4 THE JOURNAL OF COMMERCE www.joc.com
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 mark.szakonyi@ihsmarkit.com 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
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SEPTEMBER 4.2017
