11 August 2016

China ship scrapping subsidy to push another carrier into profit

Ship scrapping.

Ship scrapping subsidies from the Chinese government was the only thing keeping most mainland carriers in the black by the end of 2015, so the announcement by Shanghai-listed China Merchants Energy Shipping (CMES) that it expects the subsidies to boost its 2016 profits hardly comes as a surprise.

CMES said in a filing to the exchange that it has received CNY763 million (USD115 million) government subsidies for scrapped ships so far this year and that this would have a “positive influence” on the company’s profit.

This positive influence extended across the China shipping industry and was the difference between profit and huge losses in 2015. CMES itself recorded a profit of CNY1.3 billion (USD197 million) in 2015 during which it received CNY2.08 billion (USD316 million) in scrapping subsidies.

But one of the biggest beneficiaries of the scrapping policy has been China’s top shipping company China COSCO. The carrier has subsequently been merged with China Shipping, but last year it reported a result that was significantly boosted by the subsidies.

China COSCO posted a 2015 profit of CNY283 million (USD43 million) last year, while it received an enormous CNY4.25 billion (USD650 million) in subsidies for scrapping 28 bulk carriers and container ships. The annual reports of another 11 listed shipping companies in China showed that the subsidies they received were well above their total profits.

The ship scrapping scheme was introduced in 2013 and was initially planned to run for two years but has been extended to the end of 2017. Massive over-ordering by China’s shipping lines combined with an economic slowdown to leave the industry with a chronic capacity overhang, prompting Beijing to jump in with the subsidy to prop up the carriers. Shipping lines are paid grants of CNY1,500 (USD228) per gross ton to replace old vessels with new and more environmentally friendly ships.

Shipping companies will continue to benefit from this policy in the coming two years, Wang Hai, a shipping expert, told IHS Fairplay. For instance, China COSCO Shipping Bulk, the newly-formed branch of China COSCO Shipping, announced that in the coming two years it will retire 53 old ships that have a total carrying capacity of 2.89 million dwt.

Source: fairplay. 20 June 2016

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