STX Pan Ocean, a South Korean shipping firm, barely broke even in the third quarter as it misjudged the dry bulk shipping market, leading to an unrealised loss on its freight contracts with customers.
Singapore-listed STX, which derives most of its profit from shipping bulk cargo such as coal, grains and ore, said in a statement that it earned third-quarter net profit of just $1.7 million, down sharply from $62.8 million a year ago.
The company's earnings were hit by unrealised valuation losses of $34.8 million - resulting from forward freight agreements as well as higher fuel costs for its ships - which it expects to be realised when the agreements mature. Overall costs in the quarter rose 30 percent to $697.8 million, while sales rose 23 percent to $765.3 million.
"Looking ahead, STX believes that the dry bulk market is still finely balanced with prospects of increased cargo flows set against a sustained expansion in fleet supply," STX said in a statement.
It added that it expects a new quarterly peak for the major dry bulk trades in the fourth quarter of this year and a strengthening in 2007, subject to seasonal fluctuations. The Baltic Dry Index, which tracks bulk shipping rates, has climbed 75 percent since the start of the year to 4,214 points.
In May, STX had predicted the index would stay at around 2,500 points for the rest of 2006. The index fell sharply from a high of more than 6,200 in December 2004 to less than 1,800 in August 2005 as China's ore imports fell.
Investment bank Goldman Sachs, which managed STX Pan Ocean's Singapore stock market listing last year, said in September that dry commodities freight rates should rise further in the final quarter and in 2007 on utility demand, booming China trade and slowing ship orders next year.
The company, South Korea's biggest dry bulk shipping company, is looking to reduce its dependence on dry bulk, its main money spinner, because the business is closely tied to China's appetite for raw materials, particularly ore used in steel production.
STX shares, which were sold at S$0.90 each in July last year when the firm listed in Singapore, have fallen 8 percent since the start of this year, valuing the group at around $910 million.