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September 28, 2016

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Shipping rates go astray with the wrong moves of big players

FOLLOWING the collapse of South Korean firm Hanjin Shipping Co Ltd, container shipping rates from Asia to the United States spiked 50 percent as the carrier’s customers scrambled for ships. Few shipping industry experts expect those price increases to fix what is wrong with the industry.

Hanjin’s collapse and the resulting chaos in the global shipping sector are symptoms of deeper ills caused by a capacity glut that will remain even after the resolution of Hanjin’s crisis, industry officials and experts told Reuters.

“All of Hanjin’s ships aren’t just going to sink overnight,” said Clint Eisenhauer, vice president for external affairs at the South Carolina Port Authority. “We are going to see the same imbalance between supply and demand, and beyond a short-term spike the impact on rates shouldn’t be dramatic.”

In recent years container ship companies have gone on a spending spree, ordering ever larger vessels based on the assumption of rising trade in consumer goods from China and Asia.

Shipping industry data provider Alphaliner estimates fleet owners will increase container shipping capacity by 3.9 percent in 2016, even as estimates for global demand range from growth of just 1 percent to 3 percent.

According to order book figures from British shipping services firm Clarkson, the global container ship fleet should grow by 16.9 percent between now and 2019.

“These are significant investments that were based on what seemed reasonable forecasts at the time,” said Dean Tracy, principal of consultancy Global Integrated Services and former import transportation director at Lowe’s.

However, exports of goods and services as a percentage of global gross domestic product have slipped in recent years to 29.3 percent in 2015 from 30.7 percent in 2012, according to data compiled by the World Bank.

The mismatch between supply and demand has left 7.4 percent of container ships worldwide sitting idle as of this spring, according to Alphaliner. Consulting firm Drewry said in July it expects a record 150 container vessels would be scrapped this year, but that would “only make a dent” in the excess capacity built between 2010 and 2015.

The capacity overhang has battered container shipping rates and shipping company profits. In mid-February 2015, it cost US$2,265 to haul a container from Shanghai to the US West Coast. By late August, the price for shipping a container across the Pacific had fallen by nearly half to US$1,153. Rates rose to US$1,746 in early September, according to the Shanghai Containerized Freight Index, but remain well short of the earlier peak.

All the major companies have struggled amid a low rate environment. Maersk, the world’s largest container ship company, has warned investors its 2016 profit will be significantly lower than last year, fired its chief executive and announced plans to restructure its business. Germany’s Hapag-Lloyd also warned profits would fall this year.

South Korea’s Hyundai Merchant Marine Co Ltd, the world’s fourteenth largest carrier, avoided collapse earlier this year when it managed to cut a deal with creditors.

“I think the container sector has more serious long term structural problems,” said Ralph Leszczynski, head of research at shipbroker Banchero Costa in Singapore.

The bankruptcy of Hanjin is the largest ever collapse of a container ship company. The world’s seventh biggest carrier has a fleet of 88 ships or around 3 percent of global capacity. Hanjin only owns around 30 of those vessels and runs the rest on charters.

Two questions now are how much of Hanjin’s capacity will be scrapped, which could help firm up shipping rates, and how much will be replaced by rivals seeking to grab market share?

Seaspan Corp Chief Executive Gerry Wang says he has already been approached by a number of other operators who want to lease three ships his company, the largest global lessor of container ships, had placed with Hanjin under long-term contracts.

Wang said Hanjin’s woes could boost container shipping rates as some of the carrier’s older ships should be idled.

Flight to quality

Rival shippers are moving to fill the breach created by Hanjin. Within days of Hanjin’s bankruptcy filing, Maersk and Mediterranean Shipping Company SA, the world’s two largest carriers who have a vessel sharing agreement, announced they would both launch new trans-Pacific services on Sept 15. Both companies committed six ships each to the new services.

The moves are “symptomatic of the industry’s oversupply problems,” said Chaim Shacham, a consultant and former maritime shipping executive based in New Jersey.

In an email, Soren Egholm, vice president of trade and marketing at Maersk Line North America, said that as a “financially strong company we are currently being approached by many customers on the Transpacific who ask if we can provide alternative transport solutions for their cargo.”

Lawrence Gross, a partner at FTR Transportation Intelligence, said that Hanjin’s collapse could push producers and retailers to more closely scrutinize the shipping companies they choose.

“Customers have treated container shipping as a pure commodity play, but now they realize not all carriers are built the same,” Gross said. “I think we may see a bit of a flight to quality as customers seek more stable partners.”


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