Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Beijing's shakeup of the state-controlled shipping industry involves a supply chain as complicated as any Made in China product.

Cosco Group and China Shipping will shuffle a ports company, a container-leasing business, tanker and bulk carrier lines and no fewer than 33 separate container-shipping businesses to make more sense of their myriad publicly traded subsidiaries.

Shares of China Cosco Holdings and China Shipping Container Lines fell the most in at least a decade after resuming trading in Hong Kong on Monday after four months of suspension, erasing $900 million in market value in a matter of hours.

That's probably just a reflection of the changing expectations for the stocks over the time they've been in the deep freeze: The 811 million yuan ($125.6 million) of net income analysts estimated for the 2015 fiscal year when China Shipping Container was halted Aug. 10 has now been revised to a 483 million yuan net loss. China Cosco's earlier estimated 6.3 million yuan loss for the period has swelled to 963 million yuan. Valuations have ballooned as a result.

Back to Reality
Price-earnings ratios of Chinese shipping companies, 24-month blended forward estimates
Source: Bloomberg data

You can't blame shareholders for feeling nervous. Under the planned reorganization, China Cosco will double down on a shipping-container business that is already losing money amid a global oversupply of vessels. It costs $443 to send a 40-foot container from Shanghai to Rotterdam now, barely a third of the $1,315 rate 12 months ago. Just last week, Singapore's state-owned investment company Temasek, owner of the world's second-largest container port, quit the business by agreeing to sell its shipping line Neptune Orient to France's CMA CGM.

China Cosco's affiliate Cosco Pacific doesn't do much better, turning into a focused ports operator but failing to gain complete control of terminals it would need to drive profits, according to Jefferies analyst Johnson Leung. China Shipping Container fares even worse, being stripped of its core transport business and taking Cosco Pacific's unattractive container-leasing unit in return, said Leung.

Shareholders who expected to be made whole following the sweetheart deal to merge train-makers CNR and CSR into CRRC earlier this year will naturally be disappointed -- and concerned about the outcome of future planned state-brokered mergers to consolidate industries such as turbine-manufacturing and mining. But there's one bright spot.

It's a reasonable assumption that all corners of the shipping industry must be suffering at the moment. Reasonable, but wrong: The same factors that are causing container rates to plunge and the Baltic Dry index of goods such as iron ore and grain to hit a record low last month are great news for China Shipping Development, the China Shipping Container affiliate that specializes in transporting oil and gas.

Oil tankers have the useful characteristic that they don't just transport oil, they also store it. With petroleum continuing to flood out of Opec countries and U.S. shale basins, and demand persistently failing to keep pace, one commodity in seriously short supply is space for all those hydrocarbons. The benchmark rate for hiring oil tankers hit a seven-year high earlier this month as vessels queued up outside Chinese ports for a slot to unload into onshore storage tanks. At a point when West Texas Intermediate crude looks to be heading below $35 a barrel, that trend won't change soon. While the cost of container transport on Chinese routes now stands at about 16 percent of its level three years ago, tanker rates have gone up by about two-thirds:

Oil Floats
Tanker rates on Chinese routes have risen while containers have slumped
Source: World Container Index, Bloomberg data
Note: Dec. 21, 2012=100

In exchange for getting China Cosco's profitable tanker business, all China Shipping Development has to do is give away its own loss-making dry bulk unit in return. That sounds like a trade worth backing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net