European Institute of Management and Finance | The Shipping Industry Crisis: Over-financing and Overcapacity
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The Shipping Industry Crisis: Over-financing and Overcapacity

19 Oct The Shipping Industry Crisis: Over-financing and Overcapacity

Korea-Overhauling-Its-Ailing-Shipping-Shipbuilding-Sectors

This year has seen an unprecedented collapse of one of the largest shipping firms in the world. South Korean shipping line Hanjin, which was, until its demise, the 7th largest worldwide, has declared bankruptcy, causing ripple effects throughout the industry.

Hanjin’s collapse comes in a year when the vast majority of shipping companies have announced heavy losses with some smaller firms teetering in the verge of collapse. For outside observers this comes as a shock, considering the ever decreasing costs of transportation due to the plummeting of oil prices in recent times. These should have been times of increased profits for container shipping firms, or for the opening of new longer but safer from piracy routes around the horn of Africa, avoiding fees like the Suez Canal, practices now viable due to decreased costs per nautical mile.

For industry participants though this comes as no surprise and is seen as the culmination of what is now described as the worst crisis the industry has recent in modern times, a fact evident by the lowest ever scores in the Baltic Dry Index which measures the health of the global shipping industry. What led to this state of things is a combination of two factors that brought on the current turmoil in a once rock-solid sector.

Firstly, we saw a shift in paradigm in the trading world due to the global financial crisis following the credit crunch. There has been a steady decrease in growth for demand for seafaring trade due to unforeseen factors. The overall demand for products currently does not meet the global GDP increase; also a relatively new practice has emerged of major goods manufacturers sourcing or developing parts locally rather than shipping them from abroad, due to comparatively lower costs of manufacturing brought on by lower wages and changes in the scenery of labour relations in traditional manufacturing countries.

Secondly, the shipping industry has been itself a victim of the credit crunch, following a ship-ordering binge in early 2010’s leading to overcapacity of an ever increasing global fleet size.

In layman’s terms and simple Economics 101, demand for container space could not catch up to the ever increasing supply, plummeting shipment prices and slashing profits.

Shipping giants like the Maersk Group have long ago diversified their portfolio in other sectors, affording them some hope that they can weather the storm (even though this particular conglomerate is also heavily invested in oil as well, another suffering market) but smaller factions are in real danger of collapse. It is still unclear how the issue will be resolved, as one way of battling overcapacity is by scrapping vessels, a move deemed necessary by commentators but still resisted by the shipping companies themselves. Scrapping yards have seen an increase of 50% in vessel decommissioning since 2015, but this is still a very low number for it to affect the sector. Some are waiting to see how Hanjin’s collapse will affect overcapacity as the company’s fleet amounted to 3% of worldwide shipping volume. Experts though are doubtful that this will play any significant role as the overcapacity issue is much greater than that.

The future may seem bleak for some players in the industry, but for the sector itself things are expected to take their turn. As the issue that brought the crisis is the eventual collapse of prices, an increase in prices is what will solve the problem, and there are 3 ways this can happen.

Overcapacity could be fixed by the probable collapse of other major players in the sector and by removing the majority of their fleet from active duty. Already some companies are on the verge of collapse, and if a large number of ships is decommissioned then the problem of oversupply of shipping volume could be alleviated in that way.

Economists can see the writing on the wall and expect that firms will form consolidations and collude to support prices, as the current price war is not sustainable. Mergers and Acquisitions will most probably take place soon, and the danger of price-fixing by shipping cartels is quite evident, a turn of events that will hurt consumers.

The most desirable way that the industry cablevel itself though is through global economic growth and the increase in consumer demand. Even though projections seem to indicate that the worse is behind us and that we are globally in the process of coming out of the dark, we are still going through challenging times. There is global political unrest, with the proliferation of far right ideologies, the rise of extremist groups, and the refugee crisis in Europe, all having an adverse effect on the global economy. Furthermore, the US Federal Reserve is tightening its monetary policy, and there is economic turmoil in Asia due to the doubtful financial stability in China.

But not all is bad. With an admittedly disquieting consensus among economists that ‘things could have been worse’, low oil prices and weak currencies have kept costs low and demand high, a combination of factors that acted as a lifeboat for Europe and Japan in particular. If this is the silver lining in a bleak future, or the beginning of a better era, only time will show.

As for the sector, an old adage comes to mind that there are prospects in times of crisis. Or as John F. Kennedy eloquently put it: “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.”

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To help shipping professionals take advantage of these opportunities, the EIMF is organizing a workshop titled Certificate in Shipping Finance with Maritime expert Dr Nick Skrekas. For more information, visit here or call the EIMF at 22274470

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