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China COSCO Holdings (OTCPK:CICOF), parent company of China's largest state-owned steamship company, has reported a return to net profit in 2013, thereby saving itself from delisting. It was not a turnaround in markets or management genius that engineered this seeming turnaround, but financial legerdemain.
Through a series of one-time transactions (it sold chunks of itself to its own parent company), the company is showing a positive bottom line. But things aren't looking good for 2014, the company is running out of financial tricks, and slow recoveries in Europe and the United States are likely to combine with the company's huge capacity surplus to keep the firm a non-performer.
Waiting for Profits
As a state-owned enterprise, the company has the implicit backing of the government: COSCO can afford to wait for things to turn around, unlike global competitors like Maersk (OTC:AMKAF), Neptune Orient Line (OTCPK:NPTOF), Hanjin (OTC:HNJSF), Mitsui OSK (OTC:MSLOF), and Evergreen (OTC:EVGQF).
Government coffers are not bottomless, however, and there is no guarantee that a turnaround in the industry will be sufficient to suck up all of the extra tonnage COSCO has added in recent years. Companies are moving manufacturing of large, bulky items closer to markets, and COSCO's overshoot on dry-bulk capacity (for carrying everything from wheat to iron ore) may leave new ships idle for a long time.
At some point, Beijing is likely to have to take ships off of COSCO's hands, or at least remove them from the commercial market. The obvious choice would be to sell the oldest ships to ship breakers. Yet COSCO's older ships have already been turned into scrap, leaving a fleet that is much younger than before.
And none of this addresses the growing ranks of costly thumb-twiddlers at China's shipyards. It is hard to keep upgrading in an industry when demand is imploding.
PLAN for it
In short, arrows continue to point in a direction we suggested a while ago. China's navy needs ships of every type. China's admirals would rather spend their precious cash on boats that shoot rather than boats that schlep, but they need both. COSCO's surplus of capacity offers the government an opportunity to create an entity that provides full-time contract sealift to China's armed services, something akin to the Military Sealift Command in the United States.
The spare dry-bulk carriers would probably not be much help: the cost of refitting these to accommodate troops or military cargo would probably not be far off the cost of purpose-built ships. Container and Roll-on/Roll-off vessels, on the other hand, could serve as pre-positioning ships for extended operations outside of Asia (to support China's UN peacekeepers, for example), shuttle ships for China's precious few underway replenishment vessels (that by definition need to stay close to their assigned battle groups), or as amphibious support ships.
A move like this seems inevitable, and when it happens it will quietly signal that the People's Liberation Army Navy has matured, and is clearly thinking about how to start projecting power as well as how to prop up its struggling merchant fleet.