Against the charter

Shipping bosses bridle as Cosco attempts to renegotiate contracts

Against the charter

Facing a storm of criticism

A venerable maritime institution, the Baltic Exchange traces its existence back to a London coffee house in 1744. It adheres to the Baltic Code, a guide summed up for its members by a motto: “Our word is our bond.”

That’s not strictly applicable, of course, as pen will be put to paper on almost every deal (or thousands of contract lawyers will be forced to seek gainful employment).

But the principle still holds true enough, which is why accusations against China Ocean Shipping Company (Cosco) have been causing a stir.

The charge? That it has reneged on contracts with shipowners in an attempt to renegotiate the terms by which it charters its vessels. “Someone at Cosco seems to have drawn a line in its chartering book to decide which charters should be paid and which shouldn’t,” one shipowner complained to the South China Morning Post.

Details on the contracts that Cosco are renegotiating remain unclear. But a quick look at the declining prices for chartering vessels establishes clear motive to push for newer terms. Hiring a 180,000-deadweight-tonne Capesize vessel cost more than $80,000 a day in late 2008. Now, the same ship is going for closer to $15,000.

That yesterday’s (signed) contracts look expensive compared to today’s is no excuse for some: “The Baltic takes the view that a deal between two parties stands and it’s simply not acceptable for one party alone to attempt to change the terms,” said Jeremy Penn, the Exchange’s chief executive.

Events came to a head when several shipowners then obtained court orders allowing seizure of Cosco’s own ships in response to the stopped payments. (Cosco operates 400 ships, 200 of which it charters.) “Contract disputes are normal, and the detention of vessels happens often when leasing contracts are being adjusted,” Zhang Liang, an executive director of another shipping company told the Financial Times.

But at least one of the companies affected by Cosco’s tactics, Navios Maritime Holdings, denied that the Chinese firm was adhering to ‘normal practice’, taking issue with what it felt to be Cosco’s unilateral behaviour. Ratings agency Moody’s also entered the fray to warn that, if similar renegotiations were to become standard, the impact could be detrimental for the entire industry. “Renegotiation of contracts could set a precedent that spurs other China shipping companies to seek more favourable terms in their existing contracts,” it warned.

But after a week of bad PR, Cosco seems to have buckled. According to the FT, the world’s biggest dry bulk ship operator has now resumed payments on the vessel leases.

Meanwhile two other newsworthy events at Cosco. Last week, the company announced an interim loss of Rmb2.76 billion ($430 million), a depressing turnaround from the Rmb3.4 billion it made in the same period last year. And Cosco then shuffled its senior management, with longstanding CEO Wei Jiafu stepping down (he will remain as chairman).

Wei was often seen as a bullish spokesman for his industry. Last year, he shared his view that the Baltic Dry Index, the benchmark for freight charges, would reach 3,500 in 2011. At the Boao Forum for Asia in April, he stuck to his prediction for a year of growth for the industry.

By early August, Wei had changed his tune. The second half of the year would be worse than the first, he admitted. And the Baltic Index was also well short of his prediction, at closer to 1,700 points. Might the contract contretemps be linked to the unanticipated slowdown in the market? What is clear is that there are rough seas ahead for shipping bosses, with industry prospects looking “even more severe before bottoming out in 2013”, says Zhen Hong, secretary-general of Shanghai International Shipping Centre.

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