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April 27 2020

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14 The Journal of Commerce | April 27 2020 www.joc.com International Maritime A SHARP DROP in cash flow as demand evaporates in the second quarter is eroding the financial bedrock of container shipping com- panies, with one analyst warning that industry-wide losses in 2020 could top $23 billion if rates collapse along with demand. Losses of this magnitude would be similar to those recorded during the global financial crisis in 2009, when carriers lost $20 billion, and while the industry rebounded in 2010 as inventories were replen- ished, the losses deeply undermined carrier finances. In the years that followed, slower volume growth and rate wars eroded revenues, and in 2011, annual losses reached $5 billion. In 2016, $3.5 billion in losses was recorded in the year that Hanjin Shipping went bankrupt. With carriers entering the second quarter desperate to match capacity with falling demand, more than 200 sailings have been canceled for April and May as the coronavirus disease 2019 (COVID-19) shuts down the global economy. Even though idling ships can save on operating costs, Sea-Intelligence Maritime Consulting estimates that in volume terms alone, the withdrawn capacity represents roughly $6 billion in lost revenue for the carriers. "For carriers, ports, and ship- pers alike, there is no escaping the financial hurricane engulfing our industry," Sea-Intelligence said in its Sunday Spotlight newsletter. The degree to which carriers can access capital and hold the line on capacity discipline that's been building for about two years will determine whether the industry can manage through deep drops in demand, or be marked by carrier collapses like Hanjin's. Following a massive wave of mergers and acquisitions, the number of carriers plying the major east-west trades has been halved to 10, giving them better footing for a downturn, but not enough to relieve concerns that the smaller carriers may collapse or get swallowed up by a rival. Facing such enormous cost pressures — and with no certainty of when demand will recover or how strong that recovery will be — carriers are exposed to a sustained economic downturn and vulnerable to rumors of financial trouble among their jittery customer base. Container shipping was already facing soaring industry-wide debt levels even before the coronavirus brought economies to a halt, with slowing volume growth levels over the past two years making the debts difficult to pare down. Drewry estimated in the fourth quarter of last year that the overall debt for the world's top 12 carriers exceeded $85 billion, with a com- bined debt-to-equity ratio of about 140 percent. But as the coronavirus impact on demand worsened across interna- tional supply chains, even the more profitable carriers were not immune. Moody's Investor Service on March 31 changed its ratings outlook on Hapag-Lloyd and Maersk Line from "stable" to "negative." The ratings agency also plans to review the neg- ative rating of CMA CGM, saying in an April 1 announcement that the carrier's capital structure was too weak for it to maintain its current high credit risk rating of B2. "Given the rapid and widening spread of the coronavirus outbreak and the deteriorating global economic outlook, there is a downside risk that the earnings before interest, taxes, depreciation, and amortization [EBITDA] of shipping companies glob- ally could decline by 25 to 30 percent, similar to levels last seen in 2016, when Hanjin Shipping went bankrupt Caught in the undertow High debt levels, low demand could sink smaller container lines By Greg Knowler "There is no escaping the financial hurricane engulfing our industry." Importing & Exporting | Ports | Carriers | Breakbulk | Global Logistics

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