Shipping in crisis: The sinking feeling

Shipping in crisis: The sinking feeling

As reported in The Economist too many ships, too little trade. In August Hanjin Shipping, South Korea’s biggest container carrier and the seventh-largest in the world, filed for bankruptcy, after five years of losses and another deficit in the first half of 2016. Hanjin was holed by shipping’s prolonged global slump, the product of vast overcapacity and slow trade growth. Its creditors, led by state-owned Korea Development Bank (KDB), have had enough. 

Shipping’s malaise is both broad and deep. An earnings index compiled by Clarksons, a research firm, covering the main types of vessel bulk carriers, container ships, tankers and gas transporters reached a 25-year low in mid-August. The average for the first half of 2016 was 30% down, year-on-year and 80% below the peak of December 2007. Stephen Gordon of Clarksons adds that new orders at shipyards are the lowest in 30-years. German banks, traditionally strong in shipping, were eager lenders before the crisis, happily putting up 70% of a vessel’s cost and even the rest, before borrowers raised the equity. 

Then the storm broke: Petrofin calculates that between 2010 and 2015 leading German lenders slashed their shipping books from $ 154 billion to $ 91 billion. In 2012 Commerzbank, the country’s second-largest lender, decided to quit altogether. Its portfolio has since dwindled from € 19 billion ($ 24 billion) to € 8 billion. In August Bremer Landesbank, from the city-state of Bremen, announced loan-loss provisions, mainly for shipping, of € 449m over one fifth of its equity at the end of 2015 and reported a first half loss of € 384m. At € 6.5 billion, its shipping portfolio is around 30% of its loan book. Bremer LB will not be allowed to sink. NORD/LB, its neighbour, which already owns 54.8%, is taking it over fully. 

The deal values the state government’s 41.2% stake at € 262m far below its worth when Bremen boosted its holding in 2012. NORD/LB itself is far from shipshape. It recently reported a first-half loss of € 406m, thanks to further loss provisions on marine loans. It plans to cut its shipping book, € 19 billion at the end of 2015, to € 12 billion - € 14 billion. Last month it agreed to sell $ 1.5 billion of loans to KKR, a private equity firm and an unnamed sovereign wealth fund. 

A third lender, HSH Nordbank, is seaworthy largely thanks to guarantees, covering € 10 billion of loans, from the states of Hamburg and Schleswig-Holstein. The guarantees were cut to € 7 billion in 2011, but increased in 2013 when that proved premature. In May the European Commission approved the reinstated aid, provided that the bank’s core operations were sold. This is due by 2018.

Rate rise following Hanjin collapse

Shippers are facing container freight rate rises on key East-West trades following the decision by Hanjin Shipping to file for court bankruptcy last week, with the Korean Line’s collapse contributing to container freight price rises of around 40% on Asia-Europe and Asia US services, Drewry reports. In the container shipping analyst’s Container Insight Weekly report today, Drewry noted: “Even shippers unaffected by Hanjin’s situation will feel a short-term shock as the reduction of capacity will inflate freight rates.” 

The report shows the trades in which Hanjin had the largest presence, including a 10% share of Asia-Middle East nominal capacity, 9% share of Asia-Mediterranean, 9% share of Asia-WCNA and 6% share of Asia-ECNA. Notwithstanding the general rate increases (GRIs) already in place, freight rates out of Asia surged the day after Hanjin’s announcement, Drewry noted. The World Container Index, a joint venture between Drewry and Cleartrade Exchange, reported that spot rates from Shanghai to Los Angeles in the US and Rotterdam in Europe, increased by 42% and 39% respectively in September.

Drewry also pointed to other lines, not only the various service partners with slots on board Hanjin ships. The carriers facing the biggest disruption are Hanjin’s partners in the CKYHE Alliance – Cosco, K Line, Yang King and Evergreen, who operate a number of services in the East-West container trades, Drewry noted. However, such is the intertwined nature of the industry whereby carriers swap space freely in order to expand their network offering that many more lines will be affected. 

Many shippers will be unaware that when they book with carrier Y that their container will actually have been moved on a Hanjin operated vessel. The analysts continued: “Now that the unthinkable has happened, the immediate attention has to go on how to clean up the mess. Hanjin’s service partners will have already started efforts to arrange alternative shipments but there will be inevitable delays, especially for containers stuck on ships denied entry to ports. What will happen to containers with Hanjin Bills of Lading is harder to predict, although there are reports that HMM might step in to fulfil those obligations.

Shippers moving boxes away from Hanjin B/L this week to other carriers will bear additional costs, while terminals will have issues moving boxes to meet a different vessel and uncertainty over who will pay the handling fees. This will all be very messy and an additional burden.” But Drwery said there were also longer term implications, particularly with regard to the global container shipping alliances. The CKYHE Alliance will have to fill the gaps caused by Hanjin’s exit, which is likely to disrupt their network scheduling for some months, it noted.

Also, Hanjin was due to leave the CKYHE Alliance net year as part of the reshuffling of carriers into new groups and form a new pact with Hapag-Lloyd, K Line, MOL, NYK and Yang Ming called The Alliance. 

Shippers blamed for Hanjin bankruptcy

As reported by Lloyd’s Loading List, shippers played a major role in creating the conditions in which Hanjin Shipping was forced into receivership, according to one leading analyst. In the most thorough report produced so far into the demise of Hanjin and its repercussions for global transport networks, SeaIntel said that shippers with cargo caught up in Hanjin linked supply chains should also reflect on their role in the difficulties many box lines are currently facing, not least because the relentless downward pressure on rates in recent years had created a situation where the entire carrier industry was heavily loss making. 

If we are being objective about this, the shippers are not without their part in creating this situation, said the analyst. It is of course impossible to see a situation where you can both have a stable supply chain and at the same time ensure that the providers of said supply chain are loss making. We are aware this might be a controversial point of view seen from shipper side and we are not blaming them alone. Yes, the carriers have engaged in price wars and it is the carriers that at times unprovoked, offered even lower rates. 

But we are saying that an industry where one part obtains significant savings while the other part is loss making is not a set-up which is long term viable. SeaIntel said post Hanjin shippers worldwide should start planning for increasing costs for ocean shipping compared to the current levels. The alternative is a situation where we will indeed again see large scale supply chain disruptions, the report added.

Trans-Eurasian land bridge, a threat to shipping

Deutsche Bahn (DB) Cargo is poised to launch a regular rail freight service between the Chinese city of Hefei, situated 250 miles west of Shanghai and Hamburg. The German group has signed a Memorandum of Understanding with Hefei’s municipal authority with initial plans making provision for a weekly frequency on the route starting next month. Due to its nodal position in the Eastern Chinese province of Anhui, Hefei is a freight hub for shippers from Eastern and Southern Chinese regions, DB Cargo explained. 

Goods are varied and include photovoltaic components, computers and textiles. The constantly rising transport volumes of the Trans-Eurasian land bridge demonstrates that railway has established itself as a competitive alternative to other modes of freight transport said DB Cargo’s CEO Jurgen Wilder. We are thrilled that we can continue to expand rail transport with Hefei along the traditional Silk Road route. I firmly believe that more customers will use rail services to transport their goods to and from China in the future, he added. 

Routed via Dostyk in Kazakhstan, Moscow and Warsaw, the freight train convoy will carry containers over a distance of 10,600 km, the journey to Germany taking 15 days to complete. The service is run by Trans Eurasia Logistics (TEL), a joint venture between DB and Russian Railways. TEL has been offering rail freight connections between a number of Chinese regions and Europe for several years. (Lloyd’s Loading List).

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).)