Shipping industry in choppy waters as coronavirus evokes 2016 slump and Hanjin bankruptcy

Ryan Swift

The shipping industry is expected to remain under pressure in 2020, as freight rates and profits in the container and dry bulk sectors slide, with the coronavirus outbreak pushing the global economy closer to a recession.

Global container shippers idled 2.46 million twenty-foot containers as of March 2, equivalent to 10.6 per cent of total industry capacity, according to industry researcher Alphaliner. The pullback is worse than during the aftermath of the 2008 global financial crisis.

While the current container rates of US$1,500 per forty-foot boxes remain above the US$1,400 average in 2019, they are being unsustainably propped up by shrinking capacity and cancelled sailings. BIMCO, the world’s largest shipping association, sees lower prices as the pandemic worsens.

“Before the pandemic, BIMCO expected average freight rates for 2020 to come down from last year,” chief shipping analyst Peter Sand said in a report on March 19. “They will now become even lower” on contraction in demand, he added.

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The calamity could drag the industry’s gross profits down to levels last seen in 2016, according to Moody’s Investors Service, reminiscent of the calamity that pushed Hanjin Shipping of South Korea into bankruptcy and disrupted the global supply chain.

This time, it will be a challenging year for highly-indebted shippers such as French group CMA CGM. The world’s fourth largest container liner has the second largest amount of new capacity being built in shipyards, after Evergreen of Taiwan, according to Alphaliner.

“There is downside risk that the Ebitda of shipping companies globally could decline by 25 to 30 per cent, similar to levels last seen in 2016 when Hanjin Shipping went bankrupt,” Moody’s said in a March 17 report.

The Korean company, then the seventh largest container shipper, filed for bankruptcy in August 2016 under some US$5 billion of debt load, and left US$14 billion of goods stranded at sea.

“Shipping is just like buying a property for the rental market – you can buy the flat, but if nobody rents it, you can’t pay the mortgage,” said Mike Lai, a professor in the department of Logistics and Maritime Studies at Hong Kong Polytechnic University. Idle ships are very expensive to maintain, he added.

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The pressure has prompted the Chinese Shipowners Association to seek relief from the State Council on February 21, according to Freny Patel, Asia-Pacific editor of data and news provider Policy and Regulatory Report.

The proposals included a temporary suspension of IMO 2020 regulation that requires shippers to switch to cleaner, low sulphur fuels.

Container rates this year had been supported by a sharp withdrawal of capacity and cancelled sailings, Sand of BIMCO said. With some of the world’s biggest economy slowing to near a standstill, the market could turn from bad to worse.

“In the longer term, a gradual return to normality is expected,” Sand said in the report. “No demand boost is expected to come around, as the events [of the coronavirus] have not built up demand, merely destroyed it.”

Shrinking profitability margins led to Hanjin Shipping’s bankruptcy in 2016. Photo: AP Photo

The dry bulk sector, which is responsible for shipping cargo such as iron ore, coal and grains, is still struggling under rates far below break-even levels for owners, Sand said in a separate interview.

Average daily rates for capesize cargo ships – the largest such ships – has fallen over 90 per cent to less than US$3,000 per day from December to this month, according to BIMCO and Clarksons Research. The rates need to be about US$15,000 for the vessels to be profitable, they estimate.

A recent pickup in Chinese industrial activity has lifted the spot rate on five routes to US$3,843, while the forward freight rates for third quarter this year are indicated at US$12,000, according to Tim Huxley, director of Mandarin Shipping in Hong Kong.

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“All other dry bulk segments are about US$1,000 per day in the red but have been on the rise throughout the past 30 days,” Sand said. Demand from China is still very weak, but South American grains export was lifting rates from the lows in February, he added.

As the coronavirus pandemic forces many countries to shut their borders to contain the virus, BIMCO is concerned that those drastic measures could hit seaborne trades.

“Increasing protectionist measures may also become more widespread as nations seek to fix exposed vulnerability which the health crisis has made abundantly clear,” it said.

Meanwhile, Orient Overseas International, a subsidiary of Cosco Shipping, released its full-year report for 2019 on Monday, showing a 5.2 per cent rise in revenue to US$6.275 billion. Orient Overseas booked the profit from its sale of the Long Beach Container Terminal for US$1.78 billion in 2019, which raised its liquid assets to US$2.9 billion and dropped its net debt to an equity ratio of 0.23 from 0.41, among the lowest in the industry.

Orient Overseas said in its report that the outlook in February was much more positive on hopes that the coronavirus had been contained to China. For March, the outlook was more challenging, and that “supply chain disruptions plus the potential hit to growth and demand” would have negative results that could last for the rest of the year.

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