Chinese shipping operators are missing out on the global trade rebound, weighed down by excess shipping capacity and operating inefficiencies.
China Cosco Holdings Co. and China Shipping Container Lines Co., two of the country’s biggest shipping operators, posted weak earnings Thursday, with soft freight rates and high costs continuing to plague the companies, in contrast to strict cost controls that have buoyed competitors such as Hong Kong rival Orient Overseas (International) Ltd. and Maersk Line, the shipping unit of Danish giant A.P. Moeller-Maersk A/S.
China Cosco Holdings Co., which operates the World’s fifth largest container fleet, Thursday reported a widened first-half net loss, because of the lack of one-time gains from asset sales and soft freight rates. The company also operates China’s major dry bulk fleet, which shipping raw materials such as iron ores, cements and sugar.
China Cosco’s net loss for first six months ended June 30 was 2.28 billion yuan (US$370 million) according to Chinese accounting standard, widened from a net loss of CNY990 million in the year-earlier period when it booked more than CNY3 billion in gains from two asset sales. China Cosco’s revenue fell 0.9% to CNY29.94 billion in the first half from CNY30.21 billion a year earlier, it said.
The listed flagship of China’s biggest state-run shipping group attributed the losses to persistent overcapacity that weighed on shipping rates.
“The shipping industry will remain in a downturn for the rest of this year. Shipping operators will continue to face challenges including weak demand, high operating costs, and tight funding supply,” China Cosco said in a statement.
In a separate statement, China Shipping Container Lines Co., the world’s seventh largest based on fleet size., said it swung to a first-half net profit of CNY460.3 million, compared with a net loss of CNY1.27 billion a year earlier, only because of a more than CNY900 million one-time gain from asset sales. Its revenue rose 8.1% to CNY17.55 billion from CNY16.23 billion a year earlier on higher shipping volumes.
China Shipping said it expects demand for container shipments continue to recover thanks to improved global economic outlook, however it remains challenging to keep freight rates at reasonable level as the industry continues to struggle with oversupply of shipping capacity.
The disappointing results were a contrast to global shipping giant Maersk Line, which last week reported a 25% rise in second-quarter profit of $547 million, compared with $439 million a year earlier, on a 4.4% reduction in unit costs and a 6.6% increase in container volumes. Maersk Line, which moves around 15% of the world’s containers, said it is expected to earn “significantly” above what it did in 2013.
Hong Kong-based Orient Overseas (International) Ltd. earlier this month said it swung to a first-half profit of US$181.3 million, thanks to lower operating costs and higher shipping volumes.
Geoffrey Cheng, head of Transportation & Industrial Research at Bocom International, said China Cosco’s orders for lots of high-price vessels before the outbreak of financial crisis partly attributed to high operating costs.
“Operating performance in the shipping industry would be diverse this year. Companies that are operating with bigger vessels and stringent cost control could make a profit this year,” said Mr. Cheng.
The weak first-half results came despite China’s exports surged 14.5% in July from a year earlier, accelerating from a 7.2% on-year growth rate in June amid strong demand from the U.S., Europe and Southeast Asia. The July growth rate was sharply higher than the 8% growth forecast by economists.
Persistently weak freight rates due to overcapacity are also keeping the Chinese companies from taking advantage of the pickup in global shipping. Analysts expects the shipping market won’t achieve supply-demand balance till 2016. The world’s shipping supply is expected to rise 5.6% this year, outpacing the forecast 5.2% growth in demand for international trade, according to Orient Overseas.
Container rates on the key Shanghai-Rotterdam route held at $2,533 per 40-foot-equivalent unit, retreating from a year-to-data high of $3,324 per FEU in January, but were well above late June’s $990, the trough of 2013, according to the World Container Index.
“We won’t be seeing a sharp rise in freight rates in the near term because of abundant shipping capacity in the market,” Mr. Cheng said.