Monday, December 08, 2008
Monday, 08 December 2008
Global shippers are experiencing some aches and pains as the global economic washout is sending a chill throughout the sector. A freefall in demands for the commodities that are their main cargo has led to a severe drop in shipping rates. It appears that the sector's prolonged boom is fading fast, putting investor confidence on the rocks. The outlook is equally bad for Chinese shippers. But even so, the shipping conglomerate China Ocean Shipping Group Co. (COSCO) has not changed course with its overseas expansion plans.
COSCO Pacific, a Hong Kong-and Shanghai-listed container unit of the parent company, announced on November 26 that it had signed a 4.3-billion-euro ($5.4 billion) deal with Greece to manage and upgrade facilities at the Piraeus Port for up to 35 years, marking the biggest foreign direct investment of Greece to date.
According to the deal, COSCO would expand an existing terminal at Piraeus and finish building a new one by 2014 to help triple the port's capacity to more than 3 million TEUs (20-foot equivalent unit, or a unit of measurement equivalent to one 20-foot container) annually.
The deal is expected to expedite COSCO's foray into Europe as Piraeus is widely seen as a strategically important port. Containers could be transferred there to smaller ships that can navigate the winding Bosphorus Strait to serve ports in southeast European countries such as Romania and Georgia, according to a report in the Financial Times.
Meanwhile, some analysts interpret the move as an effort by COSCO to diversify its profit sources and in turn offset the growing slack in the shipping sector. Port investments, usually long-term and low-risk, are traditionally reasonable options during downturns in the shipping industry, they said.
"It is impossible that the financial storm will rage on for 35 years," Wei Jiafu, COSCO's president, said in a printed statement. "In 35 years, we are confident that we will make a considerable return on this investment."
Previously, COSCO had obtained stakes in a batch of ports in Singapore, Antwerp, Belgium, and the Suez Canal in Egypt, and now operates more than 600 modern vessels worldwide.
The company's risk-averse tactics come at a time when the financial contagion is eating into demands for raw materials and consumer goods and causing global seaborne trade to decline to a trickle. On the contrary, the shipping capacity of the sector, as a result of a shipbuilding spree a few years ago, has increased and is now a factor that further weighs against shippers.
According to data of Thomson Reuters, the Baltic Dry Index (BDI), a measure of freight costs for dry bulk goods such as iron ore and grains, has plummeted more than 90 percent from its peak seen this May, typical of a shipping downturn.
Sun Liping, a senior analyst at Guotai Junan Securities Co. Ltd., said that the global shipping sector has followed the world economy into a downward cycle. The boom times would not return until the economy rebounded, she added.
Amid uncertainties hanging over the global shipping sector, COSCO largely held up in the first quarter of this year with the help of buoyant domestic demands. The company earlier announced that it had posted seaborne traffic of 334 million tons by October 10, almost its prescribed target for the whole year.
But as the U.S. credit debacle leaks into China's slowing economy, COSCO has also felt the pinch. Yuan Xiaoyu, a company manager, said that the previously big increases in COSCO's shipping revenue have fizzled since October. Worse still, shares of COSCO Pacific listed in Shanghai have shed over half their value this year as investors cashed out on concerns over ship oversupplies and worries that the domestic economic slowdown would eventually dampen the seaborne trade.
Cai Zhongguang, a shipping analyst at BOC International (China) Ltd., said that the domestic dry bulk shipping sector, accounting for more than 70 percent of COSCO's total profit, is likely to face greater pressure since the country's foreign trade has shown signs of easing.
Analysts also have issued warnings about COSCO's container lines. The global downturns may well hit its container shipping revenues, which depend heavily on U.S. and European consumer demand, they said.
Following a series of recessionary signs that spooked the market, COSCO has acted swiftly to bring a measure of calm to its investors. This year it has switched some of its capacity from the port of Long Beach in California to Prince Rupert Port in British Columbia, Canada, which is about 1,000 miles closer to Shanghai. This will save its ships almost three days on each trip.
Meanwhile, the company has responded to the risk-ridden market with a clampdown on cash outflows to boost its balance sheet. Huang Tian, Director General Manager of COSCO Pacific, said in a printed statement that the group plans to trim capital spending for the fourth quarter and next year, and defer some new projects and restructuring of its shipping subsidiaries.
In addition, seven of COSCO's subsidiaries recently said they would sell part of their shares on the Tianjin Property Rights Exchange, in a move aimed at soothing the parent company's cash needs.
"We will continue to maintain a sound capital position as financial health matters the most in a fast-changing climate," Wei said.
Besides the company's self-rescue efforts, it has embarked on an innovative drive to push for combined sea-rail transport. In many ports in China, arriving containers must be first unloaded onto trucks and then go through complicated procedures before being transported to inland destinations by railway. In recent years COSCO has sought to simplify the transfer process and integrate sea and rail transport through closer ties with inland railway operators and local container center stations.
Under the amphibious transport model, cargo is directly unloaded onto trains for a faster rail travel to inland destinations. This would appreciably heighten transport efficiency and cut costs, said Liu Gang, Executive Vice General Manager of COSCO Shanghai International Ocean Freight and Forwarding Co. This is commonplace in Europe and is expected to be promoted in China, he added.
"The shipping sector has hit rock bottom, but will not collapse," Liu said. "Such efficiency-saving innovations are just needed to help shippers shrug off the downward pressures."
Wei Jiafu also echoed Liu's opinion, adding that global shipping sector would turn around next year.
"The current BDI dive was mainly caused by the shell-shocked investors who are acting on panic, not on reason," Wei said."But the diver has to come up eventually. I believe that shipping demand will be back in the first half of next year.
"It is impossible for the larger trend of economic globalization to take a turn back, signaling vibrant shipping demands in the long term. The shippers should make efforts to precipitate the turnaround in coordination with ship-builders, banks and ports."
Source: Beijing Review