International Shipping Business Upswing: COSCO Orders 9 New Ships
Is it a further sign of the global economic turnaround? It could certainly be construed that way, but probably has more to do with incentives from China.
The Wall Street Journal reports that COSCO Container Lines, one of the world’s largest carriers and the national flag carrier of the People’s Republic of China, is ordering 9 new ships.
This is the first time COSCO has made a major purchase like this in 5 years!
Joanne Chiu expands in the Wall Street Journal article:
…Cosco launched an ambitious plan between 2007 and 2008 to increase the size of its fleet. In 2008, the company made $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 was not alone among shipping industry carriers expanding in 2007 and 2008. Those years were very good years for the international shipping industry and carriers in particular. But when all the ships started hitting the water that carriers were ordering in the good times, bad economic times struck and things became very difficult for the carriers.
If you’ve read Universal Cargo Management’s blog for a long time, you’ve probably seen articles here talking about overcapacity in 2011 driving freight rates down and contributing to carriers like COSCO to have losses in the billions.
The Wall Street Journal article details that COSCO suffered 10.4 billion yuan in losses during 2011, which would translate into 1.72 billion dollars by current conversion rates. Despite carriers imposing general rate increases (GRIs) in 2012 to try to get rates back to profitable margins, COSCO still lost 9.56 billion yuan in 2012 according to Chiu’s Wall Street Journal article. That translates to 1.58 billion dollars lost by today’s standard, but the article translated it as 1.56 billion U.S. dollars (probably using a 2012 conversion rate, which would be more precise to the losses of the time).
Despite these huge losses, COSCO has survived and is now expanding. The Wall Street Journal article reports that COSCO has agreed to buy 4 dry-bulk ships of 64,000 deadweight tons each for $108 million and 5 container ships with a capacity of 9,400 TEUs each (although the cost of the container ships are not included in the article or announced by COSCO as of yet).
Buying new ships certainly signifies a confidence in the global economy from COSCO and the ability of the international shipping industry to thrive in the midst of global economic growth over the upcoming years.
Still, what makes it possible for COSCO to make a big, expensive move like this is a government subsidy from China that COSCO is taking advantage of.
Again, Chiu details the Chinese subsidy in the Wall Street Journal article:
…Beijing unveiled details of a new subsidy program earlier this month to encourage the nation’s ship operators to replace older cargo ships and tankers with new ones. Chinese shipowners will receive half of a cash subsidy of 1,500 yuan ($247) per gross ton—a measure of a ship’s internal volume—to replace old ships and get the remainder if a new ship is built.
The subsidy is encouraging quite a bit of business within China as COSCO’s ordering of new ships is happening within China’s ship building industry as gleaned from Chiu’s Wall Street Journal article:
The Chinese shipping conglomerate said it plans to order the ships from CSSC Huangpu Wenchong Shipbuilding Co, a Chinese shipbuilder controlled by China State Shipbuilding Corp.
Here at Universal Cargo Management, we don’t have a government subsidy to offer you, but hope your business is seeing success in the global economic turnaround and are ready to help you import goods from China or succeed in importing and exporting from and to locations all around the world.