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.

Source: Stockmarkets Review

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