A container ship produced by Nantong COSCO KHI Ship Engineering Co earlier this year Photo: CFP

After nearly five years of continuous downturn, there is still no sign of an improvement for the shipping industry.

On July 1, China Ocean Shipping (Group) Co (COSCO Group), the country's largest shipping company by fleet size, announced that its President Ma Zehua would replace Wei Jiafu as the new chairman.

Amid the weak demand caused by the global economic downturn, China COSCO Holdings Co, the listed arm of the group, has reported losses for two consecutive years, amounting to nearly 20 billion yuan ($3.26 billion).

According to securities regulations, companies that report a loss for three consecutive years face the risk of being delisted from the A-share market. Ma's primary task will be to avoid this ignominious fate.

A slight recovery has been seen in the sector recently, but experts said it could prove short-lived, and it will be hard for COSCO to turn things around.

Sinking feeling

The 63-year-old Wei has been the head of COSCO Group for the past 15 years. Under his management, the company built the world's largest commodities fleet and COSCO Holdings went public on both the Hong Kong and Shanghai stock exchanges.

Amid China's fast economic development over the last three decades, there was strong demand for shipping dry-bulk goods such as iron ore and grains, and products made in China were also transported all over the world.

But the world economy was hit by the global financial crisis in 2008, and as international trade shrank in size COSCO's large fleet has become a liability.

In 2012, COSCO Holdings incurred losses of 9.5 billion yuan. In the first quarter this year, the company again lost 1.99 billion yuan.

Shares in the company on the Shanghai Stock Exchange have plunged to around 3 yuan per share at present, compared with over 60 yuan per share in 2007.

To avoid a potential delisting, the company has been selling some of its assets. A logistics subsidiary and a container shipping unit were sold earlier this year, and the two assets sales have brought in 4.86 billion yuan before tax for the company.

However, experts believe the outlook for the shipping industry will remain negative in the short term, since the supply of vessels still outstrips demand for shipping services.

Other major shipping companies are also suffering losses or declining profits. Shanghai-listed China Shipping Development Co reported a net loss of 320 million yuan for the first quarter.

The shipping industry downturn has also affected the shipbuilding industry, and most shipbuilders are suffering from losses.

China Rongsheng Heavy Industries Group, the largest private shipbuilder in China by accumulated orders, reported a loss of 570 million yuan in 2012. And the company also predicts a net loss for the first half of this year. Despite a change of focus to offshore engineering, the company still made a loss in the first quarter.

On July 1, employees of Rongsheng Heavy went on strike, claiming that the company had delayed their salary payment.

A short rebound?

Wei Jiafu said in 2012 that the upturn cycle for the global shipping industry before 2008 lasted seven years, and that the downturn may also last seven years. If that is the case, the sector will not see any obvious improvement until 2015.

However, a slight rebound recently in some indicators for the industry has made some people believe that a recovery could come sooner.

The Baltic Dry Index (BDI), an index measuring the cost of dry-bulk shipping, rebounded to a half-year high of 1,133 Wednesday.

Container shipping freight for major routes also rebounded to around $1,000 per ton compared with $600 per ton about two months ago, Wu Minghua, an industry watcher who has been in this sector for more than 20 years, told the Global Times.

Orders in shipbuilding have also seen an improvement. Statistics from the China Association of the National Shipbuilding Industry showed that in the first five months this year, new shipbuilding orders increased by 44.2 percent year-on-year to 13.75 million deadweight tons.

Wu noted that the current rebound does not indicate the start of a long-term recovery. The current rebound in dry-bulk transportation "is mainly due to a seasonal rise in grain transportation … and it is also not clear whether container shipping freight will remain stable," said Wu.

Wu noted that the BDI was still well under the industry's break-even point of around 1,500. The index was over 10,000 back in 2007.

Experts also noted that the increase in shipbuilding orders is not a result of increasing demand, but due to the extremely low prices for shipbuilding at present.

"Shipping companies should be cautious in making new shipbuilding orders, as a spending spree now could cause future oversupply in the sector," Wu noted.

"The price we offer to build a ship has been nearly halved compared with the pre-crisis peak, but our costs have not dropped," an employee at Rongsheng Heavy told the Global Times on condition of anonymity, noting that the shipbuilding industry is still at a 13-year low at present.

Media reports said that the company has laid off about 8,000 people in recent months, or approximately 40 percent of the company's workforce.

Zhang Yongfeng, an expert at Shanghai International Shipping Institute, said that though shipping demand may recover slowly along with the global economy in the future, the supply glut will still constrain the recovery.

"The capacity in the dry-bulk sector is around 30 percent more than the actual demand," Zhang said.

Government revival plan

The industry has already seen some small shipping firms as well as shipbuilders going bankrupt during the past two years. Experts noted that government support is needed to help the ailing industry.

The long-awaited support plan, initiated by the National Development and Reform Commission, the Ministry of Transport and the Ministry of Finance, is expected to be announced in the second half of this year, Securities Daily reported on July 1.

Subsidies will be given to companies to help them weed out obsolete shipping capacity, and preferential tax policies are also expected, media reports said.

According to the draft plan, old ships that have been used for more than 15 years will be phased out, with the government offering subsidies in return, media reports said.

"These old ships could cause safety hazards. Getting rid of them is the most effective way to solve the problem of overcapacity in the sector," said Wu.