Caixin
Mar 01, 2013 12:23 PM

How State-owned Shipper Sailed into Stormy Seas

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(Beijing) – One of the country's most prominent liner shipping operators, China COSCO Holdings Co. Ltd., is struggling to avoid being kicked out of the Shanghai Stock Exchange five years after its debut.

It lost 6.5 billion yuan in the first three quarters of 2012 after a 10.4 billion yuan loss the previous year. Analysts expect it to post a loss of under 10 billion yuan for all of 2012.

If it is in the red again in 2013, it will be forced to temporarily suspend trading until a profit can be turned. If losses continue for a fourth straight year, it will be delisted.

However, the chances it can turn the tide this year seem to be long. Analysts say management is more incompetent than it cares to admit. Problems have arisen because of strategic miscalculations and bungled investments with hedging tools.

The company blamed weak demand and high fuel prices, but other international shipping carriers have dealt with those challenges and not seen their bottom lines hit as badly.

COSCO Holdings is 52 percent owned by China Ocean Shipping (Group) Co. (COSCO Group), a state-owned shipping giant whose lines cover over more than 160 countries and regions.

It handles the majority of the parent's important businesses, including manufacturing and shipping, dry bulk shipping, building terminals and other sea transport logistics.

COSCO Holdings went public in Hong Kong in 2005 and in Shanghai two years later, raising about 7.8 billion and 15.1 billion yuan, respectively. The last year it did not lose money was 2010, when it posted a profit of 6.8 billion yuan.

Happier Times

In good years, COSCO Holdings prided itself on owning the world's largest fleet involved in dry bulk shipping. Now there is talk among analysts that the entire line of business should be jettisoned so the ship does not sink with it.

One analyst familiar with the situation, who asked not to be named, said the dry bulk shipping business alone may have caused a loss of up to 10 billion yuan in 2012. Logistics and terminal operations were making a profit of almost 2 billion yuan, he said, enough to offset the loss of about 1.5 billion yuan from the container shipping arm of business.

COSCO Holdings is also heavily burdened by ship leasing contracts. Some 117 out of its 337 dry bulk vessels were leased from other companies, the firm's third quarter report says. That alone could have cost the company at least 3 billion yuan in rental fees last year, the analyst said.

The exact amount of leasing expenditure is not known because the company does not publish all information needed to complete a calculation, he said.

An alternative way of looking at the matter lends further insight into the depth of COSCO Holdings' problem.

This method uses the Baltic Dry Index (BDI), an indicator compiled by the London-based Baltic Exchange, which reflects the supply and demand for global shipping capacities and serves as the basis for all shipping companies to set their transport charges.

The BDI needs to be between 2,000 and 2,500 points, a range based on several analysts' estimates, for a normal shipping business to break even if it uses its own ships. If lease payment is included, the index would have to be higher to cover expenses.

However, throughout 2012, the BDI averaged only 920 points, down from the previous year's 1,549, COSCO Holdings' third-quarter report says.

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