China Cosco Holdings is considering making dozens of orders for new cargo ships starting in the first half of 2014, in what would be the state-owned shipping giant's first major vessel purchases in over five years.
Cosco hopes to take advantage of the Chinese government's new cash subsidies for vessel scrapping to upgrade its fleet of aging dry-bulk ships, which carry commodities such as grain, ore, and cement, said two people familiar with the situation, reported The Wall Street Journal.
The company is in talks with several shipyards to build new dry-bulk ships, which would be more fuel-efficient and environmentally friendly, the people said.
"Cosco is reserving some construction slots at shipyards for the possible orders, though details involving payment, construction terms and specifications are still under negotiation," one of the people said.
The potential orders come at a difficult time for Cosco. The flagship of state shipping conglomerate China Ocean Shipping (Group) plans to reverse losses thus far in 2013 and thereby avoid mandatory delisting from the Shanghai Stock Exchange. In July, long-time group chairman Wei Jiafu retired, triggering a senior management shuffle.
The company hit another setback in November, when one of its executive directors was placed under investigation by Chinese authorities for unspecified wrongdoing, though Cosco has said its operations were unaffected.
Under Wei's leadership, Cosco launched an ambitious plan between 2007 and 2008 to increase the size of its fleet. In 2008, the company made US$2.3 billion of new ship orders for eight container ships and 17 dry-bulk vessels, while also entering into fixed long-term charter contracts for more ship capacity.
The move coincided with the global economic slowdown, contributing to a glut of vessels hitting the shipping business amid reduced demand for seaborne transportation.
Cosco has since been suffering from the huge capacity boost. It racked up losses of $1.7 billion in 2011 and $1.57 billion in 2012. Over the first three quarters of 2013, the company posted a loss of $334 million, narrower than the loss of $1.05 billion it recorded during the same period a year earlier. A third year of losses would threaten the company's Shanghai listing status, a predicament it plans to avoid through several asset sales.
The company reduced its dry-bulk shipping fleet to 332 ships as of June from around 450 ships at the height of the shipping boom in 2008, when half of its fleet was chartered, which made Cosco especially vulnerable to price fluctuations in the spot market.
The proportion of chartered ships has gone down to about a third.
A decision to move forward with ship orders wouldn't mean the company sees a turnaround in the shipping market, the people said; instead, Cosco hopes to reduce fuel and other operating costs with new ships.
Beijing on Monday unveiled details of a new subsidy programme to encourage the nation's ship operators to replace older cargo ships and tankers with new ones. Chinese shipowners will receive half of the cash subsidy of $247 per gross tonne-a measure of a ship's internal volume-to replace old ships and get the remainder if a new ship is built.
The cash incentive would help shipowners take advantage of lower prices and modernise their fleets to reduce operating costs. The market price of a new handysize dry-bulk ship-a small class of vessel, used to carry commodities-is about 17 percent lower compared with levels at the end of 2010, according to shipping consultant Clarkson Research Services.
Brokerage Daiwa estimates that Cosco has 300,000 gross tonnes of vessels that could be scrapped under the cash-subsidy programme. Assuming it would take three years to scrap the ships, this would amount to around $25 million in subsidies to Cosco a year for the next three years, equivalent to six percent of Daiwa's 2014 net-profit forecast for Cosco.
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