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Forewarned is Forearmed: Maritime Industry at Stake

Forewarned is Forearmed: Maritime Industry at Stake

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Forewarned is forearmed. 2016 seemed to be a really tough year for shipping companies: Global financial slowdown and global meltdown have significantly affected freight companies and similar. Earlier this semester, Suzzanne Uhland wrote about the effects of such juncture in the industry, and after two months, the bankruptcy of the Hanjin Shipping Line caused a major turmoil and drove the world to confusion, as merchants had to find out another way to carry their goods.

As of past august, the company had to file for bankruptcy and stopped accepting new cargo. Its assets were frozen, ships were forbidden to offload and take aboard cargo, as there were no guarantees that its employees would be paid. Being Hanjin the world’s seventh largest container and freight carrier, it is not a total nonsense to wonder what possible actions both carriers and merchants can take in order for them to thrive and avoid such aftermath under today’s framework. Soon after the company filed for bankruptcy, the cargo, for which the company was responsible, was inexorably left in limbo. The situation got so tough, that some of Hanjin ships were reportedly seized in China on behalf of creditors, which is why a South Korean court allegedly tried to help the carrier to prevent its ships from being seized in other countries by trying to rehabilitate the carrier, even though the most likely scenario was to have the company’s assets liquidated.

Hanjin’s economic situation was critic: the company had a debt of $4,900 million dollars. And given the fact that it was one of Asia’s strongest carriers, its bankruptcy revealed not only that the company had indeed a problem —it had been losing money for several years and had to file for bankruptcy protection after its creditors refused to back it up—, but that there is a generalized issue that has been affecting the shipping industry and leading companies to follow the same fate. The Hanjin bankruptcy has been just the first major disturbance in an industry that is clearly experiencing difficulties and, furthermore, expected so suffer major losses that would amount up to $6 billion dollars by the end of the year. As Hanjin, Maersk Line —the world’s biggest shipping carrier and freight company— lost nearly $115 millions dollars during the first semester of this year, which is definitely something that requires further assessment, since during the same period of 2015 the company had a profit of $1,22 billion. Such pejorative scenario gets worse should the bigger picture were seen: alongside Maersk and Hanjin, most of its competitors reported two-digit depletions in revenue during 2016.

Image courtesy of ROBERT HUFFSTUTTER at Flickr.com

This inception of this juncture emerged during the past decade when the majority of carriers and shipping companies spent millions on bigger fuel-efficient ships as oil prices were going through the roof. Ship manufacturers, port officials, and container lines were expecting to benefit from China’s profuse demand, going from metals to tailored hand crafted purses. Today, as mentioned earlier, the economy is showing a marked slowdown: it has become lazy, somewhat sluggish and heavy, nurtured not only by the slowdown in China but by regressions and contractions in Brazil and Russia as well, which ultimately accounts for today’s plummeted global economic growth.

In order to thrive, companies have gone on a consolidation streak, and mergers and acquisitions have been emerging around every corner of the globe. Since 2017 is expected to worsen such decline, the likelihood of having more freight lines and more carriers filing for bankruptcy starts to get higher, especially when global freight rates depicted a downsizing of almost 10% in 2015.

But what is about to come is rather uncertain: the flow of goods after Hanjin’s bankruptcy and other major freight lines compromised have left the industry in disarray. Experts have agreed that the only way to make the industry profitable again and fix today’s oversupply of carriers and ships is to inflict a selective culling on older vessels. For years the shipping industry has been trying to thrive under a situation of unprecedented capacity, and, who would have thought, even though capacity is often related with something positive, in reality, it was responsible for damaging both rates and profitability in shipping lines. The vicious circle of trying to improve and enhance profitability by acquiring larger ships —capable of holding more containers—, harnessing economies of scale has definitely failed and, what is worse, has left the industry at stake. Such scenario could have been to some extent prevented: it is widely known that when capacity grows much faster than demand, crisis emerges and rates and income, as well as revenue, plummet.

Under this framework, it will not be rare to see other companies trying to raise liquidity and restructure their debts; an unprecedented struggle to gain control of their containers —just to avoid containers being held as Hanjin’s— is likely to be seen soon enough. The consequences of the vicious circle will span over the whole international supply chain and the shipping industry.

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