Head of Research, Affinity Shipping LLP
16 Apr 2018 16:06 (GMT+1)

Containers: Cosco’s takeover deal of Long Beach terminal under threat due to tension between US and China?

After the tension developing between the United States of America and China, there has been several rumours and concern about the future of Cosco’s takeover deal of Long Beach terminal. The main driver behind the speculations has been the delay from the US regulators’ side to approve Cosco Shipping’s takeover of a Long Beach terminal through its acquisition of Orient Overseas Container Line.

Last week, the shares of OOCL’s parent Orient Overseas (International) Ltd hit a new low since COSCO, together with joint-acquirer SIPG, placed an offer for the Hong-Kong based parent company of Orient Overseas Container Line (OOCL) in July 2017. This means that the discount reached 12 per cent to Cosco’s offer prices of USD 63 Bn. The concern among investors is more than obvious. After US President Trump’s planned measures to restrict Chinese investments, OOIL’s deal with the Chinese state-owned shipping and logistics firm has been threatened further as the Committee on Foreign Investment in the United States (CFIUS) might block the deal.

Cosco has been in discussions about these US terminal assets with CFIUS officials, still being rather confident the deal will pass US review and that the deal’s June 30 deadline will be met. After getting approved by the European Union, the deal passed the US Hart-Scott-Rodino antitrust review and a review by Cosco shareholders, but it still needs to be approved by two Chinese regulators. Cosco controls 46 per cent of the Pier J Terminal (PCT) in Long Beach and 100 per cent of Pier 100-102 West Basin Container Terminal (WBCT) in Los Angeles.

Cosco’s lease at PCT, jointly owned with SSA (44 per cent) and CMA CGM (10 per cent), will expire in 2022, while the lease at WBCT, which was acquired by Cosco in 2016 from China Shipping Container Lines, will expire much later, with some sources suggesting 2038.

A month ago, the Trump administration blocked chipmaker Broadcom, based in Singapore, when it tried to buy Qualcomm, the largest US mobile chipmaker, due to security issues linked to the United States’ ability to build a 5G network while China pursues the same goal. And even if both sides plan to negotiate with market’s expectations improving during the last week, US tariffs on USD 50 Bn of Chinese imports and Chinese retaliation could threaten about 0.89 Mn Teu, or 6.6 per cent of the container trade between US and China, or 2.5 per cent of all container volumes from the US.

The merged Cosco-OOCL would be the second-largest ocean carrier covering the US trades, with its market share about to reach 12 per cent. In the meantime this would be the largest ocean carrier carrying containers from Asia to the US, controlling more than 17 per cent of the market. In the last five years, OOCL managed to expand its share of total trade from 4.1 to 5.2 per cent, mainly driven by an impressive increase in its Asia import share from 4.5 to 6.5 per cent. In parallel to that, Cosco’s share of total trade moved from 4.4 to 6.6 per cent, with its share of Asian imports reaching 10.8 per cent. Cosco Shipping and OOCL are expected to further improve their positions, after the volumes carried between Asia and the US volume rise impressively in 2018 Q1, up by 23 per cent year on year (standing at 0.695 Mn Teu). This has been one the fastest rate of growth when we only refer to the Top 10 ocean carriers. Cosco plans to reduce its capacity deployed on the trans-Pacific from 23 to 19 per cent this year.

Focusing on the regulatory review, the main topic to consider is that OOCL’s Long Beach Container Terminal could under Cosco’s control for 40 years lease, with a value at USD 4.6 Bn. Cosco already controls two other container terminals in the Los Angeles-Long Beach/San Pedro Bay area.

After the delays from US Congress over port security issues, United Arab Emirates based terminal operator DP World decided to exit the operating leases of six US ports it acquired from UK-based P&O Ports. Back in 2015, UAE-based Gulftainer gained a 35-year terminal lease at the Port of Canaveral (Florida), after some local pushback and requests by US Rep. Duncan Hunter, R-Calif., to the then-Obama administration to scrutinize the deal for security implications. Hunter chairs the House subcommittee overseeing port security, having been a President Donald Trump supporter from the beginning of his Presidency, having urged the blocking of Broadcom’s acquisition of Qualcomm.


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