HONG KONG: China COSCO Holdings Co Ltd said it expects the operating environment for shipping firms to improve in the second half of the year after an "extremely weak" showing in the first quarter.

Chairman Wei Jiafu yesterday said shipping firms are currently facing tough times, with demand for their services weak amid a global recession and a supply glut in the shipping industry.

Wei fielded questions from the media yesterday after reporting on Wednesday weaker-than-expected 2008 results.

The company, which operates the world's largest dry bulk fleet and a large container fleet, reported on Wednesday a 40.4 percent year-on-year drop in net profit to 11.62 billion yuan for 2008, blaming a significantly-deteriorated operating environment in the last quarter.

Macquarie Bank predicted China COSCO to book a net profit of 17.40 billion yuan while HSBC Research forecast a net of 20.90 billion yuan. Credit Suisse estimated the net at 15.1 billion yuan.

"I am confident that operating environment will improve in the second half compared with the first half, and will further improve next year," Wei said, citing sequentially-improved March economic indicators in China after Beijing implemented a package of stimulus measures.

The mainland will need to import a lot more raw materials as fixed-asset investments grow rapidly after Beijing announced a 4-trillion yuan stimulus package, he said.

This bodes well for the bulk dry shipping sector, he said. "The Baltic Dry index (BDI) will definitely continue to rise this year."

The Baltic Dry index, which traces costs for transporting commodities globally, plunged over 90 percent from a high of over 11,000 last year to a low of 800 earlier this year before rallying to around 1,800 currently.

Xu Zunwu, executive vice president of China COSCO, said demand in the bulk shipping market has improved in March compared with the previous two months.

He expects bulk shipping freight rates to rise gradually in the second half of the year.

Sun Jiakang, another executive vice president, also noted improvements in the container shipping market.

He said freight rates for Europe-Asian routes have increased by 200-300 US dollars per TEU from this month while rates for destinations in Southeast Asia and Persian Gulf have also risen.

However, analysts remain bearish on the outlook for shipping firms.

"Expectations for a quick recovery in the shipping sector are wishful thinking," said Francis Lun, general manager at Fulbright Securities Ltd, citing withering global trade amid the downturn.

The slight improvement in demand for shipping capacity in March was mainly due to short-orders by importers, who wish to replenish their inventory, he said.

Lun expects most shipping firms to suffer operating losses this year. "China COSCO will not be an exception," he said.

Kevin Yim, a shipping analyst at Dao Heng Securities Ltd, agreed with Lun.

"China COSCO will swing to the red this year if freight rates hover around current levels," he said.

(HK Edition 04/24/2009 page3)