China Cosco Holdings saw its shares slump as much as 12.4 per cent yesterday in Hong Kong after the world's largest dry-bulk ship operator said it might lose 3.95 billion yuan (HK$4.47 billion) from wrong-way bets on freight rates. But the stock recouped most of its losses and ended down just 0.71 per cent at HK$5.61 after rising international freight rates helped allay investor worries. Its Shanghai-traded A shares, nevertheless, fell 5.18 per cent to 8.78 yuan. China Cosco late on Monday said potential losses in freight-forwarding agreements had increased to 3.95 billion yuan on December 12 from 440 million yuan on September 30 amid a drastic fall in global freight rates. The Baltic Dry Index, which tracks global rates for dry-bulk carriers, fell 76 per cent during the period. The index rose 5.1 per cent to 803 points on Monday, an almost three-week high, but is still down 93 per cent from a record 11,793 points on May 20. China Cosco used freight-forwarding contracts to lock in costs for chartered-in vessels. Sellers of such deals generally agree to pay the company a certain amount if spot charter rates climb above an agreed figure. Conversely, the line agrees to pay the seller if the rate falls below that level. Sophie Fan Shuofen, an analyst at CSC Securities, said it was common for shipping lines to use freight-forwarding agreements for hedging, but she thought not many firms were trading those contracts as aggressively as China Cosco. China Cosco is not the first shipping line to lose out on freight-forwarding deals. In July 2004, Jinhui Holdings said its 50.9 per cent-owned, Oslo-listed shipping unit, Jinhui Shipping and Transportation, lost US$60 million to US$70 million on such agreements. Goldman Sachs said it believed a portion of China Cosco's freight forwarding agreement positions represented directional trades on the future freight market, but the firm did not disclose its positions in detail, making it impossible to analyse the size of the trades. China Cosco said paper losses on the agreements held by its dry-bulk shipping units amounted to 5.38 billion yuan for the year to December 12, when the Baltic Dry Index was 764 points. But it did not give details of the short and long positions, and did not reveal the amounts involved. Goldman said the potential losses could hurt China Cosco's fourth-quarter profit, but it expected losses to stabilise at current levels given that freight rates appeared to be finding the bottom. China Cosco joins Citic Pacific, Air China and other mainland firms losing money on financial instruments, raising fears more companies may unveil similar losses as turbulence in the global economy causes volatility in currencies and commodities. Emily Lau, head of investor relations at Pacific Basin Shipping, said the company only used freight-forwarding agreements for hedging and minimised its trading in these instruments. The company's positions in the agreements were net short, which analysts said might even allow Pacific Basin to make a profit. Two other Hong Kong-listed shipping lines, China Shipping Development and Sinotrans Shipping, said they had not traded freight-forwarding agreements. Johnson Man Leung, an analyst at JP Morgan, said China Cosco's case was not as serious as Citic's. 'The downside risks for freight-forwarding agreements are limited that in the worst case, it'll only lose its entire principal, unlike Citic's currency accumulators that would have potential unlimited losses,' he said. He was bearish on the industry and China Cosco. The dry-bulk shipping sector had just moved into a down-cycle that could last four years as a global recession, followed by a capacity glut, could weigh the industry down, he said. Mr Leung said the Baltic Dry Index could hover near 1,000 points next year, against this year's average of about 6,300. He said China Cosco could report a fourth-quarter loss and keep making losses until 2012.