COSCO Corp (S), once a market darling, has seen its fortunes flow and ebb. In mid-2008, the Baltic Dry Index (BDI) which measures commodity freight rates was at its zenith of 11,793 points. Bulk carriers were commanding high volumes and shipyards around the world cheered at the influx of new contracts. Fast forward, with the BDI hanging at around 2,300 points, the shipping industry and COSCO’s shares seem a far cry than it was 2 years ago.
Yet despite an extremely challenging 2009, COSCO managed to remain profitable for FY09. Cancellations and rescheduling of contracts notwithstanding, COSCO recorded a 64% decrease in net profit to $110m from a year ago, on the back of $2.9b in turnover. COSCO also hit a personal milestone by delivering the Sevan Driller, the world’s first cylindrical deep-sea driller. A total of eleven vessels comprising eight bulk carriers, one heavy lift ship, one accommodation and work barge and one offshore driller were delivered to customers in FY09.
COSCO announced recently on 13 Jul that its partially owned subsidiary had signed a US$130m contract with an European shipowner to build a jack-up vessel to install offshore wind turbines. On 15 Jun, the company announced that it had signed 11 contracts and 4 letters of intent totaling US$440m with European shipowners to build 15 bulk carriers. Earlier on 2 Jun, it also won 2 FPSO conversion contracts worth US$100m from a Japanese and an European ship owners.
Growing Amid Uncertainties
There are several factors that might contribute to the recent pickup in shipbuilding orders. Firstly, with the Chinese economy continuing to grow at double-digit figures, there is an increase in its local domestic ordering.
Secondly, the credit crisis and global recession have shut down some of the smaller and weaker shipyards that were caught unprepared, as cancellations and default orders swept across the shipbuilding industry. This in turn has allowed COSCO to increase its market share as it fills the void left behind by the demise of its competitors.
Also with the recovery in its early stages, vessel prices are still less than its peak during the shipping boom. As a result some ship owners are taking the chance to expand and increase its fleet to take advantage of the low vessel prices at this time. Coupled with an easing credit situation, this has helped fuel an increase in shipbuilding orders, as banks today are more willing to lend.
The shipbuilding sector is expected to face increased competition as shipyards compete for contracts. The volatile freight rates of late have also caused ship owners to remain cautious over their expansion plans. Should the global economy recovery pick up its pace however, we might instead see a fresh wave of activities in the shipping industry.
COSCO, with its positive net cash position of $1.4b as of end of 1Q10, appears to be well positioned to expand further should the outlook improves. Nevertheless, with its present sizeable order book, it seems capable of delivering positive results for FY10.