By Deng Yaqing

Shipping giant COSCO prepares to restructure its assets

China COSCO Holdings Co., the world’s second largest shipping company by fleet size, continued its trend of heavy losses in 2012. Since its listing on the mainland’s A-share market in 2007, its share price experienced a sharp plunge from 70 yuan ($11.26)to less than 5 yuan ($0.80), putting investors on tenterhooks.

In the first three quarters of 2012, COSCO saw its losses totaling 6.4 billion yuan ($1.03 billion). Some analysts predicted that COSCO would continue to lose another 2 billion yuan($321.8 million) in the fourth quarter.

The COSCO Group, its parent company, is trying to ensure its long-term viability by selling assets.

In December 2012, the COSCO Group announced a plan to sell 29.7 percent of its stocks in the Shanghai Eastern Logistics Co. Ltd.,whose net assets are 815 million yuan ($131.13 million) in book value and 1.89 billion yuan($304.1 million) in estimated value, a premium rate of over 132 percent.

On January 8, the first stockholders’ meeting in 2013 marked that COSCO Shipping Co.Ltd., another listed company of the COSCO Group, had completed its acquisition of Guangzhou Ocean Shipping Co. Ltd., an unlisted company under the group.

Ye Weilong, Chairman of COSCO Shipping,said that the decision was aimed at expanding the company’s business scope and fleet size at a low cost.

(Source: COSCO, $1=6.22 yuan)

As the COSCO Group has yet to be fully listed, COSCO Holdings may attempt to get rid of money-losing assets and inject good assets from the COSCO Group in an effort to undergo restructuring and avoid delisting.

Hard times

Due to the global financial crisis, demand for raw materials has been sluggish, pushing down the Baltic Dry Index (BDI), a barometer for shipping costs of dry bulk commodities. In the first half of 2012, the BDI averaged 943 points, down 31.3 percent from the same period in 2011.

It has been widely recognized that the break-even point for COSCO is 1,500 to 2,000 points. But in 2011 when the BDI averaged 1,549 points, COSCO still lost 10.4 billion yuan ($1.67 billion).

A number of international iron ore giants have begun to establish their own fleets in order to save transportation costs.For instance, Companhia vale do Rio Doce,the world’s largest iron ore supplier, has built up its own fleet to serve iron ore trade with China. The fleet is composed of very large ore carriers with a transport capacity of 400,000 tons. In contrast, COSCO’s main fleet vessel, the Capesize bulk carrier, can only carry 80,000 tons.

On December 24, 2012, the BDI dropped to 699, indicating that a quick recovery for the industry was not in the cards.

According to the Shanghai International Shipping Institute’s latest report, the dry bulk and container shipping market will stay bleak in 2013 as capacity continues to outstrip volume.

Overcapacity

The global shipping industry saw good times over a five-year period starting in 2003 when companies placed a large number of orders at shipyards across the world.

Making a big bet on China’s robust economic growth, COSCO expanded its fleet of dry bulk carriers from 400 in 2007 to 450 in 2010. By June 30, 2012, COSCO had operated 357 dry bulk carriers, including a selfowned batch of 227 and a rented batch of 130 with a transport capacity of 18.93 million tons and 13.49 million tons respectively.Additionally, it had also placed orders for 18 new dry bulk carriers with a transport capacity of 1.67 million tons.

This blind expansion ultimately landed COSCO in severe difficulties. In 2011, the daily rental for a Capesize bulk carrier fell to$4,000, with ship-owners losing as much as$20,000 a day. Before the 2008 global financial crisis, a Capesize bulk carrier’s operation and maintenance costs stood at $30,000 per day, and daily rental was as high as $260,000.

Wei Jiafu, Chairman of COSCO and President of the China Ship-owners Association, appealed at the Boao Forum for Asia in April 2012 for carriers worldwide to strengthen their cooperation and self-discipline and restrain from building more new ships.

Moreover, excess capacity led to the plummeting shipping fees charged by companies.

“In 2008, the shipping rate for imported coal was 150 yuan ($22) per ton. Now it’s down to just over 20 yuan ($3) per ton, which means carriers are seeing big losses,” said Luo Ning, Deputy Director of the Port and Shipping Administration Bureau of Zhoushan in Zhejiang Province.

Faced with persistent losses, carriers raised their rates in a concerted move in August 2012,but the excess capacity and resulting price war forced container shipping rates down by over$100 a week.

However, it is doubtful whether increasing rates will bring about greater pro fitability.

Despite a severe winter affecting the whole industry, some shipping enterprises managed to report pro fits.

Diversification

AP Moller-Maersk Group, the largest container ship operator and supply vessel operator in the world, saw pro fits of $3.4 billion in 2011, despite a loss of $600 million in container transport, and its branch company Maersk Oil and Gas rolled in $2.1 billion. In the first half of 2012, the group also made $2.1 billion, though suffering a loss of$400 million in its shipping business.

As Liu Bin, a professor from Dalian Maritime University, notes, Maersk had long maintained its presence in some sectors which have a low correlation to the shipping industry, like retail, oil and gas, so the negative impact of the current downturn had been significantly buffered.

However, COSCO’s over concentration on its main business dragged it into a resonance falling cycle. As its main businesses—container and dry bulk shipping and port operations—are interwoven with each other, when the storm swept over the shipping industry, there was no shelter. COSCO should make some adjustments to its current business structure to lower cyclical risks.

COSCO had taken some action to reverse its current plight, said Wei at the 2012 World Shipping (China) Summit held in Xiamen, Fujian Province, in September 2012.

“In fact, Maersk is also losing big money in its shipping business. But with its treasure bowl—offshore oil business, it managed to ride out of the storm,” said Wei. “Now, we are trying to explore other means to build pro fit and cover losses.” ■