Shipping Consolidation: What Does the New COSCO-OOCL Deal Mean for the Industry?

Earlier this month, COSCO Shipping announced that it was purchasing a majority stake in Orient Overseas Container Lines’ (OOCL) parent company. Pending regulatory approvals in the U.S., China, and the European Union, the deal brings together two large carriers that cumulatively control 11.6% of global container capacity, according to Supply Chain Dive.

“The weekend announcement of the deal confirmed one of the poorest-kept secrets of the shipping industry,” Edwin Lopez writes in COSCO buys OOCL for $6.3B, “once more setting in motion the gears of shipping industry consolidation worldwide.”

The Latest Chapter

Calling this announcement the “latest chapter of an industry-wide consolidation that began with COSCO Container Lines’ state-sponsored merger with China Shipping,” Lopez says the deal may foreshadow a wider shift in the shipping industry, away from a shippers’ market and into a carriers’ market.

In fact, if all pending deals are approved in the next 12 months, Lopez writes that by July 2018, 68% of world container capacity will be moved by just six ocean carriers (according to the Alphaliner Top 100):  A.P. Moller-Maersk, Mediterranean Shipping Co., COSCO, CMA CGM, Hapag-Lloyd, and Ocean Network Express. “This, in turn, may help inflate rates for shippers and return the industry to profitability,” Lopez concludes.

A Balancing Act

According to the Wall Street Journal, container shipping, which moves the majority of the world’s manufactured goods, is a $1 trillion a year industry, but individual players are struggling to stay profitable in one of the most severe down cycles in 30 years. Both Cosco and Orient Overseas posted losses last year, Costas Paris points out in China’s Cosco Agrees to Buy Shipping Rival OOCL.

For shippers, industry consolidation is a double-edge sword. On one hand, no one wants the carriers that they rely on to go out of business. But on the other, the “bigger is better” approach nearly always results in lower competition (for the carriers themselves) and higher shipping prices.

“Almost all businesses in the logistics chain are currently suffering from the effects of consolidation in container shipping: shippers deplore the decline of service frequency, ports the loss of calls and terminals the stress of larger peaks,” Hellenic Shipping News reports in The Geopolitics of Container Shipping Alliances.

“Yet, within the current business model, consolidation might be needed for the container shipping industry to be profitable: they need size to finance and fill bigger ships.”

COSCO OOCL

As the consolidation trend continues within the shipping industry, Odyssey will continue to monitor any changes in the shipping environment and keep you updated and informed.