Governments to Save Shipping?


Despite historically low rates carriers are unlikely to be killed off as creditors and governments will step in, according to the latest Container Insight Report released by Drewry Shipping Consultants.

Recent news stories report that carriers have quoted zero dollar freight rates to some forwarders on certain lanes out of Asia. Whether these are merely isolated cases or something more widespread is difficult to judge at the present time, but whatever the exact quantum there is no denying the container rates are now close to the historic lows as seen in 2009.

The World Container Index’s composite index, an average of spot freight rates on 11 global East-West routes connecting Asia, Europe and the US, reached a record low of $666 per 40-foot container on March 24, 2016.

The continued softening in the shipping market is good news for shippers’ cost budgets, but it does come with risks attached as the threat of carrier bankruptcy (potentially stranding cargo) increases the longer rates remain non-remunerative, while carriers will likely intensify practices such as void sailings in order to minimise the chance of that eventuality.

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Drewry believe it is unrealistic to expect shippers and forwarders to turn down such cheap rates, especially when it is very difficult to quantify the level of those risks. Firstly, carriers have a history of shaking off the threat of bankruptcy.

While the industry at large has not (yet) reach the same precipice, individual carriers are careering to that point much quicker than others. The most obvious case is South Korean line Hyundai Merchant Marine (HMM).

On 17 March bondholders rejected HMM’s debt rescheduling proposal and as of yet there has been no agreement from shipowners to reduce their charter rates in return for equity.

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The Korean government in February created a $1.2 billion fund to support domestic maritime companies and despite the fact that HMM does not meet its <400% debt ratio guideline – HMM’s debt ratio is 1,700% – that does not appear to be a barrier to it offering support.

Kim Young-suk, Korean Minister of Oceans and Fisheries, said: “The most important thing is each company’s possibility of revival. We will not be obsessed with the numbers like 400% and will create the shipping fund to support carriers if we can see the clear possibility of improvement in each company’s financial status.”

Giving HMM a bit of breathing space the state-owned Korea Development Bank (KDB) will enter into a voluntary agreement with HMM on March 29 that will include a three-month extension of the principal and interest on its debt.

HMM’s current plight and the way creditors are being asked to share its burden has parallels with the industry crisis of 2009. Shipowners do not want to become part-owners in failing carriers, but the alternative is that they have no business at all for their assets.

The second risk highlighted, further idling of ships, may also be less significant than previously imagined.

Drewry has long argued that for rates to return to profitable levels carriers need to address the supply-side excess, but while over one million TEU of ship capacity has been de-activated it hasn’t been sufficient to prevent rates from sinking.

In the midst of new regulations that will ban public general rate increase (GRI) announcements on routes to and from Europe over fears of price signalling, the ever decreasing freight rates must be carriers best defence that no collusion has taken place. No conspirators could be this inept.

The Drewry View: Carriers should continue to try and match supply with demand, but it has to coincide with pricing discipline. Offering zero freight rates implies a lack of self-regard for their services and an arrogance that they will be bailed out if the worst was to happen.

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