The interview: Xu Lirong
Turning bloated state-owned businesses into globally competitive players has been at the core of COSCO SHIPPING chairman Xu Lirong’s responsibility. He has delivered important achievements, while the constantly fast-changing shipping markets, complicated by rising geopolitical and regulatory uncertainties in this era, will be a continuing test for his legacy
Turning bloated state-owned businesses into globally competitive players has been at the core of Capt Xu’s responsibility. He has delivered important achievements, while the constantly fast-changing shipping markets, complicated by rising geopolitical and regulatory uncertainties in this era, will be a continuing test for his legacy
FILLED with light from the large floor-to-ceiling windows, the meeting room looks out over a gentle curve of the Huangpu river, which meanders through the Shanghai metropolis, China’s economic centre.
Ships and boats shuttle in an endless stream. On the banks, glittering high-rises are interspersed with smaller buildings, a few of which remain under construction.
China COSCO SHIPPING Corp — born from the merger of two previous shipping giants Cosco Group and China Shipping Group in early 2016 — moved its head office last year into this new modern mansion at the southwest edge of the city’s Lujiazui central business district.
After a few minutes’ wait, the company’s chairman Xu Lirong walks in.
Local media recently published a number of articles featuring him at the vanguard of reforming China’s shipping industry, a title that he had probably never imagined earning when starting his first job in 1975 as a seafarer for Cosco.
Time has left its mark on his face. Leading the state conglomerate that runs the world’s largest merchant fleet is presumably no easy task.
The last time Lloyd’s List had an exclusive interview with Capt Xu was three years ago, shortly after he took office. Since then much has happened —the shake-up in container shipping after the Hanjin Shipping collapse, the surge in scrubber installations, let alone various trade disputes — but the veteran is still a man of the most equable temperament.
“I hope I didn’t keep you waiting too long.” He smiles as he offers his hand.
It takes more than just self-possession to soldier on in this top job. COSCO SHIPPING, as the group wants to be known, boasted Yuan870bn ($122.9bn) of total assets as of August 2019. It runs a business portfolio that spans across container shipping, dry bulkers, tankers, ports, shipbuilding and even finance.
None of the divisions can rest easy on a solid ground beneath the shifting sands of today’s markets.
The conversation starts with consolidation in liner shipping, where the Chinese giant operates its crown jewel business.
The container trades suffered from cutthroat price wars for several years because of supply and demand imbalances. However, freight rates are now more settled following industry consolidation through a series of acquisitions and mergers, as well the formation of global alliances between leading carriers.
Consultancy Sea-Intelligence noted that the sector had “now reached an unprecedented level of global rate stability” since early 2017, shortly after South Korea’s Hanjin Shipping, at that time the world’s seventh-largest carrier, went bankrupt.
“After so many years of brutal competition, we’ve gradually come to our senses,” Capt Xu tells Lloyd’s List. “Now this hard-earned situation should be cherished by all of us.”
The advice represents a meaningful gesture at the time when the ongoing US-China trade war is triggering shifts in cargo flows and may even hit the overall shipping volumes if tensions escalate further.
There is no question that an escalating trade war can take a toll on container shipping lines, especially a major line based in China. The question is how to deal with it.
For the first half of 2019, carriers had overall performed better than expected, partly thanks to “rational competition” in which they have displayed discipline in managing capacity, the chairman says.
Besides, a more consolidated fleet shared by members in bigger alliances has increased the degree of agility for carriers to respond to the changing demand between various regions.
Through the Ocean Alliance and the takeover of Orient Overseas (International) Ltd, COSCO SHIPPING itself has expanded its networks into more third-country markets, such as the transatlantic and intra-Asia routes, which are now seen as useful buffers against the tariffed Sino-US trade.
And both its liner brands — the homegrown Cosco Shipping Lines and the acquired Orient Overseas Container Line — turned the year-ago losses into decent profits for the first six months.
“Competition is an indispensable part of liner shipping, but that shouldn’t prevent us from having appropriate cooperation to maintain a healthy market,” Capt Xu says.
But as the fallout of the confrontation convulsing Washington and Beijing spreads into the broader global economy, the competition may become stiffer.
Following the International Monetary Fund’s downgrade on global economic growth in July, Alphaliner in August revised its container trade growth outlook from 3.5% to 2.5% this year. And the forecasts came even before the White House’s latest announcement to put more tariffs on Chinese goods.
At the same time, spot rates in the traditional summer-autumn peak season this year have failed to perk up.
“The development of the trade dispute will be a key factor for liner shipping next year. So far we can handle it quite well by adjusting our capacity deployment, but I hope the impact will not grow beyond the extent to which our global networks can adapt,” Capt Xu says.
He then expresses optimism. “I believe the US-China trade war will be resolved because it has put pressure on the entire world economy, which gives the push to all parties involved to reach a settlement,” he says. “If they can resolve the issue next year, the prospects for container shipping will be very promising.”
The Chinese trade delegates who recently returned from Washington had “constructive” discussions with their US counterparts, state news agency Xinhua reported. That should pave the way for the next round of trade negotiations in October, the results of which are still anyone’s guess.
That said, the trade war doesn’t seem to have frustrated COSCO SHIPPING’s ambition for expansion.
In August, it completed the $560m purchase of the majority assets of Singamas Container Holdings, previously the world’s second-largest box maker.
The aim is to secure the source of supply for the rapid growth of the company’s box fleet, explains Capt Xu.
“My company runs not only the third-largest containership fleet but also the second-largest container leasing company Florens, whose combined demand for boxes amounts to 6m-7m teu.”
He says that tally will reach 10m teu within a few years, boosted by a strong synergy with OOCL and fast growth of its feeder services in areas such as Southeast Asia and the Caribbean.
“We cannot expose that huge amount of demand to the risks in the market. That’s why we decide to enhance our box-making capacity, which is already part of the industry chain we’ve built.”
The Singamas acquisition has effectively boosted the market share of COSCO SHIPPING’s container manufacturing business to about 35%, trailing China International Marine Containers (Group) with a share of nearly 50%.
The deal has also reignited earlier speculation about the state giant’s pursuit of Singamas’s parent, Pacific International Lines.
The Singapore-based carrier ranks the ninth in Alphaliner’s league table with a capacity of about 390,000 teu at last count. It was said that PIL’s expertise in Africa and Middle East markets would make a strong complement to the bigger Chinese rival, and its chairman SS Teo has kept in close contact with the top management in Shanghai.
“Rumours are just rumours,” Capt Xu replies, adding that his company is not targeting any specific carrier.
But never say never. “If there are more M&As, shipping lines with a relatively small fleet, shaky finances and a limited network of services can still be acquisition targets of the others,” he adds.
He also talks openly about the plan to order a small number of supersized containerships, which has been the subject of market speculation since last year.
COSCO SHIPPING currently has 28 vessels of 20,000 teu or above, including the sextet owned by OOCL. It would need another five to six units to complete three loops consisting of a homogeneous fleet of this class in the Asia-Europe trades.
“It is true that we still lack a few 20,000-teu class ships. It is likely and justified for us to add five or six of them to our fleet based on need to improve our route arrangement.”
However, the consolidation and the scale, as important as they have been, are not the end goal but a means for his company to better serve the customers, the chairman believes.
He admires Huawei, the world's largest telecommunications equipment supplier now leading in 5G commercial contracts despite the US ban.
“Huawei’s market share today does not only derive from its advanced technologies, but more importantly, its customer-centred mindset. They believe customers are the soul of the company.
“I told my staff that shipping should be along the same line that COSCO SHIPPING exists to serve customers, who are the soul of us, too.”
The statement, of course, needs to be taken with a pinch of salt. After all, ocean shipping has been long deemed as a provider of commoditised products that are only differentiated by price.
“We’ve made lots of improvements although we’re still far away from achieving customer satisfaction,” Capt Xu concedes. “But the consolidation and digital technologies are enabling positive changes.”
He speaks of the latest version of OOCL’s Integrated Regional Information System, known as IRIS-4.
“It’s one of the best in liner shipping. It’s one of the biggest benefits we’ve gained from the acquisition.”
The system will be adopted by the Chinese giant’s entire box shipping networks by the end of this year. That will help streamline process and increase visibility, he says. “Expect our service quality to move up another rung next year.”
The Global Shipping Business Network, the blockchain-based digital platform initiated by OOIL’s CargoSmart, represents a long-term vision.
CMA CGM, Hapag-Lloyd, Hutchison Ports, Port of Qingdao, PSA International, and Shanghai International Port Group signed service agreement in July to become partners of the programme, in addition to COSCO SHIPPING’s liner shipping and port arms.
Each of the parties has committed to providing resources to support preparatory work required to establish the network, which is being billed as a not-for-profit joint venture.
The development of the platform is still at an early stage, Capt Xu says, and it is pending approvals from anti-trust authorities to proceed further.
“As you know competition authorities treat shipping quite strictly nowadays, even more strictly than they do to some other industries. I hope they can be more understanding towards shipping companies for their contribution to the global economy and the hardship they face in operation.”
But the vision of GSBN is clear. He says the aim is not to make profits by controlling data, but to gain efficiency and safety by sharing information with industry players.
One pilot project being worked on by CargoSmart is the application for dangerous cargo documentation, a solution to shippers’ misreporting which has been the main cause of numerous onboard fires and explosions in recent years.
By sharing that information with other carriers, ports and customs regulators via the blockchain technology, the increased transparency can significantly reduce such fraudulent practice.
As the end of the interview approaches, the topic inevitably switches to the International Maritime Organization’s emission rules.
Capt Xu outlines a straightforward strategy of this company to comply with the 2020 sulphur cap.
Liquefied natural gas is not an option for now. Scrubbers will be installed only on a very limited number of ships. The vast majority of the fleet will use low-sulphur fuel oil.
It seems that COSCO SHPPING has no plan to follow its Ocean Alliance partner CMA CGM, which has opted to power a series of newbuildings of 15,000 teu-22,000 teu by LNG.
“If we order large containerships now, they won’t be fuelled by LNG or equipped with dual-fuel engines,” Capt Xu says. “It’s a promising future marine fuel but the infrastructure is just not there yet.”
At the same time, he reveals that his company has ordered exhaust gas cleaning systems for 60 vessels, mostly boxships and dry bulkers, accounting for 4% of its entire fleet. But the company has no intention to increase the uptake.
One of the major reasons that owners choose to install scrubbers on board is the estimates of a large spread between LSFO and HSFO prices. But Capt Xu expects mass production of LSFO to soon narrow that differential.
“It is not difficult to produce the blends with low sulphur content. When the volume ramps up and more producers start to compete, the price will fall.”
COSCO SHIPPING, which runs a bunkering joint venture with state oil giant PetroChina, has already locked up some 80% of the LSFO expected to be consumed by its containership fleet between October this year and March next year at floating rates, senior executives told reporters earlier.
Looking further ahead, the IMO 2050 carbon targets will have to be dealt with by Capt Xu’s successors, as he is reaching his retirement age.
Turning bloated state-owned businesses into globally competitive players has been at the core of the old hand’s responsibility. He has delivered important achievements, while the constantly fast-changing shipping markets, complicated by rising geopolitical and regulatory uncertainties in this era, will be a continued test for his legacy.