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Calmer seas

Source:Global Times Published: 2013-10-24 1:18:00

A COSCO cargo ship carries containers on August 16. Photo: IC – China Business News


 
After nearly five years of continuous downturn, a glimmer of hope has returned for the domestic shipping industry.

Amid slumping global demand for dry bulk cargo shipping, China COSCO Holdings Co, the country's largest shipping company by fleet size, has reported losses for two consecutive years, amounting to nearly 20 billion yuan ($3.26 billion).

The company risks being delisted from the A-share market if it records a loss for a third consecutive year, according to the country's securities regulations.

But the Shanghai-listed company has seen its share price climb 15.14 percent in the last three months, reaching 3.27 yuan on Wednesday.

The rise reflects investors' confidence in a potential recovery for the domestic shipping industry, analysts said.

Industry watchers believe the sector hit rock bottom in 2012 and will now start to recover gradually, even if the path ahead remains difficult.

Better indicators

A report released on October 9 by the Shanghai International Shipping Institute (SISI) said that the third-quarter prosperity index for China's shipping market rose to 101.7 points, up from 86.7 in the second quarter.

A reading below 100 indicates weak performance while a reading above 100 indicates an upturn. It was the first time since the third quarter of 2011 that the reading had been above 100.

Experts said that the rise was mainly because of an improvement in dry bulk shipping, the cost of which is measured by the Baltic Dry Index (BDI).

Early this year, the BDI was comparatively low, lingering around 700 for months, but it rose steadily during the third quarter, passing 2,000 at the end of September and even reaching a two-year high of 2,146 on October 8.

The BDI is still fluctuating, however, and fell to 1,847 Tuesday. But the rise in recent months has made many analysts, investors and companies in the sector believe that a recovery is coming.

The industry's break-even point in terms of BDI is around 1,500, Wu Minghua, who has been involved in the shipping industry for more than 20 years, told the Global Times in an earlier interview.

Xu Zunwu, general manager of COSCO Bulk Carrier Co, a subsidiary of COSCO Holdings, said in August that the BDI had reached 1,136, which represented a potentially profitable situation for the company, according to a report by the Beijing News on October 16.

Orders for shipbuilders have also seen an improvement. Statistics from the Ministry of Industry and Information Technology showed that in the first nine months, new shipbuilding orders increased by 147.1 percent year-on-year to 38.06 million deadweight tons.

 


 

Rise in demand

Analysts said that the third-quarter recovery in the country's shipping industry was driven by increasing domestic demand for bulk cargo trading, especially iron ore imports, amid a resurgence in China's economy.

According to data released by the National Bureau of Statistics Friday, GDP rose by 7.8 percent year-on-year in the third quarter and by 7.7 percent year-on-year in the first nine months.

Due to the signs of improvement in the country's economy, domestic crude steel makers have to increase iron ore purchases to meet their production capacity, Zhang Yongfeng, an expert at the SISI, told the Global Times Monday.

They prefer to ship the materials from abroad where the price is lower than for domestic iron ore, resulting in a rise in business for the country's shipping industry, said Zhang.

At the end of September, the domestic price per ton of iron ore was 909.27 yuan ($149.1), while for imports the average price was $130.85 per ton, according to the China Iron and Steel Association.

Statistics released by the General Administration of Customs on October 14 showed that China bought more than 600 million tons of iron ore from overseas markets during the first nine months, a 9 percent rise year-on-year.

Fujian-based Industrial Securities said in an October report that domestic iron ore imports will continue increasing in the future, which will further stimulate the dry bulk shipping market.

The growth rate in iron ore transportation volumes is expected to be 8 percent in 2013, 10 percent in 2014 and 12 percent in 2015, resulting in a growth rate in demand for dry bulk cargo shipment of 6 percent, 8 percent and 10 percent, respectively, said the report.

A short-term effect?

Though dry bulk shipping demand will rise along with the improving domestic economy, analysts expressed concern that the process could be slow and full of uncertainties.

According to the SISI, the prosperity index for dry bulk shipping in the fourth quarter is expected to be 91.21, indicating that the sector will slide back a little bit in the coming months.

Zhang noted that China's iron ore imports are not enough to sustain the BDI high above the break-even point in the long-term, which will make it hard for shipping firms to recover.

The international trading market is also crucial for the revival of domestic shipping firms, so their future will be bound up with that of the global economy, he said.

Some experts noted that China is not likely to see a surge in consumption of iron ore in the future, as the growth rate of domestic steel production is likely to slow down amid the central government's efforts to focus on energy-saving industries.

The cost of shipping iron ore has dropped recently, media reports said. The Baltic Capesize Index, which measures the cost of shipping using Capesize vessels that are mainly used in long-haul transportation of iron ore, fell by 11.8 percent to 3,110 Tuesday from October 16.

Besides, there is still an overcapacity problem, which will also constrain the recovery, according to Zhang.

"The capacity in the dry bulk sector is around 30 percent more than the actual demand," he noted.

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 industry.

Media reports in July said that subsidies are likely to be given to shipping companies in order to help them weed out obsolete capacity, along with preferential tax policies to assist their recovery.

The reports said that a joint plan was expected to be initiated before the end of the year by the National Development and Reform Commission, the Ministry of Transport and the Ministry of Finance, under which old ships that have been used for more than 15 years will be phased out, with the government offering subsidies in return.

Experts said that the policy will relieve the pressure from overcapacity, but improvement in the shipping industry will mainly rely on the global economic recovery.

Global Times
Posted in: Insight