China Cosco Head Sees Shipping Downturn Continuing
CHONGQING, China—The head of China’s largest state-run shipping group expects the world’s shipping industry will remain in a downturn in the next two years, weighed by persistent overcapacity and weak demand.
Ma Zehua, chairman of China Ocean Shipping (Group) Co., said Wednesday in an interview that outlook for the shipping industry, a key barometer for global economic health, will remain challenging despite a gradual economic recovery in the U.S. and the easing European debt crisis.
“There are many speculative investments in the market with shipowners and leasing firms making orders for new ships,” said Mr. Ma.
He said existing orders for new ships from all shipping companies have exceeded 10\% of the current global fleet, which is already in excess, suggesting a flux of shipping capacity would continue to put pressure on freight rates.
Meanwhile, Mr. Ma said demand growth for shipments is expected to be around 5\% this year, much less than the average annual double-digit growth rate during the previous shipping boom, before the outbreak of the global financial crisis in 2008.
Mr. Ma’s bearish comments come after the group’s Hong Kong and Shanghai-listed flagship, China Cosco Holdings Co. , said last week that it swung to a third-quarter net profit of 1.62 billion yuan ($265 million), compared with a net loss of 1.04 billion yuan in the year-earlier period, largely thanks to government subsidies and stringent cost control.
The shipping conglomerate received government subsidies of 1.52 billion yuan during the third quarter, after policies were unveiled last year to subsidize shipping operators replacing older cargo ships with new ones. The company has scrapped 47 ships so far this year.
Bonnie Chan, an analyst at brokerage firm Jefferies Hong Kong, said that excluding the one-off subsidy, Cosco posted a core profit of 162 million yuan in the third quarter, its first profitable results in 3½ years, on improved utilization of its fleet and returning dry bulk ships on expensive lease when their contracts expired.
Yet the company remained in the red for the first nine months this year, with a net loss of 1.99 billion yuan. Mr. Ma said the company will strive to deliver a good full-year result but he declined to give any forecasts.
Mr. Ma, who took the helm at China’s largest state-owned shipping group in July 2013, was tasked with turning around China Cosco.
The company had also made bad bets on China’s continued expansion by signing expensive long-term ship charter contracts during the height of the commodities boom to boost its capacity. That came just as the shipping market was collapsing, sinking the firm into deep losses in 2011 and 2012. It managed to return to profitability in 2013 only because of one-timegains from a series of asset sales to Cosco’s parent company.
Mr. Ma said the shipping industry has been mired in an era of meager profitability as it is difficult for shipping operators to raise rates amid soft demand and abundant supply of capacity.
“We have to be very cost conscious in managing our daily operations,” he said.
He said China Cosco plans to further reduce costs and strengthen its presence in developing markets and intra-Asia trade, where demand remains strong, to offset volatility in East-West trade.
“In addition to replacing its older and smaller vessels with more fuel-efficient ships, we have also been running our ships at a slower speed to reduce our operating costs,” he added.
source:wsj
