Merger Between Cosco, China Shipping to Cut Down Shipbuilding Costs

June 26 2015

Amid a slump in global ship orders, China’s two biggest state-owned shipping companies are set to merge 11 shipbuilding yards, in the biggest consolidation in the sector, The Wall Street Journal reported.

Sources familiar with the matter said that the merger will be announced early next year, which is expected to reduce shipbuilding costs.

Last year, the two companies have already combined their fleets and port operation, which created the China Cosco Holdings, the world’s fourth biggest container operator.

The recent merger is seen to create the third biggest shipbuilding group in China, the report said.

China Shipping Group has five shipping yards while Cosco owns six and also operates two other yards in joint venture with Japan’s Kawasaki Heavy Industries Ltd.

In the first half of the year, Cosco lost about $1.1 billion, as global outlook for ship orders remains sluggish.

“It will be a major challenge to turn a profit from shipbuilding,” an executive at one of the companies, who wish to remain anonymous, said. “If the merger proceeds and works out, synergies will cut down costs substantially but the operating environment is highly challenging especially if you don’t want jobs to be lost.”

According to the official, the down payment for new vessels was 30 percent but in the past 18 months, it was reduced to 10 percent.

Chinese industry officials said that the combined workforce of the two companies reach more than 25,000 as the government tries to avoid job losses. The merger will be used as a model by the government in a planned merger of the country’s biggest shipbuilders: China Shipbuilding Corp. and China Shipbuilding Industry Co.

In the past four years, the shipbuilding industry has been shrinking and although China builds about half of the world’s new ships, the government has ended giving subsidies to unprofitable enterprises.

In 2009, China has closed about three-quarters of its 1,800 shipyards “as Beijing stopped subsidizing the sector,” according to George Xiradakis, chief executive of Athens-based XRTC maritime consultancy and an adviser to China Development Bank.

“The word from Beijing is that it will continue to finance with strict performance criteria a handful of state shipbuilding conglomerates which are pushed to consolidate,” Xiradakis said, “but the rest are left on their own.”

As part of its strategy, China’s shipbuilding consolidation aims to get more growth from services and consumption rather than construction and heavy industry.

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