Cosco

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It is one stubbornly recurring aspect of the boom and bust: ordinary companies getting carried away with financial derivatives. Consider China’s Cosco, the world’s largest operator of dry bulk ships, a company so steeped in seafaring lore that it identifies its chief executive as “captain”.

Full-year accounts, presented on Thursday, showed that the Tianjin-based operator made a $760m provision in its dry bulk segment for “onerous contracts” on chartered-in vessels. These are long-term deals on which Cosco is paying more than current market rates. But on top of that there was a fair value loss of $540m on so-called freight forward agreements. Companies such as Cosco often sell FFAs to cover the risk that they might have to sub-charter vessels at lower rates than they are themselves chartering them. The more spot prices fall, the more valuable those FFAs become.

Cosco, however, went the other way. Halfway through last year it was sitting on big gains on chartered-in vessels, so it doubled up the bet that charter costs would rise and went long FFAs. But contracts struck when the Baltic Dry Index averaged over 7,000 points looked a lot less clever after freight rates plunged, and the BDI hit 663 in December. Total losses of $1.3bn compared with attributable earnings of $1.7bn. Some “hedge”.

Given that the BDI has now risen to 1869, Cosco could end up writing back some losses this year. But it is a terrible time to be playing fast and loose with shareholders’ equity. The dry bulk business – just over half of revenues – needs an average BDI of 3,000 in 2009 just to break even.

Beijing has had enough of these shenanigans from its state-controlled enterprises. A diktat last month made clear that purely speculative activity – of the kind that sprung leaks at Citic Pacific and various Chinese airlines – would not be tolerated any more. Small consolation to Cosco shareholders.

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