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Hanjin Shipping’s recent bankruptcy illustrates significant problems squeezing the shipping industry. Too many container ships on the seas combine with low freight rates to slash companies’ profit margins, shipping analysts report.
The Hanjin crisis was nearing resolution in mid-November when South Korea’s Korea Line was selected as the preferred bidder to purchase Hanjin’s Asia-US operations. The selection came almost three months after the troubled shipper abruptly halted operations and left container vessels – including those carrying coffee beans and tea – and an estimated $14 billion in cargo at sea.
Hanjin’s fate was dictated by a combination of overcapacity among carriers and falling freight rates, experts say.
“Before the (global) financial crisis, shipping companies were growing with healthy profits,” said Philip von Mecklenburg-Blumenthal, director of US operations for the international online freight marketplace Freightos. “Shipping is affected by globalization. If globalization declines, then shipping declines.”
Hanjin, at the time the world’s seventh biggest shipping company, operated a fleet of more than 97 container ships, 61 of which were chartered. As freight rates tumbled and the company’s debt grew, lines of credit evaporated. Hanjin applied for court receivership on Aug. 31.
The economic realities are not isolated to Hanjin. Major shipping companies around the world are experiencing plunging profits. A.P. Moller-Maersk suffered a 43 percent drop during the third quarter, The Wall Street Journal reported. Maersk Line, the world’s biggest container operator and the parent company’s shipping unit, lost $122 million. A year earlier, Maersk Line showed a $243 million profit.
Von Mecklenburg-Blumenthal predicts several factors will combine to bring the industry out of its doldrums. Government protection, for one, will help some lines stay afloat under the philosophy that the business is too big to fail.
Taiwan’s government, for example, came to the aid of Evergreen Marine Corp. and Yang Ming Marine Transport Corp. after the two companies posted a combined $580 million in losses during the first three quarters of 2016, the Journal reported on Nov. 16. The approved relief included $1.9 billion line of credit with favorable interest rates.
“Many companies have government protection to prevent them from going out of business and that will slow down the concentration,” von Mecklenburg-Blumenthal told STiR before the Taiwanese move. “There are more ships still ordered (to be built). It’s still just basically a growth game.”
Consolidation, however, will be a much larger role.
I believe in the Rule of 3,” von Mecklenburg-Blumenthal said. “In most industries, you find three leaders in the market. I wouldn’t be astonished if the end game in the shipping market is the Rule of 3. Maersk, maybe MSC (Mediterranean Shipping Company) in Switzerland and who knows. This is very long term, however, a minimum of five years.”
- Dan Shryock