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)