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Wednesday, June 23, 2021

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Incompetent management is sinking Cosco, say analysts

Posted to Far East Maritime (by on March 1, 2013

Two years of billion dollar losses and no profitability in sight have rattled Cosco investors and may threaten the charismatic chairman’s position.

In the mid-2000s, Cosco Holdings chairman Wei Jiafu was one of China’s rock stars, adored by the business community and revered by the media. Now irate investors want him held accountable for the mess into which China’s largest shipping line has steamed headlong.

In a damning article, China’s respected publication Caixin Online reported that analysts believe Cosco’s management to be more incompetent than the carrier cared to admit.

Management stumbled along making strategic miscalculations, bungled investments with hedging tools, signed long-term leases at the wrong time and expanded blindly, the Caixin report said.

Even the swiftest glance at the balance sheet will reveal a gaping hole where profitability used to be. Cosco lost almost US$1.7 billion dollars in 2011 and last year lost almost as much. Another red year will see Cosco forced to suspend trading on the Shanghai Exchange until it makes a profit, and if the carrier returns four years of losses in a row it will be delisted.

That is an almost unthinkable position for the pride of China’s shipping fleet to be in. Back in happier times, Capt Wei would swoop into conferences and take to the stage surrounded by sychophants and drooling media. (An interesting exercise would be to tally the Lifetime Achievement, Personality of the Year or Newsmaker awards he racked up while on top of the heap.)

An analyst quoted in Caixin’s riveting report blames the dry bulk division of the group for a lot of the problem, which made up the bulk of the 2010 losses. A third of its 337 dry bulk fleet was leased, which placed an immense drag on profitability. The analysts noted that competing shipping lines with large bulk fleets posted better results. Its fellow state-owned line, China Shipping, fared better because it was big in domestic shipping.

But the fleet expansion strategy was where the real damage was done. Cosco Holdings expanded blindly and did not have a long-term strategy, said yet another analyst, this one “familiar with Cosco Holdings track record”, whatever that means.

Contributing to the huge operating losses were the forward freight agreements, a financial derivative that has caused much pain in the shipping world. The analyst said Wei should be held accountable for that, a sentiment apparently shared by some investors.

But Beijing also appears to have grown weary with the sustained losses incurred by Cosco Holdings. An internal bank document Caixin found showed that state-owned banks were told to reduce their credit line to the carrier.

Wei has reportedly appealed for a bailout from Beijing but has so far been ignored. His fall from grace now seems assured.