The dry bulk cargo market is facing rougher seas from a surge in ship deliveries that are forcing down freight rates and which risk charter defaults as ship owners struggle to make lease payments.
The warning was sounded by Jinhui Holdings, one of Hong Kong's largest dry cargo ship operators, after the company saw net profit slump to HK$366.8 million, down from HK$655.3 million last year. This was despite a 9 per cent rise in revenue to HK$3.1 billion, up from HK$2.9 billion. Group net profit, which included a contribution from Jinhui Shipping and Transportation, its Oslo-listed subsidiary in which it owns a 54.77 per cent stake, was HK$676 million in 2010, compared with HK$1.2 billion in 2009.
The slump in profit led shares in Jinhui Holdings to fall 2.9 per cent to close at HK$2.03 yesterday.
Up until the fourth quarter, 2010 had been better than expected for Jinhui Holdings as a result of a strong freight market buoyed by China's favourable import policies and an upturn in Asian demand for coal and steel, said Jinhui Holdings chairman Ng Siu-fai. 'However, the seas turned rough from the fourth quarter as soon as China reduced its government stimulus package and stepped up efforts to combat inflation and cool down the domestic real estate market.' As a result freight rates slumped, while a record 20 million deadweight tonnes of ship deliveries exacerbated the situation.
Raymond Ching Wei-man, vice-chairman of Jinhui Shipping and Transportation, said: 'The supply situation is quite staggering.'
The oversupply of tonnage caused a general drop in ship values, which led Jinhui to carry out an assessment of the values of its owned fleet and those under construction.
As a result, the company, which controls 37 dry bulk vessels with a further seven on order, made an impairment loss of HK$577.5 million on these ships. It also did not rule out further impairment losses if ship prices continued to fall.
The firm cancelled contracts for two new ships, which led to the forfeiture of HK$78.1 million in advance payments. But the company received HK$202.8 million to settle legal cases against two charterers who breached charter contracts in 2009.
Ching said the company was mulling its options after Korea Line, one of Asia's largest shipping companies, filed for protective receivership in January. He said Jinhui had a capesize dry cargo bulk carrier, of about 170,000 deadweight tonnes, chartered from Korea Line. But the company was concerned the size of Korea Line's fleet, which numbered 180 ships, could trigger further industry-wide charter defaults as owners were unable to receive lease payments or meet chartering commitments.
Ching said the Jinhui Holdings results were in line with expectations 'but we do see risks going ahead'.
Ching said the tsunami and nuclear problems in Japan could spur demand for cement, iron ore and other raw materials when the reconstruction process started.
The oversupply of tonnage caused a general drop in ship values
Jinhui cancelled contracts for two new ships, which led to the forfeiture, in HK dollars, of: $78.1m