Cosco Shipping Holdings has issued a profit warning on expectations that it will report a net loss of USD1.44 billion for 2016 as weak demand, low freight rates and rising costs weighed heavily on the carrier’s earnings.

It is an ominous sign of what is to come as container lines prepare to release their financial results for a year that was characterised by poor contract rates and a spot market that fell to record lows in the first half.

China’s largest shipping company said in its profit warning to the Hong Kong Exchange that with slow growth in global container shipping demand and oversupply of capacity the industry lacked solid improvement in addressing the imbalance between supply and demand.

“As a result of the weak market, during the reporting period the growth of revenue generated from the container shipping business segment of the company was lower than the growth of the container shipping volume, and the increase in revenue was less than the increase in costs,” Cosco told investors.

Cosco said the Baltic Dry Index, the Shanghai Containerized Freight Index and the China Containerized Freight Index all fell to historical lows during 2016. As a result, the carrier expects to record a net loss of RMB9.9 billion, or $1.44 billion, for the full financial year, although it said recovering spot rates in the fourth quarter will generate profit before interests and tax (EBIT) of $100 million.

Maritime analyst Dynamar said 12 of the top 25 carriers recorded a loss of $13 billion by the end of the third quarter, and while the fourth quarter rates did recover strongly, it will not be enough to turn around the nine-month losses.

Peter Sand, chief shipping analyst for global shipping association BIMCO, said shipping lines operating in the spot market on all SCFI trade routes achieved an average rate that was 7 percent ($42) lower in 2016 than in 2015. He said this was primarily due to the devastatingly low rates achieved in the first half of 2016 but the freight rates managed to gain momentum through the second half of 2016, as carriers improved network optimisation, scrapping and were more careful with deployment around the peak season.

Last year’s merger of Cosco and China Shipping created the world’s fourth largest container shipping line, and Cosco said the restructuring has been completed. In the Hong Kong Exchange filing, Cosco said it has deepened business reform and completed the restructuring of its organizational structure, management team, legal structure, IT system, container management and supplier management.

The container shipping business unit also completed the restructuring of its domestic network in the first half and consolidated its offices at nine major ports and over 400 outlets in China under one roof. The merger of its overseas offices was completed at the end of October.

Looking ahead into 2017, the company pledged to step up efforts to strengthen customer services, yield management, cost control, service innovation, risk management and overseas development for its container shipping business.

No results announcement for a state-owned company would be complete without a reference to the One Belt, One Road trade initiative, and Cosco said it would accelerate the expansion of its global terminal network and create greater synergies between container shipping and terminal operations to boost its competitive strength in international markets.

Beijing’s China Development Bank earlier in January extended a $26 billion helping hand to Cosco to assist the carrier with its marine terminal expansion and to aid its continuing reforms.

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Cosco’s expected loss announcement follows a profit warning by China International Marine Containers, the world’s biggest box maker, that told the Hong Kong Exchange it expects 2016 net profit will be between zero to half of what it was in 2015 when CIMC made a $288 million profit.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.

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