China's Shipping Industry Aid Pays Off

As China's economic slowdown squeezes the global shipping industry, three of the country's biggest domestic cargo freighters likely skirted the losses that plagued international peers last year thanks to a five-fold jump in state subsidies.

Boosted by hundreds of millions of dollars in cash grants from Beijing for scrapping old vessels, China Cosco , China Shipping Development and China Shipping Container Lines will report 2014 earnings starting later on Thursday showing some of their best profits in years.

But industry insiders and analysts say Beijing's support for national firms as its economy slows is the only factor that kept the firms out of the red, creating a dependence on support that will be sustained with no industry upturn in sight. For the International Chamber of Shipping, representing the global merchant fleet, the aid artificially boosts shipbuilding just as the sector faces a surplus of ships.

The three firms, backed by state-owned companies China Ocean Shipping Group and China Shipping, received at least 2.4 billion yuan ($359 million) in subsidies over 2014, a five-fold increase compared to the previous year, according to Reuters calculations based on company filings.

The subsidies stem from a 2013 move by Beijing to increase cash grants for scrapping old ships to 1,500 yuan per gross ton from 1,000 yuan. While the program, designed to accelerate fleet renewal, is currently scheduled to run only until end-2015, Beijing has signaled continued support and an unwillingness to allow large shipyards to go under.

Profits at the Chinese firms run counter to slowing trade activity, much of which has stemmed from softer demand from China, which dragged down the Baltic Exchange's main sea freight index to an all-time low in February.

China Cosco in January flagged that it will report a 2014 net profit of at least 350 million yuan, a four-year-high. It avoided a delisting last year after it returned to profit by selling assets to its parent.

Without subsidies of at least 1.38 billion yuan, and taking into account other factors such as the sales of a Shanghai hotel firm stake and shipyard to its parent in October, China Cosco would have incurred a 2014 loss of about 500 million yuan, Changjiang Securities analyst Han Yichao said in a January note.

Similarly, China Shipping Development, which received 456 million yuan in grants in 2014, would have likely reported a loss of about 156 million yuan minus subsidies, Han estimated. The firm will report its results on Friday.

China Shipping Development said in January it will post a net profit of about 300 million yuan, while sister firm China Shipping Container Lines also expects to swing to black in 2014.

($1 = 6.2105 Chinese yuan renminbi)