Rapid Developments in the Shipping Industry

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Long Beach Total Terminal Solutions (TTS) Terminal, currently 54% owned by Hanjin – with talks of selling it to Mediterranean Shipping Company (MSC)

Source: http://www.polb.com/

 

Surrounded by everything that has accumulated in the 2016 shipping industry so far, “stabilization” right now seems to be synonymous with “Tom Cruise: Mission Impossible”. Amidst the fall of Hanjin on August 31st, 2016, the freight forwarding industry is waking up to the realization that cutting prices to rock bottom in attempts to undercut competitors and to maintain volume is a short-term game that hurts everyone. In addition to overcapacity already hurting the industry, and greater capacity looming in the very near future as more mega ships are currently being built, it has become clear that action needs to be taken now to slowly turn the industry around to profitable levels again; with the top three matters on everyone’s mind being Hanjin’s Long Beach Terminal sale, trucking pricing pressures, and 2017 BCO contracts.

 

With Hanjin Shipping Co. officially financially tapped out and grasping for concluding streams of revenues with existing assets as they finalize their bankruptcy, they have publicly announced that they are selling their largest asset, their 54% stake in Total Terminals International (TTI) nestled in Pier T at the Port of Long Beach, through which 1/3 of the port’s cargo passes, stating: “In order to secure liquidity for the rehabilitation process, we have been pushing for a sale of Total Terminals International, and we have received permission from the court to appoint a professional consultant in this respect.” With the Port of Long Beach being able to take vessels up to 13,000 TEUs and in a key spot to funnel containers from the newest mega-ships straight onto rail to disperse throughout the USA, many global shipping firms have vested interest in this takeover battle with the two most aggressive contenders being Hyundai Merchant Marine (HMM), whom seeks to jump into a nation’s mega shipping firm by acquiring the largest asset of Hanjin Shipping, and Mediterranean Shipping Company (MSC), the second largest shareholder of the TTI terminal with the preemption preference right of acquisition. Nonetheless, if MSC moves all of its Southern California vessels to call the TTI facility, they may not be able to fulfill their minimum joint venture operation annual guarantee to SSA Marine at the Port of Long Beach in Pier A. This brings up the question of what type of financial agreement the port will work out with MSC’s subsidiary to make it a win-win for all sides. Managing Director of Commercial Operations at the Long Beach Port, Noel Hacegaba stated that even though it’s still premature to determine exactly what the port authority will do until South Korean courts finalize Hanjin’s legal situation; they will follow developments closely in order to “remain responsive to market conditions to ensure the Port of Long Beach is competitive.”

 

Another aspect in the wake of Hanjin’s bankruptcy is a shipping market that is still weak and currently playing a losing game of struggling to regain a solid foothold. One of the chief aspects of this is emphasized through trucking companies feeling continued pressure in volume and pricing on their fleets. In a feeble attempt to control their capacity in a weakened market, Swift Transportation has cut out more than 1,600 trucks from their total fleet of more than 19,000 total tractors over the past year, and 581 trucks from their average operational truck count in the third quarter, underlining just how sudden and influential the loss of the US truckload market has been in this year alone. Swift stated in an open letter to their investors on Monday, October 24th, 2016 that an excess of over-the-road trucking capacity, high inventories, and sluggish transportation demand put “persistent pressure” on freight volumes; with pricing with the truckload and refrigerated segments experiencing the majority of this reduction. With J.B. Hunt Transport Services posting a negative operating profit starting at the end of their first quarter in 2016:

 

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Source: http://www.joc.com/

 

Weak consumer spending, high inventories, and excess truckload capacity are the culprits to blame for depressed freight demand throughout 2016. With tepid transportation demand, excess capacity supply, and slow consumer reengagement, the pricing pressures on trucking companies look like they will be settling in for a long stint as the economy shows no signs of recovery.

 

Perhaps most importantly though, everyone is looking at beneficial cargo owner’s (BCOs) 2017 service contract talks with container lines – with everyone forecasting a preparation in an increase in rates. With carriers looking for an increase of $300 per TEU, due to oversupply and lagging demand, the prices are expected to settle more along the lines of $100 per TEU increase as container lines finalize their talks in mid-November till the end of December for a 12-month 2017 contract. Interestingly enough though, you can see the fall of container contract rates from 2013 till now below, as carriers struggle to right supply and demand back to “non-losing” operational levels again:

 

2016-10-25-estimated-asia-to-europe-spot-contract-rates-in-usd

Source: http://www.joc.com/

 

 

With current spot markets always serving as a starting point for BCO contract negotiations for the next year, as a rule, contract rates should be more competitive than spot rates because they involve higher volumes over a longer period and are supposed to offer a discount for those that sign, and help many shippers accurately budget for the year ahead, helping them clear off unexpected extra costs. Nonetheless, with such a huge gap between the spot-market crashes vs. contract rates, many shippers are better off playing the market since early 2015 as portrayed in the graph above. According to Neil Dekker, director of container research at Drewry, a global shipping consultancy, “The answer lies with fully addressing the revenue side of the equation and thankfully there are signs that the spot market is being addressed to some degree. The acid test for 2017 will be how the lines approach BCO contract negotiations.” – giving a nod to the annual Container Forecaster and Review 2016/17 report that stated: “We forecast industry profitability to recover next year, thanks to improving freight rates and slightly higher cargo volumes, and so record a modest operating profit of $2.5 billion in 2017.” Drewry continues in the report: “We forecast industry profitability to recover next year, thanks to improving freight rates and slightly higher cargo volumes, and so record a modest operating profit of $2.5 billion in 2017. HOWEVER, the anticipated recovery needs to be put into perspective, while average freight rates are expected to improve next year, this will follow several years of negative returns and will still leave pricing well below the average for 2015. A key unknown remains carrier commercial behavior which has proven unpredictable and counterintuitive.”

 

In conclusion, as the shipping industry rapidly evolves over this particularly bumpy peak season, everyone in the industry is looking at the top three things that can influence wide changes within the industry. On center stage, the industry is currently looking at the sale of Long Beach’s TTS terminal, trucking’s sluggish demand, and the ultimate groundwork and conclusion for 2017 contract negotiations; we will finally see where the shipping industry is headed for as we start the 2017 shipping season with most, if not all, companies struggling to financially tread above water in the deep red sea of negative numbers.

 

 

Additional Information:

Hanjin to Sell Assets as Containers Pile Up, Long Beach Cargo Drops (LA Business Journal)

HMM to Compete with MSC for Hanjin Shipping’s Long Beach Terminal (Hellenic Shipping News)

Hanjin Shipping to Sell Stake in Long Beach Terminal Operation (Korean Times)

Drewry: Container Shipping Market Has Bottomed Out (GCaptain)

Swift Transportation Posts Higher Profit, Lower Revenue (WSJ)

Volume Guarantee Could Complicate Hanjin’s Sale of Long Beach Terminal (JOC)

Swift Slices More Capacity as Pricing Pressure Persists (JOC)

Low Rates Cut Profits for Intermodal Trucker J.B. Hunt (JOC)

Asia-Europe Shippers Prep for Rate Increases in 2017 Contracts (JOC)

As Hanjin’s Chaos Rages On, File Your Claims NOW

Suk Tai-soo, president and chief executive officer of Hanjin Shipping Co, arrives at a court in Seoul, South Korea, August 31, 2016. REUTERS/Kim Hong-Ji

Suk Tai-Soo, president and chief executive officer of Hanjin Shipping Co., arriving at court in Seoul, South Korea on August 31st, 2016

Source: http://www.reuters.com/

 

Exceeding the 1986 collapse of United States Lines, consultancy Alphaliner has declared that Hanjin Shipping’s bankruptcy is now officially the largest ever for a container shipper in terms of capacity. With so much press coverage regarding Hanjin’s bankruptcy, very little is given regarding how to proceed – leaving many people frustrated, confused, and angry as they try to sort out this Hanjin debacle during prime peak shipping season, a time where many are gearing up for holiday sales. An October 21st, 2016 screenshot of Hanjin’s website landing page now displays a series of floating windows with hot links directing visitors easier access to what they are trying to accomplish:

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Perhaps the most interesting side note slipped into this bankruptcy flurry though, is the little known fact that if you believe you have a claim against Hanjin, you need to file that claim in the Korean bankruptcy proceeding between October 11th through the 25th, 2016, with reports that if you miss that claim deadline, you will be out of luck. With a handful of Korean lawyers representing the interests of cargo owners and other potential claimants, they should be contacted immediately if you believe you need to file a claim.

As Hanjin containers pile up and cause a delay in the entire freight forwarding industry, Hanjin Shipping Co. has asked its customers to pay more than usual to bring freight into U.S. ports, creating a backlog that could keep goods off the shelves during the holiday shopping season. With everyone along the supply chain now demanding higher fees to unload and deliver cargo that was stranded abroad the South Korean shipper’s vessels, logistical problems have persisted and economic repercussions are still yet to be seen. “I don’t see a scenario where there isn’t a minimally shortened holiday retail season, and I see the potential for a very shortened retail season.” Said attorney James Van Horn, a restructuring specialist at McGuireWoods LLP, a representative of Eastman Chemical Co., whom is a Hanjin client.

With huge name companies like Wal-Mart Stores Inc., Kroger Co., Eastman Chemical, and Forever 21 Inc. all filing notices to appear in the U.S. bankruptcy case for their claims, many lawyers feel that the fee increases that have exponentially grew since Hanjin’s filing has made it wildly difficult to predict the costs of bringing in stranded ships into U.S. ports. “I’m not sure estimates will hold.” States Ilana Volkov, a lawyer for Seoul-based Hanjin, continuing on that her best guess would be anywhere from $1 to $2 million more per ship due to all the raising fees charged to customers with cargo on its vessels. As Hanjin has approached railways, marine terminals, and container supplies regarding alleged price-gouging, they have also notified the Federal Maritime Commission, but there’s little else it can do, with many troubled by the complaints of profiteering by people in the supply chain.

Nonetheless, lawyers for railways and other service providers have strongly objected to the term “price-gouging” and have simply stated that their clients were only trying to get Hanjin to cover the losses they were incurring because of these delays. As untended shipping containers gather on the docks, some still filled with holiday goods, many terminals and yards are now at full capacity during precious peak season when space is prized at a premium. Fed up with paying again and again for the same containers as prices have risen to double or more the original container prices since the bankruptcy, Ashley Furniture Industries filed papers October 4th asking the court to allow an “administrative freeze” on payments owed to Hanjin for services that were only partially provided as a result of the carrier’s failure to fulfill contractual obligations, stating that they’ve already accrued damages of almost $1 million USD since Hanjin’s collapse. Ashley Furniture asked for permission to set up an escrow fund for freight payments owned to Hanjin, estimating it will amount to about $986.41 per container.

With Hanjin ships now playing a childish last ditch effort of “Run-and-Hide” in international waters to avoid ship seizure and arrests, the shipping industry worldwide is slowly realizing two things (the TL;DR version):

    1. This overcapacity problem isn’t going to end anytime soon, and many ships will have to be scrapped prior to “supply and demand” righting itself to sustainable (and profitable) levels again.
    2. If you feel like you have a Hanjin claim, make it NOW before the Tuesday, October 25th, 2016 deadline. 

 

 

Additional Information:

Hanjin Shipping Files for Receivership, as Ports Turn Away its Vessels (Reuters)

Hanjin Clients Report Price-Gouging (Gulf-Times)

Make Your Hanjin Bankruptcy Claims Now! (JdSupra)

For Bankrupt Hanjin, Costs and Containers Pile up in U.S. Ports (Workboat)

Hanjin Rejects Shipper Effort to Freeze Owed Freight Payments (JOC)

US Forwarders, NVO Urged to File Hanjin Claims Immediately (JOC)

Hanjin Ordered by US Judge to Release Cargo if Freight Cost Paid (JOC)

Hanjin Accused of Deception in Avoiding US Ship Seizure (JOC)

Wild Ride for Hyundai Merchant Marine

Source: http://worldmaritimenews.com/

 

After the world’s biggest container capacity operator, Danish conglomerate A.P. Moller-Maersk, announced in late September that they were planning to break up their company into Transportation and Energy units, there has been intense speculations on Maersk’s takeover capacity of financially ailing Hyundai Merchant Marine (HMM), or of Hanjin Shipping after they filed for bankruptcy protection. On September 22nd, 2016, an executive container operator of Maersk Line mentioned that they were on the lookout for new acquisitions. The week following that statement, Hanjin’s shares rose more than 40% after the Maersk executive mentioned that acquisitions would be Maersk Line’s preferred growth option. “Buying Hanjin or HMM are rumors invested out of thin air. Maersk isn’t really interested in the Korean operators.” Said a source involved in the matter.

The Korea Development Bank, who is the largest creditor of the highly indebted HMM company, is currently working on a restructuring program for stabilization of the carrier and helping HMM improve their finances. From the looks of it, it seems that Korea Development Bank will be highly unlikely to sell HMM to a foreign buyer, since “The Korea government will fight tooth and nail to keep at least one national carrier. It’s a matter of principle to have a flag carrier moving Korean exports around the world.” Said another source that declined to be identified. Shipping industry analysts have stated that it makes no sense for Maersk to make a move on HMM while they are negotiating a place in the 2M shipping alliance made up of Maersk and Mediterranean Shipping Co., a Geneva-based company. If Hanjin is able to avoid liquidation, it is expected to emerge from bankruptcy protection as a much smaller regional Asian ship operator. “If Maersk swallows up Hyundai, customer retention comes into play. Cargo owners want to have a choice of carriers to spread their risk.” Says Lars Jenson, chief executive of Copenhagen-based SeaIntelligence Consulting. If HMM becomes a part of Maersk, customers will look elsewhere for a carrier to be able to shop for better rates. History shows, when Maersk bought Royal P&O Nedloyd, another container shipping company in 2005, it initially lost all of the latter’s trans-Pacific market share while trying to consolidate before finally gaining some market share back again after the dust settled.

Because of a delay in the Asian economy, overcapacity in the container shipping market, and jaw dropping low freight rates, HMM fell into serious debt and creditors took over control in June, 2016. HMM started restructuring the month after due to decreasing liquidity, low cash flows, and suffering from a large amount of debt. A few days after rumors started spreading that Maersk Line would acquire HMM and Hanjin Shipping, Korea Development Bank Chairman, Lee Dong-Geol stated, “We are working over the restructuring of the company, which could help the state-run bank to improve its financial health; but selling the firm to foreign buyer needs a cautious approach. We need to see a bigger picture like fostering Hyundai Merchant Marine into the nation’s flagship shipper.” Another source involved in the matter added, “Buying Hanjin or HMM are rumors invented out of thin air. Maersk isn’t really interested in Korean operators.”

With decreasing demand, overcapacity, and a continuing cycle of price wars that have slashed freight rates to well below break-even levels over the past two years, all carriers have suffered huge losses, and smaller carriers like Hanjin and HMM are struggling to survive. HMM is South Korea’s integrated logistics and containerized freight Transport Company with over 50 sea routes and more than 100 ports of call. HMM operates almost 140 vessels and is the world’s 15th largest container line in terms of vessel capacity, and together with Hanjin Shipping, moves almost 100% of all of South Korea’s exports. “The talk among top industry executives is that Maersk will wait for creditors of small carriers going bankrupt to knock on its door and discuss buyout deals at very low prices.” Mentioned a close source that asked not to be identified. Out of the top 20 carriers currently in play right now, executives with a long history in this industry expect less than half of the carriers to still be operating 10 years from now, and estimate collective losses to reach up to $10 billion this year.

 

Additional Information:

Maersk Unlikely to Buy Troubled Korean Shipping Lines (The Australian)

Korea Development Bank Unlikely to Sell Indebted Hyundai Merchant Marine to Foreign Buyer (Maritime Herald)

Maersk Unlikely to Buy Troubled Korean Container Ship Operators (Wall Street Journal)

Verified Gross Mass = Huge Headaches

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Source: http://www.seaspace-int.com/

 

In January 2015, the International Maritime Organization (IMO), a sub division of the United Nations, amended the Safety of Life at Sea Convention (SOLAS) to require that the shipper is responsible for each packed container to be loaded onto a ship for export must first have a verified weight. This rule was brought on by the IMO since there were carrier concerns over mis-declared container weights and overstuffed containers contributing to accidents on sea and shore. This requirement became legally effective on July 1st, 2016, causing a slight ripple and annoyance within the shipping industry.

With some shippers accusing container lines of putting the cart ahead of the horse in implementation, there was still great uncertainty over how to define the proper container weight and how to transmit data to carriers. Many have also complained about a lack of global standardization and global enforcement protocols, while carriers and marine terminals are criticized on being free to set their own rules for transmission methods, timeframes, and consequences for incomplete or untimely data. Many also say it’s unfair to hold the shipper accountable for the accuracy of the container’s tare weight when the equipment may possibly belong to the carrier, or to a third-part leasing company.

Now that the trial period of adopting a “practical and pragmatic” approach to VGM regulations has ended October 1st, Risk Management Director Peregrine Storrs-Fox said that the high rate of compliance is “encouraging” – however “it remains to be seen whether the declared VGMs are accurate, representing the result of an actual weighing process.” Since anecdotal evidence suggests that many shippers are simply adding the tare mass of the container to the previously declared weight of the cargo in order to calculate GVM, according to many in the industry. VGM seems to add more problems than it solves, with significant IT communication challenges, and questionable accuracies on full VGM compliance, or how VGM is calculated. With many terminals yet to implement the recommended BAPLIE 2.2 EDIFACT message format, many wonder how these terminals will be able to communicate VGMs to carriers.

With the three month grace period for enforcement now officially ended, the need for regulators to continue their work in a uniform standard of enforcement, including a consistency in the degree of latitude given to non-compliant shippers and industry guidelines for VGM rules. These rules are still something that is highly lacking, full of red tape, causing massive backlogs, and imposing heavy costs on exporters – causing headaches for many in the shipping industry. “Everybody wants to avoid disruption and congestion. The best way to do that is to have a common process where the inputs in the system are always the same.” says John Butler, president of the World Shipping Council. He adds, “In terms of your documentation system and compliance system, you try and build it so it works everywhere because that makes it more efficient.”

 

Additional Information:

The SOLAS Container Weight Verification Requirement (World Shipping)

Shippers Petition U.S. for Relief from Container Weight Rule (American Shipper)

Shippers Slam Forwarders and Carriers ‘Exploiting’ VGM Rule to Add Fees (GCaptain)