published on Monday.

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