Sometimes the important thing is what is not said. When Cosco warned that net losses for 2012 would be “significant”, it should not have come as a huge surprise. The world’s largest operator of dry bulk ships by capacity still suffers from rock-bottom freight rates. It was the absence of a solution for its woes that knocked 5 per cent off Cosco’s shares yesterday. The Tianjin-based operator dual-listed in Shanghai and Hong Kong now faces a potential suspension of its shares in the former if it records a third-consecutive year of losses. Cosco’s losses for 2012 add to an Rmb10bn ($1.7bn) loss in 2011 – the shipping industry’s largest ever. It needs to find a route back to profit.
Yet it still suffers from a poor bet it made in 2008 that charter costs would rise further. It went long on forward freight agreements when the Baltic Dry Index was climbing above 7,000. But the financial crisis wiped out freight demand and the BDI tumbled to just 700 by the end of 2008. That meant that losses flooded in to Cosco. Dry bulk containers now contribute less than a fifth of its total revenues, down from over a half five years ago. Yet oversupply in container shipping means that this segment is unable to offset losses elsewhere.
Cosco needs the BDI to average 1,500 to break even. Yet this looks a long way off. The seasonal rally that comes at the end of the year as China’s iron ore traders restock has already run out of steam, sending the index back to 800. Cosco needs other options. It could sell some of its vessels to its state-owned parent and then lease them. CLSA estimates that its fleet could fetch more than $6bn at second-hand rates, which means that it would need to liquidate very little to cover 2013 losses. Selling assets at the very bottom of the cycle is hardly a good move in the long term. But Cosco is running out of options to stay afloat.