Published December 4, 2008

Cosco client cancels orders for 2 carriers

Shipowner paying 80% of contract price of 3 remaining vessels by December

By VINCENT WEE
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COSCO Corp (Singapore) became the latest shipyard to announce order cancellations with the cancelling of two 57,000 deadweight tonne (dwt) handymax size dry bulk carriers from a batch of contracts for a total of eight bulkers worth US$313 million announced last July.

Floating giant: The shipowner has agreed to compensate Cosco Dalian Cosco Dalian for all expenses incurred so far for the two cancelled orders

The two vessels were part of an order of five from one shipowner. Cosco declined to reveal the worth of the ships but market prices of similar ships contracted to be built at the time were around US$30 million to US$50 million each.

Cosco said that the cancellations were part of a variation agreement where it agreed to cancel the orders for the two vessel on the condition that the owner pays 80 per cent of the total contract price of the remaining three vessels by December, a significantly advanced payment schedule. The last 20 per cent instalment will be paid in accordance with the original schedule.

In addition, the shipowner has agreed to compensate Cosco Dalian, the Cosco unit that was to do the work, for all expenses incurred so far for the two cancelled orders although construction has not yet commenced. The two parties have also agreed to delay the delivery date of the third of the remaining vessels to June 30, 2010 instead of December 2009.

The owner had requested the cancellations and delivery delays due to prevailing unfavourable market conditions, Cosco said. Then company president Ji Hai Sheng had said, when the contracts were announced, that 'many of our contracts had been sealed with world renowned global industry players'. Cosco had insisted right up to its third quarter results briefing that it did not foresee any order cancellations.

On Monday, another large Chinese shipbuilder, JES International said that it was querying its Korean client Parkroad Corporation on the status of a US$166 million contract to build four panamax class dry bulk ships after news reports had highlighted its financial position.

The dry bulk carrier market has collapsed over the past two quarters with both spot charter rates and resale prices for the larger vessels like panamaxes and capesizes being especially hard hit. While brokers say that the smaller handysize and handymaxes are relatively better off, these latest cancellations suggest they are starting to be affected as well.

The cancellations and variations are not expected to have a significant impact on Cosco's net tangible assets and earnings per share for the year ending Dec 31, 2008.

Cosco shares closed nine cents higher at 85 cents yesterday.