A cash subsidy by Beijing aimed at getting shipping lines to upgrade their fleets is good news for China’s largest and long suffering carrier.
China Cosco Holdings, the mainland’s flagship shipping company, hasn’t ordered ships for five years. But rather than being a shrewd strategy, it is the result of a couple of years generating GDP-sized losses.
In 2011, the losses hit US$1.7 billion. The following year the line lost US$1.6 billion and in three quarters of this year a modest US$380 million. To avoid a third consecutive year of losses and delisting from the Shanghai Stock Exchange, the carrier is selling assets to its parent company.
It has been a rough five years for China Cosco. The carrier saw the stepping down of its long-time charismatic head Capt Wei Jiafu, a subsequent management reshuffle and a corruption investigation launched into one of its top executives.
To be fair, China Cosco was largely the victim of circumstances that existed in the shipping industry when the world ended in 2008. Dry bulk and container shipping were on an all-time high with full vessels, great freight rates and an orderbook that stretched to the moon. No one seemed the slightest bit concerned at a possible downturn in the notoriously cyclical business, or if they did, never expected the downward part of the cycle to fall so far and last for so long.
Voices advising caution and predicting a shipping crash were drowned out in the belief that world trade would continue growing indefinitely.
Wei and his management were not immune to the “growth is forever” mentality and decided in 2007 to dramatically boost the line’s fleet, ordering eight container ships and 17 dry bulk vessels. Crucially, the company also signed fixed long-term charter contracts for a large amount of additional capacity.
Not long after that the music stopped and China Cosco was left stumbling about looking for a chair.
The losses began to rack up as the market continued to slide. Load factors were well down and Cosco was locked into charter commitments with the recession deepening.
Of course, all shipping companies faced the same problem. Some were fortunate in that conservative newbuilding strategies saved them from overcapacity and the need to lay up vast numbers of ships, but China Cosco was not among these fortunates.
At the time of the global financial crisis in 2008, the company operated a fleet of 450 ships. In the five years since then, and even with the massive losses racked up over that period, China Cosco has only managed to cut its fleet by just over 100 vessels.
At first glance, the carrier’s plan to order dozens of new dry bulk ships seems insane, but there is a method to the madness. Beijing is offering cash subsidies for scrapping vessels as the government tries to encourage its shipping companies to upgrade their fleets of ageing bulkers.
According to the Wall Street Journal, Cosco has 300,000 gross tonnes of vessels that could be scrapped under the cash-subsidy program, gaining the carrier US$25 million a year in cash subsidies. Not enough to pay for the replacement vessels, but not exactly chump change, either.
In addition to being paid to scrap its old bulkers, China Cosco will be able to add more fuel-efficient vessels to its fleet. Fuel comprises more than 60 percent of a bulk carrier’s operating costs, so the savings from new generation ships can be significant.
Easing the pressure on its long-suffering balance sheet is priority number one for China Cosco, so it makes sense for the state owned carrier to take the plunge and make its first major ship order in five years.
The orders will reportedly begin in the first quarter of 2014 and will take time to produce, but China Cosco will be hoping world trade has improved by the time the ships come online so it can stop selling the family silver to its parents just to stay in business.