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More pain ahead for shipping companies: Coface

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Sluggish global trade growth, overcapacities and plummeting freight rates have had a huge impact on shipping companies globally in the past year – especially small firms. 

In late August, Korean carrier Hanjin Shipping (the 10th largest shipping company in the world) filed for court receivership after its banks decided to end financial support.

Hanjin revealed debts estimated at 6000 billion won (about US$5.4 billion).

With 547,606 TEUs (against 93,000 TEUs recorded by US Lines in November 1986) Hanjin Shipping bankruptcy would be the largest ever in the shipping sector.

And it’s not the only major shipping company feeling the effects of the downturn.

CMA CGM’s (the 3rd largest shipping firm in the world) turnover has declined by 14.6% in the first half of the year.

These examples show the risk of bankruptcies for smaller players is on the rise, especially in Asia, warns Coface, a global leader in credit insurance and risk management.

Coface says the decline has been caused by a number of factors including:

  • Freight rates (SCFI) have fallen by 20% over the last two years because of the bad mix of higher supply leading to overcapacity, low transportation requests and tariff war.
  • Shipping trade firms are suffering from the world trade slowdown.Before the 2009 crisis, global trade grew twice faster than GDP (7.2% against 3.2% between 1995 and 2007). It fell to 3.5% between 2012 and 2014 with a 2.6% global growth. For the first time this year, global growth is expected to be higher than global trade (2.5% against 1.7%).

The current trend has been caused mainly by China’s slowdown, the decrease in commodity prices and more protectionism.

Against this backdrop of lower demand, supply has continued to increase.

This year world capacity has increased by 1.3 billion TEU (from 18 to 19.3). This mainly results from investments of the five biggest shipping companies (Maersk Line, MSC, CMA CGM, Cosco and Evergreen) which account for 55% of TEUs world supply (72% for the top ten).

This leads to a vicious circle, says Coface. The biggest companies can put pressure on prices and jeopardize the business models of smaller companies.

Coface has identified a number of factors that are likely to continue to weigh on freight rates and on the profitability of the sector in the coming months:

  • Oil prices are expected to remain low for the remainder of the year and 2017 ($44 and $51 respectively).
  • Freight rates are expected to rise modestly over the next 12 months and continue to threaten the profitability of all containerised liners. With a higher and less flexible breakeven point than the major players, small shipping firms’ profitability should be strongly impacted.?

In June this year CMA CGM merged with Singaporean NOL and created Ocean Alliance with Cosco, Evergreen and OOCL.

They aim at optimising their fleets of vessels, improve fill rates and achieve economies of scale. This trend is likely to push down prices further and therefore put pressure on small players in the months ahead, Coface predicts.

Therefore, Coface predicts the overcapacity issue will only be solved in the long-term, as an investment process usually lasts 2-3 years in the sector.

In the short-term, the merger and acquisition trend is likely to lead to a reduction in competition, and so weigh on prices. 

Coface’s risk assessment for the transport sector in North America is low, with a medium risk in Western Europe and emerging Asia.

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