COSCO pays up at cost to dry-bulk trade
By Olivia Chung
HONG KONG - A long-running payments dispute in which state-owned China COSCO
Holdings withheld payments on high-priced contracts has tainted its reputation,
industry analysts said after it was revealed it had resumed some charter
payments.
The shipping dispute threatens the credit worthiness of the dry-bulk industry
as a whole, and any downward negotiation of contracted charter rates would be
negative for dry-bulk shipowners, Moody's said in its weekly credit market
report.
"Charter rates are currently much lower than they were in 2008 and
renegotiation of contracts could set a precedent that spurs other Chinese
shipping companies to seek more favorable terms in their existing agreements,"
it said.
Two international shipowners confirmed that China's largest
shipping company has resumed charter-hire payments. Raymond Ching,
vice-president of Jinhui Shipping, which is listed in Oslo and based in Hong
Kong, told Asia Times Online that COSCO had paid the company to settle a
five-year dispute over lease payments.
"Some of the hire payments had been delayed for extensive periods of time on contracts of up to five year duration, which were signed in 2008, for which the COSCO paid higher charter rates especially compared to today's rates," said Ching. He declined to provide details, including how much COSCO had owed and if the contracted charter rates had been changed as COSCO sought to renegotiate its charter agreements.
"Anyway, the issue with COSCO is over and everybody's fine," Ching said.
Many of the shipping contracts involved were signed during the 2008 shipping
boom, when the benchmark Baltic Exchange Dry Index (BDI) hit a record high of
11,793 points in May that year. The the benchmark index for the dry-bulk
shipping market last week stood at 1,537, down 87% from its peak, after
plummeting in the global economic downturn and an oversupply of vessels.
COSCO withheld payments for vessels chartered long-term for as much as $80,000
a day. Average spot-market rates to charter Capesize vessels - the largest
class - stood at $16,716 a day last month.
China COSCO Holdings president Zhang Liang said during the firm's results
briefing late last month that charter disputes were a common business problem.
Zhang said the parent company and its subsidiaries had charters for more than
400 ships but "the percentage of disputes was small compared with the overall
number of charters".
China COSCO posted a first-half loss of 2.76 billion yuan (US$433 million)
after a collapse in rates for carrying commodities and containers.
The company had at least three vessels arrested in the past two months as
shipowners sought overdue payments, according to court filings in the US and
Singapore, Bloomberg reported. Shares in the Hong Kong-listed company are down
about 62% from their year-high of HK$9.35 to just below HK$4 on Monday.
Jinhui Shipping, owned by Hong Kong-listed Jinhui Holdings, was the first
Asian-based shipowner to warn publicly of dire consequences after the extensive
delays in charter payments. COSCO is or has been in dispute with several
international shipowners, including Greece-based DryShips and Navios and
Geneva-based Bunge SA, which have led to the seizure of at least three COSCO
vessels in various ports.
Ching said in an interview with the Financial Times earlier that the company
was in a similar position to those on whose contracts COSCO has already
reneged, referring to other shipowners including DryShips CEO George Economou,
who has threatened to seize the ships, and Bunga wining a court order for the
arrest of a COSCO ship over unpaid ship leases.
In a case brought by Aren Maritime in July in Singapore, the shipowner sought
US$8.58 million, according to Singapore court documents. China COSCO Holdings,
a Hong Kong-listed subsidiary of China Ocean Shipping (Group) Company, was
paying $87,000 a day for a Capesize vessel, the filing said.
DryShips chief financial officer Ziad Nakhleh confirmed that COSCO has resumed
charter-hire payments and that the "little hiccup" with the Chinese
counterparty is over. On a conference call, Nakhleh explained: "Our dispute is
specific to COSCO Qingdao only, with which we have approximately US$2.5 million
in unpaid hire for three of our vessels," according to Reuters.
DryShips has about 18 ships on charter to COSCO, the Financial Times reported.
China Ocean Shipping (Group) Company and its subsidiaries had 234 self-owned
dry-bulk vessels and 201 chartered dry-bulk ships with a combined capacity of
3.79 million deadweight tons at the end of June, including 95 Capesize and 165
Panamax ships carrying iron ore and coal. This was up from 61 Capesize and 86
Panamax vessels in the first quarter.
In a statement at the end of last month, China COSCO Holdings said the disputes
or the adjustment of hire rates was part of its "normal operations" and
consistent with its business philosophy. It also said that its financial status
and operational conditions were "sound and healthy".
While COSCO's attempt to resolve the unpaid payment disputes with shipowners
appears to have been successful, COSCO's attempt to renegotiate contracted
charter rates has annoyed industry players and analysts.
Ching for Jinhui Shipping said "COSCO has paid the payments, but the fact it
cannot deny is it had been prolonging the payments."
Rebuffing COSCO's insistence that it is "normal operations" for such contract
disputes, Ching said "normal operations" should be for those who refused to
honor contracts to have their vessels arrested.
"The Baltic takes the view that a deal agreed between two parties stands, and
it's simply not acceptable for one party alone to attempt to change the terms,”
Jeremy Penn, chief executive of London's Baltic Exchange, was quoted as saying
by the Financial Times.
Australia's Fortescue Metals Group was suspended as a Baltic Exchange member
after it refused to honor contracts to ship goods at high prices with shipping
companies when the dry- bulk cargo market and shipping rates collapsed in late
2008. The move led to several shipping companies filing for bankruptcy or
protection from creditors.
Olivia Chung is a senior Asia Times Online reporter.
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