The “Gene Transfer”Between COSCO and CHINA SHIPPING

By Shen Chen & Jiang Nanchun

From the new restructuring plan which is announced by the 4 listed companies of COSCO and China Shipping, it can be seen that the two big shipping groups will build up 4 specialized service clusters, which include container service, oil gas transportation, terminal service and shipping financial sectors.

COSCO is going to rent and manage container vessels and containers from China Shipping, and will acquire 33 management networks from CSCL worth a total of$1.14 billion; to sell at 6.77billion yuan on dry bulk shipping assets to COSCO.After the transaction, COSCO will become a listing platform which focuses on container shipping services.

As the container leasing subsidiary of COSCO, Florens Contatiner Services Co.,Ltd., will be sold at 7.78billion yuan to CSCL. At the same time, China Shipping will totally split apart their container vessel operational services, CSCL will acquire leasing and financial services and assets from COSCO and China Shipping,to transform from the container liner operator to the comprehensive financial service supplier who focuses on ship leasing, container leasing, nonshipping financial leasing and other diversif i ed leasing services and investment services, to form a leasing service integration platform for shipping leasing,container leasing and other non-shipping financial leasing.

COSCO Pacific Limited (hereinafter referred to as“COSCO Pacific”) which is listed in Hong Kong is responsible for the terminal service of COSCO; CSCL and China Shipping Ports Development Co., Ltd.(hereinafter referred to as “China Shipping Ports”) are in charge of the terminal service of China Shipping.According to the restructuring plan, China Shipping will sell 7.63 billion yuan of above-mentioned terminal services to “COSCO Pacif i c”.

Accordingly, after the integration, whether the group level of COSCO and China Shipping will merge or not,their subsidiary container and related services will do the “gene transfer”, they will be incorporated into three companies: first, COSCON, which is the subsidiary liners of COSCO; second, COSCO Pacific, which is the international terminal operator (ITO) of COSCO;third, China Shipping Leasing Co., Ltd. which includes shipping leasing (hereinafter referred to as “China Shipping Leasing”), container leasing (hereinafter referred to as “China Shipping Container Leasing”), and other non-ship financial leasing (such as energy, health,education and more other industries.)

After the “gene transfer”, the leasing gene of “new COSCON” will rise signif i cantly. For “new COSCON”,the capacity is rented capacity from the original CSCL,therefore, the proportion of rented capacity of “new COSCON ” will increase from 45.5% to 70%. In today’s top 20 shipping liners, although the proportion of chartering in “new COSCON” is not very high, it will be followed by ZIM (91.1%), K Line (79.5%) and MOL (72.9%). As new shipbuildings leave the factory of the original COSCON and off-lease of time charter(expect that the vessel rented from China Shipping will not off-lease) one after another, the proportion of rented capacity of the “new COSCON” will fall down about 60%, but still higher than now.The focus of attention is that the “new COSCON”which contain the China Shipping gene will remain in which alliance? After the transaction, COSCON and CSCL will operate in their own alliance respectively until the end of 2016; and the discussion of the alliance cooperation in 2017 is in progress, the two companies will carefully consider the selection of the next alliance members from the angle of guaranteeing the stability of customer services. According to the report,Yang Ming and Evergreen consider that COSCO and China Shipping kept a good relationship with Taiwan industries, they would choose CKYHE alliance after the merger. But the senior executive of CMA CGM in Taiwan think that the “new COSCON” have a high complementary function with O3 alliance, which includes many shipping lines of China, Europe and the Middle East, so they would choose O3 alliance.

According to the calculation of up and down shipping periods liner fleet allocation on trans-pacific lines of every carriers, the “new COSCON” will surpass Evergreen become the biggest lines for up and down shipping periods liner fleet allocation on trans-pacific lines. If the “new COSCON” decide to stay in CKYHE alliance, the market share of this alliance will run up to 43.7%. However, due to the vessel sharing agreement(VSA) of CKYHE alliance is limited to Asia-Europe line (including Asia-Northern Europe line and Asia-Mediterranean line), there is no antitrust review problem.

The alliance would be the second biggest alliance on the Asia-Northern Europe line in addition to 2M alliance, and the market share is close to 30%, so there is no antitrust review problem either.