Dispatch: Chinese Shipping Company COSCO's Troubles

2 MINS READSep 1, 2011 | 16:58 GMT
China Director Jennifer Richmond examines the wider implications for China's state-owned shipping company COSCO's charter contract disagreement.

Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.

Several international shipping companies are currently in dispute with China's COSCO, resulting in a handful of seizures of COSCO's ships worldwide. COSCO, a Chinese state-owned enterprise, is one of the largest shipping companies in the world. It has more than 800 vessels; 400 are dry bulk, and 200 are what are called bareboat charters. In a bareboat charter, a company leases a ship from a ship owner for a set amount of time, taking on all the operating costs during that time. COSCO is accused of withholding payment on charter contracts signed in 2008, at the height of the dry bulk shipping rates, at $80,000 a day. Average spot market rates are currently approximately $17,000 a day. Moody's recently stated that any downward negotiation of charter contracts would have an overall impact on the dry bulk shipping market, and other people are saying that this could also set a bad precedent for shipping worldwide. Sources in the coal industry who frequently use COSCO ships say that charter contracts are typically considered by their industry as non-negotiable. However, lawyers who deal with these types of situations daily say that charter contract violations are frequent. The revenue from current time-charter rates, which are rates that change from shipment to shipment well below the rates at which China's COSCO signed the contracts, has China's COSCO facing severe losses. The possibility that China will renege on these negotiated contracts has global businesses, especially in the commodities trade, wondering about China's overall reliability. This is just one example of the growing concern of doing business with Chinese companies. Enforcing legal contracts is notoriously difficult in China, especially with state-owned enterprises that can use political pressure as leverage. However, if China is able to continue to sweeten the deal with cheap capital, there are many who will continue to assume the risk until the stakes outweigh the benefits.
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