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Starting from the bottom, container market set for slow rebound

Container shipping is set for a gradual recovery after hitting bottom with the collapse of Hanjin Shipping, despite continuing concerns over weak trade growth and an oversupplied fleet, according to Drewry Shipping Consultants.

“Hanjin’s receivership represents the trough of the container shipping market,” said the London-based firm’s latest Container Forecaster and Review 2016/17.

Container lines will post improved results in the second half of this year following a worse-than-expected second quarter, but Drewry still expects a collective operating loss of $5 billion for 2016.

“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, although average freight rates are expected to improve next year, this will follow several years of negative returns and will still leave prices “well below” the 2015 average.

A key unknown, according to Drewry, remains container lines’ commercial behavior, which has been unpredictable.

“Hanjin’s demise may mark a watershed in this regard, but liner complacency on the risks of insolvency may challenge this notion."

The rise in fuel prices could support higher freight rates through bunker surcharges, but it will also increase operating costs.

The virtual standstill in shipyard order books is a major positive, along with rapidly increasing scrapping of ships.

“But even so, the next two years will still be very challenging on the supply side, with the annual fleet growth of between 5 and 6 percent and many more ultra-large container vessels to be delivered.”

The industry is responding by rapidly consolidating through necessity rather than design, and the carriers that weather the prolonged slump have the potential to emerge the strongest in 2019 and 2020.

Hanjin’s plight has spotlighted the industry’s failure to focus on revenue, and with increasing debt this is a “genuine issue,” says Drewry, which estimates revenue may reach $143 billion in 2016 compared with $218 billion in 2012.

“Hanjin’s failure is the culmination of several years of poor commercial decisions and mismanagement, not just by Hanjin, but the industry as a whole,” said Neil Dekker, Drewry’s director of container research.

Hanjin’s collapse did not necessarily signal a major tipping point for the industry, but was more of a sideshow as freight rates had “crucially” already turned a corner at mid-year.

More consolidation is likely “but it is not necessarily the route to the promised land,” Dekker said.

“Senior company executives talk about the synergy savings of hundreds of millions of dollars, but this means nothing when it is too easily given away in weak contract negotiations and the desire to maintain precious market share.”

Instead, carriers should fully address the revenue side of the equation “and thankfully there are signs that the spot market is being addressed to some degree.”

Bruce Barnard - JOC 10/20/2016
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After the collapse of Hanjin Shipping, shippers want some assurance from alliances that there are emergency plans in place if one of their container lines can’t deliver its own cargo and that of its member partners.

Until Hanjin’s bankruptcy stranded some 540,000 containers, equating to about $14 billion in goods, shippers generally viewed alliances as a necessary evil. The benefit of helping smaller container lines stay afloat by allowing them to pool their ships to fill larger ships outweighed the trouble of finding that one’s cargo was being shipped by an unfavorable carrier within an alliance. That changed on Aug. 31, when shippers booking with Hanjin, other CKYHE Alliance members, and carriers with slot-sharing agreements with Hanjin found their containers stranded.

The webs of vessel-sharing alliances aren’t new, but the Hanjin debacle has brought the risks in this volatile industry to the forefront, Federal Maritime Commissioner William P. Doyle said at last month’s the annual Port Industry Day at the Port of New York and New Jersey. “Now it’s not hypothetical or theoretical,” he said. “It’s reality.”

Doyle said alliances should be required to devise failsafes in case a member folds. Such an effort faces two tough challenges. Using the Shipping Act of 1984, the five FMC commissioners determine whether a VSA will likely cause an unreasonable decrease in service and/or an unreasonable increase in cost. If carriers’ refused to include a failsafe plan within their VSA, they wouldn’t likely fall afoul of those parameters, a maritime attorney told The Journal of Commerce.

Doyle, though, isn’t so sure that carriers couldn’t be required to include a failsafe plan in their alliance proposals. “There is nothing in the Shipping Act that says we can, and there is nothing in the Shipping Act that says we can’t” require a failsafe plan, he said.

Beyond whether the FMC has the power to require a failsafe plan, there’s also the question of whether the other four commissioners would be on board.

FMC Chairman Mario Cordero said the agency is working to mitigate disruption risks to US shippers by analyzing how alliances affect containerized supply chains, and by collecting best practices to fight congestion. The agency, he said, needs more staffing to monitor the complexities of alliances and more transparency of discussion agreements involving marine terminals, with the goal of greater accountability for such facilities.

Cordero hinted that if those paths were exhausted and new tools are needed to protect the US shipping public, then a change to the Shipping Act might be warranted.

The risk of alliances “is certainly a conversation that shouldn’t be dismissed. At the end of the day, though, as it relates to Hanjin, much of this is up to the bankruptcy courts in New Jersey and Seoul. That process will take months.”

Although the FMC has been more public in helping shippers during the Hanjin crisis by mitigating disputes on demurrage and detention, and offering shippers guidance, the Commerce Department has been aiding in the background. Commerce officials have helped encourage the South Korean government to lean on the Korea Development Bank to provide Hanjin with money needed to get stranded cargo released.

“As the supply chain has evolved over the past decade, it is important for the government to re-evaluate its roles and responsibilities for dealing with different disruptions,” said Jon Gold, vice president of supply chain at the National Retail Federation.

Time is running out for shippers wanting alliance failsafe plans, as two alliances are set to sail in the spring and a third, the 2M Alliance of Maersk Line and Mediterranean Shipping Co., may be joined by Hyundai Merchant Marine, pending approval from US, European, and Chinese regulators. The FMC is considering the Ocean Alliance — involving CMA CGM, China Cosco Shipping, Evergreen Line, and OOCL. THE Alliance — MOL, NYK Line, “K” Line, Hapag-Lloyd, and Yang Ming Line, but presumably without originally intended member Hanjin — also needs regulatory approval.

With little immediate pressure to create a failsafe plan, alliances could volunteer one, for the benefit of the industry and as a savvy way to assure shipper customers they won’t be left at sea.

JOC 10/10/2016
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ASF Logistics strives to be the company of choice for global logistics by fostering a collaborative environment of partnerships, teamwork, and creativity. Our goal is to consistently deliver a competitive advantage to our customers through innovative and customized solutions which add value and sets them apart from their competitors.

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  • Cross-docking and trans-loading
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