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Why there’s nothing surprising about Daiichi Chuo’s demise

The surprising thing for me about the demise of Daiichi Chuo Kisen Kaisha was that we weren’t all talking about it earlier. Japan’s fifth largest shipping line sought bankruptcy protection this Tuesday, sullied by some $1.5bn in debts, becoming the biggest failure by a publicly-traded Japanese company this year.

Daiichi Chuo’s demise followed one week after another big bulker name, Global Maritime Investments (GMI) had filed for bankruptcy.

Daiichi Chuo’s slide was well telegraphed. Like a rudderless supertanker bound for the rocks, its inability to turn things around financially had been well documented – four years of big losses, even larger losses due this year. Nevertheless, despite being listed in Tokyo, the secret nature of much of Japanese shipping kept the full scale of the disaster out of the limelight. Spokespeople from the company late last week tried to douse the fire from our exclusive report on its financial failing, telling other maritime media that the line was not on the verge of bankruptcy. The thing is the Asian dry bulk sector in particular was well aware of Daiichi Chuo’s predicament for months before it officially sought protection. At Splash, we were first alerted to Daiichi Chuo’s likely bankruptcy a number of months ago – nailing the story without raising the heckles of lawyers proved harder however.

Daiichi Chuo’s failure is a familiar one for shipping – and indeed for Japanese shipping – to many eggs in one basket and a failed counter cyclical bet.

On its website Daiichi Chuo makes much hullaballoo of its strong China ties. “[W]e began doing business with large Chinese steel mills in the mid-1990s and were the first Japanese shipping company to secure a long term contract,” it states. The firm soared with the rise of Chinese demand for commodities in the last decade but could never wean itself from this market when things slowed down.

“Daiichi is basically the same story of Sanko Parts 1 and 2,” one Asian shipowner with strong ties to Japan tells me, in reference to Japan’s greatest shipping bankruptcy, Sanko Steamship, which has gone bust not once, but twice in 30 years.

An overly aggressive business strategy, heavy leveraging and banking on the past shipping boom of 2004 to 2009 to last forever cost Daiichi Chuo massively. Like many others, the ‘China Dream’ proved just that – unsustainable.

“Our measures to expand our fleet backfired,” the company’s president Masakazu Yakushiji told a news conference on Tuesday. Daiichi Chuo’s fleet expanded counter cyclically from 162 ships in fiscal 2008 to 232 in fiscal 2011. It since cut the fleet back by around 60 ships, but China’s slowdown and the subsequent drop in freight rates proved fatal.

Like Sanko Steamship, Daiichi Chuo died a slow death thanks to the ‘share the pain’ spirit of Japan Inc with banks and shareholders (led by Mitsui OSK Lines) pumping money into a dying company in intensive care.

“There was no shock, no breaking news, everyone was just waiting to see when the inevitable will happen – restructuring,” the owner confides.

“We see the fact that Daiichi does not have the funds to go through a restructuring process as further exacerbating the situation,” said Oslo-based research firm, Arctic.

“This may ultimately mean a slew of lawsuits and redelivery of tonnage, as well as forced sales of vessels – potentially adding pressure on a fragile dry bulk market.”

Splash understands there will be a meeting convened next week to go through many of Daiichi Chuo’s charter deals. The worst affected from its collapse are likely to be smaller Japanese owners.

Ultimately, it’s restructuring and Daiichi Chuo will come back in a few years, quite possibly to do it all over again.

Sam Chambers

Starting out with the Informa Group in 2000 in Hong Kong, Sam Chambers became editor of Maritime Asia magazine as well as East Asia Editor for the world’s oldest newspaper, Lloyd’s List. In 2005 he pursued a freelance career and wrote for a variety of titles including taking on the role of Asia Editor at Seatrade magazine and China correspondent for Supply Chain Asia. His work has also appeared in The Economist, The New York Times, The Sunday Times and The International Herald Tribune.
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