Freight monsters help sink profits

As the world's biggest container ship makes its maiden voyage to Europe from China, trouble is lurking on the high seas for cargo carriers.

Four more vessels of similar size to the huge Cosco Guangzhou are due this year, pushing the number of launches to a record 1992 and creating a capacity glut.

The oversupply, expected to continue through next year, will push down freight rates and share prices for cargo carriers, who also face a drop in profit because of a 55 per cent rise in the price of marine fuel.

"The shipping industry is heading for a difficult two years because of falling freight rates and high fuel costs," said Han Sang Soo, of Tong Yang Investment Trust Management in Seoul. Investors have been anticipating the drop in profit. Shares of Evergreen, Asia's largest container line, have fallen 26 per cent in the past 12 months. Hanjin, South Korea's biggest, is down 25 per cent and Neptune Orient, Asia's No 4 shipper, has dropped 24 per cent. Morgan Stanley Capital International's Asia Pacific Index is up 19.5 per cent in the same period.

Shares of Beijing-based China Cosco, Asia's No 2 shipping line, have fallen 9.8 per cent since they started trading in June - the company operates the giant 100,000- deadweight tonne Cosco Guangzhou.

This year's record deliveries of 1992 vessels will be up 47 per cent from last year, said an analyst at Tong Yang Merchant Bank in Seoul.

Shipyards in South Korea, which account for 38 per cent of the global market, have a record order backlog of 980 ships, of which container ships account for almost half. Dresdner Kleinwort Wasserstein predicts that global cargo capacity will expand 56 per cent in the next three years, outstripping the increase in shipping demand. Container rates are also expected to fall this year for the first time in five years. Higher fuel costs and concern about lower freight rates prompted Nippon Yuse and two other Japanese shipping lines to cut their operating profit estimates for their fiscal year ending March 31.

Hyundai Heavy Industries, the world's largest shipbuilder, plans to finish 50 container ships this year. The South Korean company delivered the Cosco Guangzhou to Greek firm Costamare Shipping last month.

China Cosco has leased the ship, which can carry about 9450 6m containers, and is using it on routes between China and Europe. Costamare is also buying four additional 100,000-tonne ships from Hyundai this year.

Freight rates will "soften" this year as more new capacity is added, said David Lim, chief executive of Neptune Orient.

Average freight rates for 6m containers moved to Europe from Asia in the fourth quarter fell 7 per cent from a year earlier to about US$1709 ($2660) each, said Containerisation International, which tracks the shipping industry.

Average rates for 6m containers moved to the US from Asia dropped 1 per cent to US$1878.

Some analysts are concerned the industry's earnings will be squeezed further by two acquisitions last year - A. P. Moeller-Maersk's purchase of Royal P&O Nedlloyd and TUI AG's of CP Ships. Morgan Stanley says the buyers may cut rates to ensure their newly expanded capacity is put to use.


Giant among giants

* Cosco Guangzhou is owned by Costamare Shipping of Greece.
* China Cosco has leased the ship, which can carry about 9450 6m containers.
* It is used on routes between China and Europe.
* Costamare will take delivery of another four 100,000-tonne ships this year.

- BLOOMBERG