The COSCO cushion will smooth OOCL’s expansion programme
Despite being forced to cancel sailings, an ailment affecting the whole industry, OOCL is committed to an extensive fleet expansion plan.
In the chart on this page, the company’s latest information (mid-March 2020) shows that chartered vessels make up 40% of the fleet, but only 25% of total TEU capacity and a little more than 50% of the average TEU capacity of its own ships. Average age of the entire fleet is about eight years.
The price of each of the five new vessels of 23,000 TEU OOCL has ordered, due to be delivered in 2023, is US$156M and the document filed with the Hong Kong Stock Exchange states, "The company currently envisages that bank financing will be arranged for the transaction and expects that finance for about 60% of the contract price of each vessel, with the financing guaranteed by the company, will be finalised in the near future with the balance of the contract price to be funded from internal resources. Should such bank finance not be arranged, the full contract price of each vessel would come from internal resources of the group."
OOCL’s umbrella company, OOIL, says in a statement, "Not only will these modern, efficient vessels improve our cost structure, fill the capacity gap caused by the future expiry of chartered-in capacity and further improve the group’s environmental protection and green operation level, but they will also serve as clear evidence of the entire group’s continuing commitment to our very successful dual-brand strategy."
New mega vessels
Parent company COSCO says, "After the delivery, OOCL will be able to independently form a complete loop in the Asia-Europe trade and provide more stable and highly efficient services for customers."
Three of the ships are being built by Nantong and two by Dalian. "Nantong is an associate of COSCO Shipping which indirectly holds 50% equity interest in Nantong," says the stock exchange filing. "Dalian is an indirect subsidiary of COSCO Shipping and Nantong directly holds 30% equity interest in Dalian. COSCO Shipping indirectly controls more than 50% of the issued share capital of the Company."
OOCL says it will return or dispose of 13 ships from its fleet – implying that both owned and chartered vessels will be jettisoned – over the next five years, totalling 76,000 TEU. This will mean a net gain of 39,000 TEU.
There is uncertainty over the type of fuel the new vessels will use. Initial statements from executives alluded to LNG capability, but little more was said. COSCO and OOCL are known to be wary about LNG, seeing it as too experimental. And nothing has been said about using scrubbers.
Nantong (known as NACKS) and Dalian (DACKS) are among the biggest shipyards in China. Dalian takes up 1.9M m2, with a building area of 440,000 m2 and a workforce of 2,500. One of its two docks is 700 m long, the longest in China. An expansion project is under way, with steel processing reaching 400,000 tonnes a year.
Like all other major lines, OOCL and its parent COSCO are cancelling sailings in April and May with the worst affected route the transpacific to the United States. In its latest update, OOCL is suspending 14 sailings to the east and west coasts between April and the end of May. There are at least 386 blank sailing announcements for mid-March until the end of April 2020 for all container lines.
An extremely strong balance sheet plus a sizeable slice of government ownership in parent COSCO mean OOCL does not have to be unduly worried by the crash in worldwide economic activity just when it has committed to US$800M in newbuilds.
"OOCL has always had the strongest balance sheet among the larger carriers even prior to the COSCO acquisition," says Hong Kong analyst H J Tan. "Within the last two years, OOCL has expanded into various new markets by using the larger COSCO network covering Latin America and Africa.
An indication of strength is that COSCO at the end of 2019 sat on an operating cash flow of US$3Bn. OOCL itself had a low net debt to equity ratio of 0.23.
OOIL recorded an exceptional year in 2019 because of the sale of the Long Beach Container Terminal, bringing in a profit of US$1.15Bn, to a group led by Macquarie Infrastructure Partners. The total price was US$1.78Bn.
The US Committee on Foreign Investment ordered the company to sell the terminal after the 2018 takeover by COSCO Shipping Holdings. "Recognising the high quality of the terminal, a good sales price was achieved," OOIL said in its statement on 2019 earnings. "The new buyer acquired a very attractive asset, and as part of the overall arrangements, OOCL will continue to have access to the terminal to service the requirements of our trans-Pacific trade."
Copenhagen-based SeaIntelligence Consulting chief executive Lars Jensen tells Container Shipping and Trade, "There is going to be consolidation among carriers caused by the shake out from the economic downturn, but carriers that have government backing and investment will be in a strong position."
The OOCL tie up with COSCO goes beyond straightforward ownership. Detailed shipping-related agreements govern their relationship, known as Master Agreements, through the umbrella of OOIL.
New three-year agreements were signed at the beginning of 2020, covering general business, bunkering, terminals, general equipment and vessel services such as chartering. These set out caps on the services the two provide to each other. There are also agreements on financial services between the two.
Under the general business agreement, COSCO will be allowed a cap of US$408M in 2020 and OOIL US$326M. These will rise to US$535M and US$334M respectively, in 2022.
The bunkering agreement specifies a cap of US$120M for each of the three years for fuel supplies by COSCO to OOIL.
Under the terminal agreement, COSCO will be allowed a cap of US$155M in 2020, rising to US$160M in 2022, while OOIL is set at an unchanged level of US$25M.
The equipment procurement agreement sets COSCO’s cap at US$570M in 2020, rising to US$590M in 2022; with the comparable levels for OOIL US$36M and US$101M.
Vessel services for COSCO are capped at US$190M, rising to US$230M in 2022, while for OOIL they are US$61M and US$103M.
COSCO and OOCL combined account for the biggest share of transpacific trade at about 16%. But observers note their real strength lies in trade between Asian countries. This trade makes up about 65% of total volumes.
Germany-based credit ratings agency Scope Ratings has revised its outlook for the container shipping sector to negative from stable. “One of the biggest drags on the sectors’ operating profitability has been persistent overcapacity."
The agency says the coronavirus and economic crisis "may further accelerate the clearing out of excess capacity as weaker players are forced out of business with an even larger proportion of trade volumes shared among the container alliances.”
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