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Cosco to expand business

Cosco to expand business
China?s shipping giant China Ocean Shipping (Group) Company (COSCO) continues to expand its global business.

COSCO holds equity in port companies in the US, Singapore, and Antwerp

China's shipping giant China Ocean Shipping (Group) Company (COSCO) continues to expand its global business.

Although slowing world output and falling commodities prices are affecting the shipping market, for Chinese shipping companies, times may be looking up.

COSCO's subsidiary COSCO Pacific, the fifth largest container port operator in the world, has recently sealed terms to run the container operations at the port of Piraeus, Greece's largest, a big step for COSCO's strategic expansion in Europe.

The company gained a 35-year concession for 4.3 billion euros. Cosco will pay an initial 50 million euros, and a further 591 million euros in rent over the 35-year period.

While long maintaining a pragmatic attitude towards its container and dry bulk transportation business, COSCO's biggest earner, the company has been promoting its transformation from a pure shipping company into a comprehensive logistics company. Global port layout is a part of this strategy.

COSCO holds equity in port companies in the US, Singapore, and Antwerp. In China, COSCO also has a stake in at least 10 domestic companies. COSCO"s aim in seeking port operation rights is clear. The shipping business is very cyclical, with ?one good year, followed by one medium year and two bad years.? Investment returns from port operations are more stable.

Among the world"s top ten port operators, half of them, including Maersk Logistics, and Li Ka Shing"s Hutchison Whampoa, also run shipping businesses. According to the analysis of COSCO president Wei Jiafu, 70% of global shipping industry investment goes into moving sea freight, with an average investment return of 6% to 7%, while the other 30% is put into port facilities, container rental, and logistics, with the average return of over 20%.

This advantage was not so interesting during the ?good year? for container and dry bulk transportation, but gained a certain fascination when the Baltic Dry Index (BDI), an index covering dry bulk shipping rates, nosedived from over 10,000 points to under 3,000 points within four months.

Dry bulk accounts for 75% of international trade. The sea freight of grain, coal, and non-ferrous metals has garnered shipping companies such as COSCO and China Shipping Container Lines Co., Ltd (CSCL), rich profits. COSCO"s half-year financial report shows its dry bulk business grew by 127% year-on-year, contributing 90% of the company"s total gain.

The dry bulk and container business will continue to contribute the major part of the company"s profit, and its expansion into the port business won"t change the company"s profit structure immediately. COSCO still needs to get through the current downturn.

Government policy will help, aiding shipping companies and bulk producers at the same time.

At present, China"s import dependence for iron ore and crude oil is 37% and 47%, respectively. But Chinese shipping companies transport only a small portion of the imports needed.

Due to national strategic security concerns and the requirements of the steel industry, CSCL and COSCO have both signed long-term iron ore transport contracts with large domestic steel makers, whose importance has been magnified by the increasingly possible merger of the two mammoth Australian iron miners BHP-Billiton and Rio Tinto and the attempted mid-contract iron ore price hike by Brazil"s Vale.

The government is requiring that by 2010 at least 50% of China"s crude oil imports will be transported by domestic enterprises. Companies including China Shipping Development Company and China Merchants Energy Shipping Company are negotiating with Sinopec and PetroChina for long-term contracts.

Despite the BDI, iron ore and crude oil transport look to help COSCO and CSCL to swim through troubled waters.


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