Lackluster quarterly results at China’s two shipping giants underscore the continuing challenges to turn around one of the nation’s most strategic industries, as global demand for commodities and raw materials stays mute.
The outlook of the world’s shipping industry, in its sixth year of a prolonged downturn, is overshadowed by an oversupply of shipping capacity and weak trade data from China, despite signs of a broader recovery.
For Chinese shipping operators, competition is tough not only on major international routes, but on the congested domestic lanes as well, fueling significant pressure on freight rates and earnings.
China Cosco Holdings, the listed flagship of China’s biggest state-run shipping group, on Tuesday posted a first-quarter net loss of 1.88 billion Chinese yuan, or about $300 million, as lower freight rates weighed on profitability. Its results mirror the 1.99 billion yuan net loss from the year-earlier period.
Analysts don’t expect Cosco’s challenges to diminish for the rest of the year, as its container shipping division, which accounts for two-thirds of revenue, struggles with the shipping capacity glut. Credit Suisse saCSGN.VX +0.43%ys it believes current freight rates on the key Asia-to-Europe route can’t even cover Cosco’s operating costs. Rates have fallen 29% on the route, according to the brokerage.
“Cosco’s high exposure to the spot markets means that its liner earnings in (the second quarter) will be once again disappointing,” said Credit Suisse, noting it expects Cosco’s losses to widen in the second quarter.
Cosco’s results were followed by weak earnings results from its rival China Shipping Container Lines Co.601866.SH +1.44%, which returned to a first-quarter net profit of 61.4 million yuan because of asset sales, but would have otherwise remained unprofitable, say analysts.
It’s not uncommon for Chinese state-owned firms to use asset disposals to lift profitability. Cosco swung to a 2013 net profit thanks to such one-off gains. The move prevented the stock from being de-listed in Shanghai, as a third year of losses would have triggered such regulatory action. Cosco accumulated losses totaling 20 billion yuan in 2011 and 2012.
Barclays Capital said it expects Cosco to swing to a net loss of 3.8 billion yuan. “We expect the resumption of losses now that the company has no incentive, in our view, to “manufacture” another profitable result in 2014,” the investment bank said.