High oil prices and falling freight rates expected to hurt profits

SINGAPORE / HONG KONG - China COSCO Holdings Co Ltd, the country's top shipping company, sought to reassure investors on Wednesday that negotiations with ship owners over unpaid bills would be resolved and its business remained strong.

COSCO's decision to halt payments to several ship owners in the past few weeks to force better terms threatens to taint its reputation within the international shipping community. At least one of the ships it leases has been seized and further seizures have been threatened because of the debts.

China's huge demand for iron ore, coal and other commodities was the main driver behind a freight market boom in 2008, boosting the global influence of COSCO, China Shipping Development Co Ltd and other Chinese maritime companies.

Many of the shipping contracts currently being renegotiated were struck during the 2008 boom when the industry's largest capesize vessels were being rented by COSCO and others for more than $100,000 a day.

The dry bulk market has since plummeted due to the economic downturn and an oversupply of vessels, leaving COSCO paying 2008 prices for ships that now rent for $18,000 a day.

"I think (COSCO's action) hurts the Chinese shipping companies in terms of chartering in vessels in the future," said Janet Lewis, analyst at Macquarie Securities Group.

The world's largest dry bulk company is in talks with shipping companies to extend payments and reduce costs on chartered vessels following a sharp downturn in the freight market, said two COSCO officials.

"These are commercial disputes and we are dealing with them," a COSCO official, who asked not to be identified, told Reuters. "Our cash flow condition is good and our business development is normal."

Greek ship owner and DryShips Inc founder, George Economou, has threatened to seize ships operated by COSCO after it halted payments on high-priced charter contracts, the Financial Times reported. Economou said he had the industry's biggest exposure to COSCO with 17 or 18 ships on charter to the company.

At least one COSCO-operated vessel in Singapore has already been detained due to outstanding debts, a COSCO official said.

It is not unusual for vessels to be detained at ports because of disputes between owners and operators, but typically they are released within a few weeks after a resolution is reached.

Despite the contract disputes, COSCO is expected to maintain its influence in the industry because of its size.

"They have more than 400 dry bulk vessels and around half of that is chartered. Given the size of it, they will still be a major player," said Andrew Lee, an analyst at Nomura International Plc.

COSCO, the world's sixth-largest container ship operator, issued a profit warning this month, saying it would likely suffer a net loss in the first half of the year due to falling freight rates and high oil prices.

COSCO is expected to name a new chief executive this week due to the age of the current CEO, not because of the company's performance, officials said on Tuesday.

China Shipping Group's vice-president, Ma Zehua, is expected to replace 61-year-old Wei Jiafu as CEO.

Reuters