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Saturday, June 24, 2017

CSCL’s mega ship order raises eyebrows

Posted to Far East Maritime (by on May 3, 2013

When all the talk is about excess capacity and freight rates being destroyed by the glut of capacity, why would a China carrier go and order Maersk-sized vessels?

According to reports, China Shipping Container Lines’ decision to order five 18,000 TEU giants will put a US$700 million dent in its pocket. Those things are not cheap, especially considering CSCL made a loss of US$112 million in the past three months.

The carrier has forecast a 2013 profit of around US$100 million, but most analysts are skeptical. Not that anyone should set his watch by an analyst’s predictions, but splashing out on a monster order for monster ships while money is gushing down the gurgler doesn’t seem like such a solid strategy.

Of course, a curiosity (or maybe a perk) of being a mainland giant is the absence of solid strategies in their business plan and an apparent disconnect between accountability and financial performance. CSCL is also a Hong Kong listed company, so there are shareholders to consider. Surely. Maybe.

Admittedly, CSCL is not in the spectacularly dire position of its big brother Cosco. Spare a thought for (former?) princeling Capt Wei Jiafu who has to somehow convert a two-year loss of US$3.25 billion into something entered in black ink by the end of 2013 or face being delisted from the Shanghai Stock Exchange.

Wei, obviously used to being fawned over by an adoring mainland media, has adopted a belligerent stance in response to media criticisms, claiming to have Beijing’s full support.

The problem is, Cosco is a publicly listed company and should be answering to its shareholders and not to the Chinese government.

A Caixin Media columnist suggested in an analysis piece earlier this month that the best thing for the company would be for it to delist from the Shanghai exchange. Caixin said that would give the company the ability to right its wrongs without having to clear things with shareholders. This was a bad thing and would constrict the company’s ability to sort itself out, the columnist said.

But what good secrecy would do in Cosco’s restructuring is debatable. Wei has pretty much run the company as his own anyway and look where that got everyone, so to put it back in the hands of the captain and state control would surely result in more of the same.

That’s enough about Cosco. Let’s get back to CSCL where the carrier told the Shanghai Stock Exchange it needs the 18,000 TEU vessels to “raise its core competitiveness”.

While the company should probably be consolidating and slashing costs, there is some method to the madness of ordering larger ships when the market is swamped with capacity.

Trying to compete with ships of under 10,000 TEU on trade routes where everyone else has giants is asking to lose money. From a unit cost and fuel saving perspective, an 18,000 TEU vessel has no equal. Of course, filling the ship will be another issue.

The vessels won’t be delivered for a couple of years and while the orderbooks for 2014 and 2015 are pretty empty at the moment, there is no doubt that at some point all the container lines will pile in.

Sooner or later on the  strategic planning chart the demand and forecast lines will meet and the orders will flood in. Just like the sun rises in the east.


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