Email This Post - Print This Post Print This Post

cd

By John Helmer in Moscow

After Far Eastern Shipping Company (Fesco), Russia’s dry-cargo fleet leader, lost 22% off its share price in the past week, Moscow investment bank Renaissance Capital has issued an investment warning that the plummeting rate for container shipping between Asia and Europe “creates a major headwind for FESCO”.

Fesco (ticker FESH:RU), based in Moscow and Vladivostok, is the most important of the Russian commercial fleets serving the Sino-Russian, Asian and Pacific dry-cargo routes.

According to the Rencap report, written by maritime analyst Paul Roger, rates now being quoted in Hong Kong for shipping some container types from Asia to Europe have hit zero. Much of Fesco’s shipping line income is directly affected by this rate movement.

Separately, National Container Company (NCC), the largest of Russia’s container terminal companies, half-owned by Fesco, reports today there was a collapse of container volumes at its three terminals in the European part of Russia during December. The First Container Terminal (FCT) of St.Petersburg, the largest in the country, reports that for the month, the terminal handled a total of 86,944 Teu [twenty-foot equivalent units], down almost 3% compared to December 2007. But refrigerated container movements at the terminal, in which Russian food imports are transported, fell by 30%, compared to December 2007, to just 7,603 Teu.

The results were much worse for NCC’s terminals on the Black Sea. At Novorossiysk, NCC’s terminal reports a drop of 21% in Teu volume in December last, compared to a year earlier. Despite months of growth early in the year, the Ilychevsk terminal, on the Ukrainian coast of the Black Sea, reports that it handled 48% less container volume in December, compared to 2007.

The Russian Railways Company (RZD) is reporting cargo volume down 20% in November, compared to a year ago, while Fesco’s dry-cargo fleet operations in Europe are being hurt by the near-100% decline in the Baltic Dry freight index since June 2008.

The latest Fesco financial report, audited by shipping specialist Moore Stephens and posted by the company on December 16, covered the period to June 30, and indicated first-half net profit of $58 million for the company’s shipping, port, and rail divisions; this was up 27% year on year, while revenues in the period rose 63% to $614 million. Amortization and tax payments were up sharply, and administrative expenses doubled. The report carries the warning that there are limitations in the company’s accounting controls, with the result that “even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation.”

If freight and box rates continue downwards, Rencap analyst Paul Roger warns that Fesco could move into the red, with domino impact on its ability to refinance heavy US-dollar denominated debt, which provided the funds for the group’s diversification into intermodal rail and port assets. The Fesco group currently owes $996 million; of that, $432 million must be repaid within the next twelve months.

“Over the past few years the group has done an excellent job at diversifying away from shipping business into ports and railway assets,” Roger reports. “Despite this, the company’s shipping lines still account for over 60% of revenue (2007). Our forecasts for 2009 are premised on a 25% decline in freight rates and we are already 40% below consensus….the latest news clearly puts pressure on forecasts for 2009. Based on our sensitivity calculations, the group would be loss-making if its blended rates fell 35% YoY.” Shipping sources in Moscow say that a combination of rate decreases, lower cargo volumes, dropping vessel valuations, and financial losses could trigger bank pressure on Fesco.

This in turn may prod the Russian government into considering further takeovers in the maritime sector. The two leading oil tanker and energy fleet companies, Sovcomflot and Novoship, were merged last year, and are now wholly owned and operated by the state.

In December, Fesco announced that Sergey Generalov, Fesco’s controlling shareholder, was taking the board chairman’s chair. Generalov is a former business associate of Mikhail Khodorkovsky, the ex-owner of the Yukos oil company who was convicted and imprisoned in 2003. Russian investment bank sources say there is skepticism in the market that Generalov has the clout to persuade the government to provide his company with emergency bailout funds, if they are required.

To ward off this pressure and strengthen his political hand, Generalov has allied Fesco with the Russian Railways group, appointing a senior rail executive to the Fesco board.

Fesco was included in last month’s Kremlin list of 295 “strategic” companies warranting state financial support. But a Moscow maritime source comments: “Fesco may be relatively far down in the list of priorities.”

Leave a Reply