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The Baltic Dry Index, which tracks the cost of shipping raw materials and is widely considered a leading economic indicator, has fallen sharply in the past several years. In February, it touched a low of 647 points, near its all-time low of 554 points in July 1986. The index's historic high of 11,793 points was reached in May 2008.
China's economic growth rate fell to 7.6 percent in the second quarter, the slowest since the global financial crisis. The slowdown, coupled with China's slower growth of investment, has curbed imports of industrial commodities such as iron ore and coking coal, which are typically carried by dry bulk ships.
"We are facing a tougher-than-ever situation," said Wei Jiafu, Board Chairman of COSCO, who has been working in the shipping industry for 45 years. "COSCO's losses are within market expectation amid general losses of the whole shipping sector. The situation is still severe in the coming third quarter and we may experience a long winter."
On the other hand, some blame COSCO for its reckless investment and rampant market expansion in 2008, which later lead to its excess capacity amid dwindling demand.
COSCO invested heavily to expand its shipping capacity in 2008, when international freight rates were at record highs. But as the economy further slows and demand shrinks, the huge shipping capacity has become a big liability.
Currently, nearly half of COSCO's bulk cargo vessels are rented from other shipping companies. "The rent for a vessel in 2008 was almost eight times the current rent, and the rent contract usually lasts three to five years," said Zhang Yongfeng, an expert at the Shanghai International Shipping Institute.
"COSCO's huge loss is not only a result of the overall sluggish shipping industry, but also a result of its too aggressive market strategy," said Cai Jianming, a research fellow at the CIConsulting, an industrial research company based in Shenzhen. "Internationally mature shipping companies should make prudence the core of its operation principles. Going after a short-term windfall should never be the goal of shipping giants like COSCO."
With market expectations that the global economy may further slow down in the second half of the year, analysts don't expect the shipping sector to turn debt into profit within a short period. Most Chinese shipping companies are hoping to get government subsidies or aid.
Wei claimed that he had handed in a petition to the Central Government several times, reporting difficulties that COSCO and China's shipping industry are facing, hoping for more support. The government is also COSCO's biggest shareholder. Wei also said that departments related to the shipping industry are actively studying the issue and formulating corresponding countermeasures.
"We wish for some favorable business tax policies," a staff member from China Shipping Container Lines Co. Ltd. told 21st Century Business Herald.
In the first half of this year, the capacity of global dry bulk cargo increased 15 percent year on year, while demand growth was just 6.2 percent, said COSCO, adding that excessive shipping capacity will remain the primary challenge for the dry bulk sector in the second half of the year. Analysts believe dry bulk shipping will recover after 2014.
In the container sector, capacity management needs to be a lot more aggressive in order to restore the demand and supply relationship, said analysts.
Some say COSCO needs to find additional capital from the markets or from asset sales.
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