Cosco earnings show challenge of recouping higher fuel costs

Cosco earnings show challenge of recouping higher fuel costs

A Cosco ship.

Not even the revenue and volume from the acquisition of OOIL, one of the better managed global carriers, and $162 million in government subsidies Cosco Shipping Holdings received between January and September, could prevent its net earnings falling by 68 percent. Photo credit: Shutterstock.com.

The financial results of Cosco Shipping Holdings show how carriers are struggling to push rising operating costs to shippers, and provide another reminder of the challenge and importance of carriers being able to recoup costs to meet the new low-sulfur mandate.

Not even the revenue and volume from the acquisition of OOIL, one of the better managed global carriers, and $162 million in government subsidies Cosco Shipping Holdings received between January and September could prevent its net earnings falling by 68 percent to $124 million.

Despite huge increases in volume and revenue, the average revenue Cosco Shipping Holdings earned per TEU actually declined 0.6 percent from January through September. Like its peers, Cosco is struggling to manage the high bunker fuel prices that the carrier said rose 34.4 percent since January to $422 per ton.

The pressure to recoup higher bunker costs will only increase, as the International Maritime Organization’s (IMO’s) mandate requiring sulfur emissions to be reduced from 3.5 percent to 0.5 percent, starting Jan. 1, 2020, nears. Ocean carriers, which have a spotty record at best of recouping higher operating costs, are facing low-sulfur fuel costs that analysts estimate will be at least 30 percent higher. While scale of the cost hitting carriers and shippers is slowing coming into view, carriers privately worry about their ability to pass on the costs to customers.

Total volume  

Total volume carried by the group was more than 16 million TEU in the January through September period, and overall revenue reached $11.84 billion, up 21.5 percent year over year. OOCL, consolidated into the financial statements of Cosco Shipping since July 1, handled $4.4 billion in revenue and 5 million TEU since January.

Trans-Pacific volume in the first nine months was up 28 percent to 2.6 million TEU and revenue on the trade grew by 33 percent year over year. Asia-Europe volume rose 17 percent to 2.68 million TEU and revenue was up 11 percent, while intra-Asia volume increased 37 percent to 4.3 million TEU and revenue was up 45 percent. The bulk of Cosco Shipping Holdings business is China domestic, where volume grew 4.6 percent to 4.9 million TEU and revenue grew by 14 percent.

But even as the revenue and volume rose, so did the bunker fuel price. As a container line’s single greatest operating cost, a rise in the fuel price has a huge effect on the revenue a carrier can earn per TEU, as was seen in the widespread industry losses during the first half.

Zim Integrated Shipping Services suffered a $67.3 million first-half net loss, and Hapag-Lloyd had a net loss of $116 million over the same period. CMA CGM reported a net loss of $34.4 million in the second quarter, largely due to higher bunker prices. Maersk Line managed to post a profit of $26 million in the quarter, largely due to discontinued operations. If the $111 million profit from discontinued operations was removed, Maersk would have suffered a loss of $85 million against a $10 million profit in the second quarter of 2017.

Ocean Network Express — which launched in April and comprises “K” Line, MOL, and NYK Line — said in its half-year earnings report in October that it collectively expects to lose $310 million in the first half of the year, on revenue of $5.03 billion. The full-year expected loss of $600 million is over revenue of $11 billion. The two losses are significantly higher than the previously announced losses of $38 million for the half year, and $110 million for the full year.

Terminal business

Cosco Shipping Holdings’ container terminal business reflected the rising demand, growing its nine-month throughput by 20 percent to 87.5 million TEU. The bulk of the volume was handled in Cosco Shipping Ports’ Bohai Rim terminals where 28.8 million TEU crossed the busy wharves, an increase of 47 percent year over year. Pearl River Delta terminals saw almost zero growth over the reporting period at 20 million TEU, a similar story at the Yangtze River Delta ports that handled 14 million TEU. By contrast, Cosco Shipping Ports’ overseas segment was up 36 percent to more than 18 million TEU.

In its outlook for the container market, Cosco Shipping said the supply growth would begin to slow in the next two years, citing data from Alphaliner and Drewry that show capacity growth and demand growth converging in 2019 for the first time in three years, with demand growth in 2020 more than 2 percent ahead of capacity growth.

The performance of container shipping lines during the peak season third quarter will likely determine whether carriers will add a second consecutive year of profitability to the $7 billion earned in 2017 after a generally dismal first half.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.