Money Makes the World Go Round

2016-09-28-pricing

Source: http://www.flexport.com/

 

 

Over the years, freight forwarding costs have steadily declined as shippers continuously undercut each other in attempts to win and keep business from multiple clients. In 2014, containers were still shipping in a solidly four digit range on the left side of the decimal point, a healthy range that sustained and paid everyone for the job. As of 2016, it is almost like a rare Mew Pokémon sighting to see anything more than three digits on the left side of the decimal point. As of March 2016, a 40’ container from Shenzhen to Rotterdam cost less than a car payment for most people at $400 – which barely covers the cost of fuel, handling, and fees. In fact, prices have gone so low, that it would be cheaper to put your personal belongings in a shipping container as it sales around the world than to keep it in a local mini-storage facility.

As Hanjin’s impact is still developing and slowly trickling out, railways, terminal operators, and container lessors are price gouging the South Korean Line’s shippers by asking cargo owners to pay more than usual to bring freight into US ports after Hanjin filed for bankruptcy. Others are feeling the burn as many transportation providers have refused to touch the South Korean carrier’s assets and unpaid fees are piling up. “If you think about it, these were normal prices back two, three years ago. $1,200, $1,500, $1,800, this was all standard pricing. You have to understand, we WANT the shipping lines to stay open so they can move our cargo, because without them, we would all be screwed. The market is trying to right itself again right now.” said a senior executive of an US based NVOCC who declined to be identified.

With this crisis looking like it will be going on for a while, complaints of inappropriate pricing practices related to Hanjin’s cargo are starting to bubble up. With trucking companies that regularly haul Hanjin cargo at the brink of losing thousands of dollars since a normal billing payment cycle for goods hauled averages 60 days after goods are received. With no formal channels in the United States other than bankruptcy proceedings to pursue their claims, it seems like everyone in getting the short end of the stick as various companies keep a tight hold on all current Hanjin containers in hand and refuse to release unless steep prices are first paid up front. “Based on past experience during tumultuous times, we know that ocean carriers and marine terminal operators begin charging detention and demurrage charges that become extremely expensive in short order.” FMC Commissioner William P. Doyle says. “Although Hanjin believes such price gouging is wholly inappropriate and has tried to intervene (including notifying the Federal Maritime Commission), there is nothing more Hanjin or the Foreign Administrator can do,” Hanjin said in a court filing last Thursday.

Shippers are being pushed and encouraged to take a good look at the financial health of their carriers prior to committing their cargo, which proves to be more complicated than it seems at first glance. Even if a shipper were to select a healthy carrier, there are a few members in each of the three alliances, 2M, Ocean, and THE Alliance, that are fiscally unsound, and there is never a guarantee that a shipper’s cargo will travel on any particular carrier. “Many shippers are having to reassess their tactics. Do we go by carrier or by alliance? That is important so we can keep a balance of the service requirements we need and the ships that are going to deliver our products. There is sufficient competition between carriers to ensure we have enough choice. We look at the financial strength of an organization, their ability to invest, the quality of customer service. Price shouldn’t be the sole determinant.” Says John McCauley, Vice President of transportation and logistics at Cargill. However, this peak season, it looks like money, and how much money a company is willing to part with, will be the sole factor of whether large Hanjin shippers such as LG and Samsung will be getting their Thanksgiving, Black Friday, and Christmas shipments in before the holidays.

 

Additional Information:

Leaky Ships: Ocean Carriers in the Age of Profitless Shipping (Flexport)

Hanjin: Rails, Terminals, and Container Lessors Gouging US Shippers (JOC)

Hanjin Could Cost US Truckers Thousands of Dollars (JOC)

Shippers Struggle to Gauge Financial Health of Alliance Partners (JOC)

Industry Leaders Flounder during Shipping Business Crisis

 

ships

Source: http://www.bloomberg.com/

 

The bankruptcy of the 7th largest shipping container line, Hanjin Shipping, has highlighted the underlying struggle that the entire shipping industry has been leading up to. With 11 of the largest shipping companies around the world publishing results in the red for this past quarter, all firms – both big and small are in danger of going under.

Ever since the financial crisis happened, world trade has slowed down to a trickle, with companies finding ways to cut costs on shipping – like General Electric making engine parts where they are needed rather than shipping them from America. The second factor has been gluttony on the shipping firms’ part, starting around 2011, shipping firms started ordering oversized new ships and creating more supply than demand in the global economy – effectively slashing shipping costs by 50%. So far, shipping companies have favored the cost-cutting strategies of forming alliances, revamping all alliances in the shipping world mid-2015 to 2016. With 3 alliance groups now accounting for close to 75% of the global market share, these partnerships have helped companies share vessel space, but has done little to solve the problem of overcapacity and freight rates from falling.

Now, shipping firms are looking at new ways to inject funds back into their industry. As the rest of the world has kept up with digitization, shipping has always lagged well behind. While modern jetliners can create several terabytes of data per day, cargo ships average about 50 days to produce a single terabyte of information. With poor data communication currently in place that doesn’t even have sensors to ensure that all hatches are closed prior to leaving port, the shipping industry can no longer ignore up to 30% cost reductions in systems that offer better coordination between ships and shores.

“I don’t think we are out of trouble here. I really feel this situation with Hanjin is such a game changer. We have had companies go out of business before. But not to this extent.” says Howard Finkel, executive vice president of China Cosco Shipping Americas. Hanjins collapse is a potential “wake-up call for the industry”,  but Finkel still feels that carriers still won’t be making money for at least another year, despite the “realities of the market” and the impact of the Hanjin collapse injecting change into the shipping industry. Finkel adds, “But I think it’s going in the right direction. Shippers, I think, are going to get the message that we cannot continue to operate at non-compensatory levels.” Peter Schaerf, vice chairman of Seaspan – an owner and manager of container ships states, “I would argue that Hanjin is only a game changer if (their) ships become scrapped, because they are not taking supply out of the market. But rates have to come up to allow volumes to sustain themselves, and carriers have to stop ordering new ships.”

With vessel overcapacity now becoming a chronic disease, and even more on the order books to come, there doesn’t seem to be a quick fix to bring the market back to any sort of short term equilibrium. With players now disappearing from the market and overall concentration increasing, there is now a set number of players controlling the lion’s share of the market – which can help the world move away from having little or no pricing power. The reshaping and reduction of alliances from 4 to 3 would make it easier to manage capacity, as well as support the development for a better balanced industry. Rolf Habben Janson, CEO of Hapag-Lloyd states that the industry needs to shift its focus from reducing costs to increasing efficiency, including addressing issues such as the high level of no shows and low booking discipline. “It is simply not possible to take much more cost out of the system. Freight rates normally go up and down, so after seven consecutive quarters of decline, I think we will start to see the curve move in the opposite direction.”

 

Additional Information:

Profits Overboard (Economist)

Others Could Follow Hanjin Before Container Shipping Rebound (JOC)

Hapag-Lloyd CEO: Container Shipping Set to Recover in One to Two Years (JOC)

Hanjin’s Bankruptcy

2016-09-07-korea-overhauling-its-ailing-shipping-shipbuilding-sectors

Source: http://www.worldmaritimenews.com

 

 

Ever since Hanjin, one of the world’s biggest shipping lines owning 2.9% of total container capacity, file for bankruptcy protection August 31st, 2016 in Seoul, Hanjin’s ships halfway through their voyages have been tellingly “prohibited” from shores at ports around the world have turned the company’s ships away; from Europe to Asia to the USA in fear that the Hanjin ships won’t be able to pay port and docking fees, or the ship would be seized by creditors and agitate normal port operations.

Operating close to 100 container ships, Hanjin has been an integral part of global delivery, shipping everything from electronics to Christmas toys coming in from overseas for this 2016 season. This bankruptcy comes after months of weak attempts to infuse cash back into the company by operating below costs in order to raise their liquidity and help with their restructuring of debt. The bankruptcy announcement has now started a “free-for-all” struggle from shippers and cargo owners around the world to locate and regain control of their containers again. With multiple Hanjin vessels being arrested at ports from Singapore to Sydney, ports are refusing to work with Hanjin owned ships in fear that they will not be paid; forcing Hanjin to file for bankruptcy protection in jurisdictions around the world to allow their cargo laden ships to enter ports and discharge cargo owned by over 8,000 cargo owners and estimated to be valued at more than $14 billion.

“It is difficult to predict such company failures, especially with governments frequently asked to bail out failing firms, and they often do so.” Says H.J. Tan, a consultant at Alphaliner. However, “The shipping company’s plans fell short of the requirements for creditors to provide help.” Main lender, Korea Development Bank has said late August, as the bank and creditors have denied Hanjin further financial support. Lee Dong Geon, Korea Development Bank’s chairman further criticized, “While Hanjin Group has shown some efforts to turn around, the owner hasn’t shouldered enough responsibility as head of the company.” Hanjin Shipping held out till September 4th 2016, the last day of their voluntary debt-restructuring program – before filing for court receivership and then bankruptcy. This bankruptcy was announced at a particularly bad time, since the U.S. and Europe retail industries are currently in “peak shipping season”, getting their Asia made products shipped to them in time for Thanksgiving and Christmas sales.

 

Additional Information:

Hanjin Shipping Bankruptcy (JOC)

Another Hanjin Vessel Arrested, this one in Austrailia (JOC)

Hanjin Shipping: One company with 2.9% market share roils global trade (CNBC)

Hanjin Shipping Lenders Reject Revamp Plans as Insufficient (Bloomberg)

Hanjin Captains Ordered to Slow Steam or Drift to Avoid Arrest (gCaptain)

HMM Takes Advantage of Opportunity, Plans to Rescue Stranded Hanjin Cargo

Merger-58456

Source: http://www.marinelink.com

 

Over the past two weeks, the freight forwarding industry has gone on red alert since the media reports and official announcement of Hanjin Shipping’s filing for receivership. The Korea-based shipping company has been suffering from multiple quarters in the red the last few years and was handling an accumulated debt of $5 billion before filing the application to the South Korean government. This turn of events came as a surprise, as Hanjin reported successful negotiations prior to the investors’ rejection of their liquidity plan. As such, cargo handlers have been withholding cargo until guaranteed pay, shippers have been paying additional fees to have their cargo delivered, and opportunists are making the most of the situation by seeking to fill the void that Hanjin Shipping has left.

One such opportunist is Hanjin’s fellow Korea-based shipping company, Hyundai Merchant Marine (HMM). Despite undergoing their own financial troubles earlier in the year, the company has been somewhat successfully normalized and is working its way back into a profitable quarter. HMM has been holding emergency meetings to tackle the Hanjin debacle, and there are now plans set in place to send out ships to rescue these containers in limbo along the trans-Pacific route and Asia-Europe route.

This decision has been outlined by HMM and Korea Development Bank, the main creditor of both HMM and Hanjin. By doing so, they hope to mitigate any fallout from Hanjin’s financial woes. What is more interesting, however, is the national interest in having HMM absorb Hanjin Shipping in some sort of merger, which would essentially minimize the loss of Hanjin’s valuable assets. These two Korea-shipping giants are essential to South Korea’s import/export sector and it seems to be in the government’s interest to minimize the damage of Hanjin Shipping’s bankruptcy by advocating for this proposed merger. Regardless of result, there is no doubt that much more will occur between shippers and carrier prior the resolution of the Hanjin Shipping fallout.

 

Additional Information:

US Marine Terminals Take Varied Approach to Hanjin Fallout (JOC)

HMM Deploys Ships to Pick Up Stranded Hanjin Cargo (JOC)

Claims Against Hanjin Flood In as Customers Seek Their Cargo (JOC)

U.S. Firms Take Action Against Hanjin Shipping As Half Its Fleet Gets Blocked (Fortune)