The unraveling of global trade has had a mighty impact on the world’s shipping industry – as amply reflected in the cratering of the Baltic Dry Index (BDI) in the first half of the year and the hemorrhaging of container freight rates. But things may be looking up for a number of players including China COSCO Holdings (1919.HK), operator of the world’s largest bulk fleet.
The company’s main focus is its dry bulk business, shipping commodities such as oil, iron and cement. COSCO had a dry bulk cargo fleet of 443 vessels at the end of 2008, with a total capacity of 34.4 million deadweight tons, and this fleet accounted for 54% of 2008 revenue. According to Ally Ma, an analyst at Citi in Hong Kong, it remains the company’s principal strength.
"The BDI is moving higher from the 2,000 September low, and China COSCO believes bulk high seas will deliver and send the BDI higher to 3,000-plus," said Ma, who has a "buy" rating on the stock.
She is less positive about container shipping – 33% of COSCO’s 2008 revenue came from its 141-strong container fleet, which has a total capacity of less than half a million 20-foot equivalent units. Although the container segment has seen a substantial recovery in the third quarter, the start of the low season in late-October – and the suspension of peak-season surcharges – may bring down overall rates by 20%.
"[COSCO] management guidance underpins our positive view on bulk and cautious view on container shipping," Ma said.
With the BDI rising to 3,900 points in June from 774 in January – and the delayed knock-on effect this has on spot shipping rates and realized time-charter-equivalent, a measure of fleet revenue – Citi believes COSCO’s third-quarter results will be significantly better than its second-quarter performance.
One might argue that it’s difficult to do any worse. COSCO booked a first-half net loss of US$671.9 million as the global downturn rocked the shipping sector. In July the company canceled orders for eight freight vessels worth US$299 million.
In line with global trends, China’s own export market crashed but is now showing signs of a slow recovery. According to customs data, September exports fell 15.2% year-on-year to US$115.9 billion – the slowest rate of decline in nine months.
Nomura analyst Jim Wong, who currently has a "neutral" call on COSCO Holdings, sees light at the end of the tunnel.
Like Citi’s Ma, he has more confidence in the prospects for dry bulk shipping than the container segment, and this can ultimately be traced back to faith in the underlying strength of China’s economy. Continued investment-driven growth in the mainland means strong demand for the materials that dry bulk shippers carry.
"Strong GDP growth means more commodities imports," Wong said.