Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy. This conversation with Basil M. Karatzas – CEO of Karatzas Marine Advisors & Co., a shipping finance advisory and ship-brokerage firm based in the New York City – is the 103rd in “The Trans-Pacific View Insight Series.”
Explain the impact of China Cosco Shipping’s acquisition of Orient Overseas International (OOIL) of Hong Kong on the global shipping industry and Cosco’s market position.
While the containership liner market is undergoing a wave of consolidation – mostly driven by the need to contain expenses in a soft pricing environment – the acquisition of OOIL by Cosco and Shanghai International Port Group (SIPG) has been much more than just an acquisitive transaction for the Cosco Group. The acquisition of OOIL notched up Cosco’s international market share from fourth to third place with approximately 11.6 percent ex post, but Cosco’s share in the ever more important North American market doubled to just above 10 percent for container imports. OOIL has been a highly-reputed company for its business practices and management astuteness and the ensuing business entity likely to utilize the blueprint of the acquired target in order to make Cosco a world-class company. And, just as a reminder, Cosco is not just another liner company but a quasi-state owned company where the stakeholders are not just the shareholders of the company but the stakeholders of the state as well. Cosco as a competitor will undoubtedly be a more formidable competitor in terms of both size and critical mass but also in terms of efficiency as well.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Explain the role of Shanghai International Port Group (SIPG) in Cosco’s decision.
OOIL’s acquisition by the Chinese was affected by the Cosco Group and SIPG. Cosco is projected to finance the acquisition by taking on more debt, mostly expected from Chinese state banks and a bridge loan from the Bank of China. All in all, after the acquisition, Cosco’s present outstanding indebtedness of US$4 billion is expected to reach twice the value of its equity, making Cosco one of the most over-leveraged containership liner companies worldwide. We are of the opinion that the participation of the Shanghai International Port Group would not have been mandatory in getting the deal done, but again, in a world where the state-sponsored Hanjin last year imploded creating a meltdown in the containership world, appearances of overleveraging have to be kept in check. Thus, the participation of SIPG helps keep indebtedness within the realm of manageable. However, we suspect, a port company being part of this transaction could add a political shine under the OBOR [One Belt, One Road] initiative as well.
How does Cosco’s expansion affect industry rival 2M Alliance – Maersk Line of Denmark and Mediterranean Shipping Company of Switzerland?
As mentioned earlier, Cosco is much more than just another containership liner company. It’s a partially state-owned company and already there have been occasions whereby one had to wonder whether Cosco has been acting in the classic sense – according to the western business analysis – of “maximizing shareholder value” or to fulfill a higher political or strategic goal besides maximizing profit. But, in all fairness, there are several western companies such as Google, Facebook, Amazon, etc. that do not necessarily have a strict definition of shareholder value in mind. Amazon, for example, after almost two decades as a publicly listed company, has minimal cumulative profit to show for by constantly putting market share ahead of the interests of the shareholders). However, with Cosco being part of the greater fabric of Chinese business activity, international containership liner companies are in for much tougher competition going forward. Cosco could easily have preferential access to containers originating from China giving the company a leg up against the competition, helping along – at least for now – the “Ocean Alliance” partnership (besides Cosco and OOCL, CMA CGM and Evergreen are also members) to the detriment of the “2M” Alliance, where the world’s number one (A.P. Moeller Maersk) and the world’s number two containership liner company (Mediterranean Shipping Company) are the only members. The “2M” Alliance has approximately 34 percent and the “Ocean Alliance” approximately 28 percent of the world market share. Just to round up the controlling players, the third major alliance (“THE Alliance” of Japan’s K Line, MOL, NYK, and Hapag-Lloyd, Yang Ming) holds 16 percent of the market share, thus the three alliances hold close to 90 percent of the market.
Given the state of the containership market, further consolidation is expected in the next few years with Cosco rumored to be one of the parties with additional appetite to grow. Again, given Cosco’s access to domestic exporters, almost access to “captive cargo” some may argue, the company is expected to have a strong advantage against the competition whether within the present alignment of alliances, a re-alignment or possibly even outside an alliance regime. One should not be surprised to see some of the western liner companies crying foul and calling the attention of regulatory bodies for the approval of the OOIL acquisition, in the first place, and also any subsequent consolidation wave in the industry at a later time.
Assess China’s increased investment in overseas ports and shipping.
After World War II, Japan’s MITI decided that shipping and shipbuilding in Japan were critical industries for Japan’s industrialization and reconstruction age. Via the keiretsu system, Japan has become the largest owner of merchant vessels in the world and Japanese shipbuilding even today holds a substantial market share worldwide. Part of the reasoning held that Japan, being an island nation and dependent on trade for the import of raw materials and export of finished products, had to have a dependable merchant marine fleet. Several decades later now, the Chinese with the largest human population and the second largest economy in the world – a huge springboard indeed, have been experiencing Japan’s agitations of the past. However, the Chinese approach seems to go much deeper than anything the Americans and the Japanese tried in the past. China has been active providing sovereign loans to countries rich in resources, i.e Venezuela, Ecuador, African countries, etc., where the collateral are claims against natural resources and not just legal paper claims. It seems that access to raw materials is in the mind of the Chinese a long-term concern. On the flip side of the trade, there will have to be constant demand of Chinese products and secure delivery of finished goods to the end consumers, and access to port infrastructure and shipping is imperative to accomplish such a goal continuously over decades with the least concern of disruption. The world famous One Belt, One Road initiative is a clear objective for China to achieve such a strategic goal. And port infrastructure and control of shipping two of the most important strongholds to achieve such an objective.
Identify two strategic trends in the global shipping industry that should concern U.S. policymakers and industry leaders.
The shipping industry has never been for the weak of heart. From the days of the clipper ships endeavoring several-month crossings driven by trade winds from London to Australia and the whale ships from Nantucket sailing to the Pacific Ocean by circumnavigating Cape Horn, the shipping industry has depended on pioneers to finance, own, and man the ships. Although our modern age has caught up with certain technological aspects in shipping as well, the industry presently is at the cusp of accelerated technological innovation. Probably the word “disruption” is unsuitable for such an old industry, but there have been credible studies for automated ships, un-manned ships, ships powered by natural gas or even by batteries or electronically control sails. In an environment of heightened regulation, investing in shipping these days cannot simply assume that today’s ships would necessarily exhaust commercially their business cycle (approximately 25 years). And, in a world of chronically low freight rates, driven partially by flattish demand, but mainly by a huge expansion of tonnage supply which in turn was stimulated by conditions of easy credit in the last decade and low interest environment and speculative impulses of this decade, one has to be very cognizant of the wave of near-shoring and anti-globalization that seems to be engulfing our planet. Shipping thrives on trade and movement of cargoes and people; however, the words Border Added Tax (BAT) and tariffs, and the collapse of trade agreements and free trade agreements have become part of our daily lexicon. The shipping industry is ill-suited at present to have to deal with trade wars, a scenario that will be detrimental to many shipping companies and a catalyst indeed for more bankruptcies, additional consolidation, and a new wave for re-aligning shipping alliances. Under such a scenario, in our opinion, Western shipping companies will have the most to lose and this will be another reason for their precipitating in the world ranks.