Israel Corporation (TASE: ILCO) will publish its financial report for the third quarter of 2011, which will include the results of its wholly-owned subsidiary Zim Integrated Shipping Services Ltd. All signs suggest that Zim will report losses even heavier than its $124 million loss for the second quarter.
Yesterday, Danish shipper AP Moller-Maersk A/S (OMX: MAERSK) published its financial report for the third quarter, which show the dire straights into which the shipping industry has sailed. Although Maersk's revenue from container shipping business (where Zim is also active) rose by 2.5%, the company swung to an operating loss of $357 million for the third quarter from an operating profit of $1.03 billion for the corresponding quarter. The company attributed the reduction to declining freight rates, which more than offset a 16% increase in containers carried.
Global freight rates were on average 12% less in the third quarter than in the corresponding quarter, while the average cost of fuel oil rose 48% to $656 per ton.
The global shipping industry is facing two contradictory trends: an increase in freight and a slump in freight rates. Bank Hapoalim analyst Yaron Friedman says, "The contradiction is due to increase in demand for shipping freight and the launch of new container ships, which has disrupted the demand/supply balance causing freight rates to fall."
Friedman adds, "Zim cannot evade these trends, and it too will suffer from falling freight rates. Zim will probably continue to report dismal results for 2011, and there are no signs at this time that the industry trend will change direction."
Maersk also announced a new Asia-Europe service to deal with the drop in freight rates. Migdal Capital Markets analyst Eran Younger says, "The fact that, despite the drop in freight rates, Maersk has launched a new line is a declaration of intent to remain the market leader even at loss-making prices. This will affect Zim, to put it mildly."
Just two years ago, Zim reached one of the largest debt settlements ever made by an Israeli company - more than $3.5 billion. The company seemed to stabilize, and it again was profitable for a while. But new storms hit this year, again pushing the company into losses.
Zim published its forecast for the next few years as part of the debt settlement, and has already cut the forecast twice. In view of the current market climate, it could very well cut the forecast again.
Zim has also amended the financial covenants with its creditors, after it failed to meet the original terms. It is unclear whether the latest losses will again cause the company to miss the terms, but if it does it will again be at the banks' mercy and their willingness to again amend the covenants.
It is premature to know whether Zim will seek a new debt settlement. Despite the shipping industry's deteriorating condition, Zim successfully postponed most of its debt payments as part of the settlement, so the weight of repayments will not over-burden it.
In addition, Zim's creditors will probably show flexibility over the financial covenants, or again postpone debt payments, since the alternative of seizing Zim's ships or liquidating the company are unpalatable, especially at a time when the shipping industry risks foundering. But if the present conditions persist, it cannot be ruled out that Zim will again have to ask the Ofer family, through Israel Corp., to inject additional capital into the company.
Two years ago, Zim's creditors were barely willing to approve the capital injection, and it remains to be seen if they will agree if asked again.
Published by Globes [online], Israel business news - www.globes-online.com - on November 10, 2011
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