Slumping freight rates and demand hurt companies’ earnings

WANING freight rates in container, dry bulk and tanker segments will continue to plague Malaysian shipping companies’ earnings this year.

The freight rates are generally down due to slumping world trade, lower iron ore demand from the world’s largest steelmaker – China, and reduced Organisation of the Petroleum Exporting Countries (Opec) production.

Declining world trade has put downward pressure on container shipping freight rates that have so far declined more than 50% since the fourth quarter of last year.

Some Chinese shipping lines were even reported to have offered zero rates last month.

Datuk Ramesh Rajaratnam ... MMM is mitigating these impacts by practising natural hedging whenever possible

The Baltic Dry Index (BDI), the yardstick of dry-bulk shipping freight rates, slumped almost 92% at year-end from its peak of 11,793 points on May 20.

The index, however, has climbed up by 98.4% to 1,534 points on April 15 year-to-date.

The demand for tanker business, especially in the crude tanker segment, is forecast to drop by 13% this year. This will be due to Opec’s cut of 4.2 million barrels per day (bpd), reflecting a 15.6% fall from the August production level.

Aggravating the situation is the new supply of containerships, dry-bulk vessels and tankers that are going to flood the industry this year.

Three local shipping companies are already in the red due to the current downturn in the global shipping industry.

Malaysian Merchant Marine Bhd (MMM) posted a net loss of RM241,000 in its third quarter ended Dec 31. Its cumulative nine-month net loss amounted to RM4.9mil.

MMM owns one double-hull tanker and two hybrid tankers.

According to executive deputy chairman Datuk Ramesh Rajaratnam, the losses were mainly due to the depreciating greenback against the ringgit.

“Our revenues are in US dollars whereas most of our costs, historically determined, are denominated in ringgit.

“However, we are mitigating these impacts by practising natural hedging whenever possible. In addition, tanker charter hire rates have also fallen by about 30%,” he told StarBiz.

He said MMM was in the midst of restructuring its businesses by disposing of its loss-making ventures and vessels and replacing them with a new fleet.

In the financial year ended March 31 (FY08), Ramesh said three old vessels were sold.

“We were supposed to rebuild our fleet with six new vessels but the plan is delayed due partly to the financial crisis and the Sichuan earthquake,” he said.

MMM was to receive four 9,000-deadweight tonne (dwt) double-hull tankers from Oceanic Shipping Pte Ltd under a bare boat charter with a conditional option to purchase agreement.

The first vessel that was supposed to be delivered in February is now rescheduled to August.

“The unforeseen events delayed our revenue-generation ability and return to profitability this year,” he said, adding that MMM’s accounts were still being finalised but “we expect to record a significantly reduced loss this year compared with FY08’s RM50mil loss.”

Another shipping company sailing in troubled waters is Nepline Bhd that recently fell under the amended PN17 status.

Bank Pembangunan is calling for receivership on three of its vessels in repayment of loans amounting to RM44.8mil. Via receivership, the receiver will collect all revenues generated and the profits will be used to pay off the company’s debt.

Nepline was reportedly unable to generate income from its vessels due to dry-docking earlier this year. It posted a net loss of RM2.9mil in its fourth quarter ended Dec 31 compared with a net profit of RM12.6mil in the previous corresponding period.

PDZ Holdings Bhd, which operates about 10 small to medium container vessels, is another casualty of the slumping freight rates and demand.

The company posted a net loss of RM2.6mil in its second quarter ended Dec 31 compared with a net profit of RM3mil in the previous corresponding period.

PDZ said the outlook for the months ahead appeared grim.

“To ride out the storm, we are implementing cost-cutting measures as well as suspending services that are likely to incur losses,” it said in a statement.

On the other hand, Malaysian Bulk Carriers Bhd (Maybulk) still registered profit despite the collapse in BDI last year.

According to an analyst with a local research house, the BDI – which is currently at 1,500-point level – could still be considered healthy.

“Although it hit 11,000 points last year, the current level is still high by historical standards,” he told StarBiz.

However, he said, the downward pressure to the index this year would be less due to iron ore import from China and new vessels coming into the marketplace.

Maybulk posted a 96.9% drop in net profit in its fourth quarter ended Dec 31 to RM4.96mil against the same quarter previously. Revenue for the period shrank 36.2% to RM138.1mil.

For the full year, it suffered only a 9.7% drop in net profit to RM521.7mil while revenue increased 18.6% to RM721.2mil.

MISC Bhd, with its diverse portfolio in energy transportation, container shipping and offshore businesses, could still record a hefty profit albeit at a lower growth in the current financial year ending March 31, 2010.

This is despite the current collapse in container and crude tanker freight rates and demand.

“This is because most of its liquefied natural gas (LNG) vessels are in stable long-term contracts,” said a shipping analyst with a local brokerage. MISC is the world’s largest single owner-operator of LNG fleet of 27 vessels.

Additionally, its offshore shipping and heavy engineering businesses are doing well despite the global economic downturn.

According to the analyst, container freight rates would see little recovery this year but was expected to show early signs of revival next year.

“The present container freight rates has declined about 80% from its peak early last year and the crude tanker market is not doing well either.

“These are the factors that will pull down MISC’s earnings in FYO9 and FY10,” he said.

MISC recorded RM249.6mil in net profit in its third quarter ended Dec 31, a drop of 76.7% against the previous corresponding period.

Source: StarBiz