A merger of China’s two largest shipping giant will have a severe impact on the current shipping alliances, with the Middle East’s United Arab Shipping Company standing to lose the most, say analysts.

Drewry Shipping Consultants has released a report examining the consequences of a rumoured merger between China’s two shipping giants (China Ocean Shipping Company COSCO, and China Shipping Container Lines (CSCL).

The report finds that such a merger, which would make the combined shipping group the fourth largest in the world, would severely impact the Middle East’s leading container line, United Arab Shipping Company (UASC).

According to the report, the merger could cause a “domino effect” on carrier alliances and future carrier mergers in Asia, forcing shipping alliance partners to potentially merge and undermining industry competition.

“Based on today’s fleet the combined entity would comfortably move into fourth place with a total fleet in excess of 1.5 million TEU, giving a world share of around 8 percent,” states Drewry. This, says Drewry, would result in changes to alliances that participate on the East-West trades, UASC being one of the major lines involved.

The two alliances to be impacted are the Ocean Three (CMA CGM, UASC, CSCL) and CKHYE (COSCO, K-Line, Hanjin, Yang Ming, and Evergreen). The merged Chinese shipping line would need to surrender participation in one of the alliances.

“A merger of the Ocean Three and CKHYE alliances would mean a combined market share above 40 percent and unlikely to be approved by regulators,” Drewry notes. However, “both the CKYHE and Ocean Three will be faced with a major void to fill were they to lose either COSCO or CSCL to the other carrier group” and both Chinese carriers contribute around 25% to the capacity of each alliance on the East-West trade.

“Depending on which alliance wins or loses its Chinese member, the Ocean Three alliance and the CKYHE alliance will decline to a market share of just 13 percent or rise to a market share of 28 percent,” the report states.

Speculation of a merger between COSCO and CSCL arose in early August after large portions of both companies ceased share trading “pending an announcement.” A merger between the two companies makes financial sense, both have run on a combined loss of US $911-million during the last half decade and analysts have long questioned the feasibility of having two Chinese shipping lines competing against one another.

A merger would allow the carriers to make some much needed financial synergies and is therefore likely to be approved by competition authorities in Beijing.

“There of course remain many obstacles to the merger taking place, but assuming the will of the Chinese government is strong and does not waver, there seems every chance that it will happen at some point in the near future,” said Drewry.

The report does, however, note a distinct irony in the Chinese competition regulators’ vetoing of the potential P3 alliance last year while its authorities appear happy for the Cosco-CSCL merger to proceed.