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Sept.4, 2017

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4 THE JOURNAL OF COMMERCE Editor's Letter Mark Szakonyi HANJIN SHIPPING'S COLLAPSE on Aug. 31, 2016 was a mile- stone in the container shipping industry's move toward stability and a driver toward this far-from-guaranteed goal, albeit with the price of major disruption in the months following. But the wake-up call around unsus- tainably low freight rates generated by the demise of the then-sixth-largest global carrier by capacity may be short-lived if some carriers become too confident in the rebound after snagging Hanjin cargo and enjoying an overall rise in demand. According to IHS Markit data, capacity is set to expand 7 percent this year, assuming existing orders aren't pushed back or canceled, putting the industry in a rare position to match growth with new slots. Global con- tainer volume expanded 6.7 percent in the first half, and maritime analyst Alphaliner forecasts a 6 percent year- over-year increase in 2017 volume. What would be the healthiest growth rate in six years is setting the industry up to end this year with $5 billion in annual profit, after six years of losses, according to Drewry Shipping Consultants. The outlook for carriers was far less favorable a year ago, when the South Korean government passed on bail- ing out Hanjin, forcing the carrier into bankruptcy. The remaining carriers lost a collective $5 billion in 2016, according to Drewry. South Korea's conclusion that it could do with just one national major carrier — Hyun - dai Merchant Marine — was part of a larger reluctance by sovereign wealth funds and private investors to keep unprofitable carriers afloat. That reluctance made possible CMA CGM's acquisition of APL, Hapag-Lloyd's takeover of United Arab Shipping Co., and Cosco Shipping's purchase of OOCL. The number of top global carriers has fallen since 2014, with the top east-west carriers down from 16 to nine. This will decline to seven after the pending merger of Japan's three carriers into Ocean Network Express. The speed and severity of Hanjin's collapse exposed the risk of alliances, as many shippers learned their cargo was on stranded ships even though they never directly booked with the South Korean carrier. "Our biggest surprise was that we had so many containers on (other carriers') bill of ladings tied to Hanjin vessels," a multinational shipper told The Journal of Commerce. Fellow members of the CKYHE Alliance had the most exposure, but some of the 540,000 stranded containers were on the ships of carriers with which Hanjin had looser slot-sharing agreements. Hanjin's bankruptcy also spurred shippers to take a closer look at carriers' health beyond just profit and loss. One Southern California-based importer-exporter that had limited exposure to Hanjin's collapse — fewer than 10 containers, but involving critical equipment — said it now fully vets the financial condition of its carriers. "When we talk to a carrier now, we examine their financial health. If they're not healthy, we're not going to sign a contract or booking," the company's senior manager of logistics said. Responding to shippers' heightened concerns, the THE Alliance created an emergency fund to help recover stranded cargo if one of the members collapsed. Alliance members haven't made the scope of the emer- gency fund public, so it's unclear if there'd be enough cash for a rescue operation, and whether the funding would be enough to ensure charterers that their ships wouldn't be seized when unloading cargo. Hanjin's demise also sent a warning to creditors on the risk of tightening the reins too hard on a struggling carrier. Creditors ranging from fuel suppliers to con- tainer lessors may only get on average 2 cents to every dollar of the $10.5 billion lost, a Hanjin attorney told a New Jersey bankruptcy court on Aug. 4. In Hanjin's wake, it's too soon to determine whether carriers fully took to heart the need for capacity disci- pline to capitalize on rising volume. Encouraging for the carriers, global capacity expansion grew in line with demand in the second quarter, at a rate of 4 percent, Maersk Line CEO Soren Skou said on Aug. 16. So far, a review of the orderbook suggests the disci- pline will hold. Container capacity will expand 7 percent in 2018, and 1.4 percent in 2019, as long as new orders aren't made and existing ones pushed back or canceled. Meanwhile, idle capacity has inched up, despite 6.7 per- cent volume growth in the first half. Scrapping activity through July is up 22 percent from the same period in 2016, according to IHS Markit. Confirmation from two Chinese shipyards that they've received letters of intent from CMA CGM for nine 22,000-TEU ships has shippers and industry watch- ers unsure whether carriers have fully turned a corner. CMA CGM declined to confirm the orders. "We do not comment on market rumors," the French carrier said. During Maersk's second-quarter earnings call, Skou acknowledged that with the low prices being offered by the yards, there was little doubt that new ships would be ordered. But, he said, the business case for newbuildings was absent. "From where I am sitting, it is important to consider that there is no incentive to order ships from a cost perspective. Maybe three to five years ago large ships were ordered because of fuel economics, but given the current prices, that has now minimized." Carriers' grabbing of the 4.5 million TEU once moved by Hanjin and rising demand has made it easier to avoid aggressive market share grabs that can lead to price wars, said Lars Jensen, partner in SeaIntelligence Con- sulting. "In 2017, they have been content to share spoils of war from Hanjin's collapse," he said, noting that the injection of capacity, some 23 percent in the Asia-Europe trade over two years, could tempt carriers to slash rates to keep up utilization. "It only takes one carrier to upset the apple cart." JOC Contact Mark Szakonyi at and follow him on Twitter: @szakonyi_joc. Don't Jump the Gun The Journal of Commerce (USPS 279 – 060), ISSN 1530-7557, September 4, 2017, Volume 18, Issue No. 18. The Journal of Commerce is published bi-weekly except the last week in December (printed 25 times per year) by JOC Group Inc., 450 West 33rd St., 5th Floor, New York, N.Y. 10001. Subscription price: $595 a year. Periodicals postage paid at New York, N.Y., and additional mailing offices. © All rights reserved. No portion of this publication may be copied or reprinted without written permission from the publisher. POSTMASTER: Please send address changes to The Journal of Commerce, Subscription Services Department, 450 West 33rd St., 5th Floor, New York, N.Y. 10001. SEPTEMBER 4.2017

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