This is not a new issue. In fact, the shipping industry has been battling for more than a decade against its own crisis; and the news about bankrupt shipping companies are nothing new at all. It is said that due to mergers and acquisitions, they will have been reduced to less than fifteen major shipping companies next year (considering that a year ago they were a little more than twenty.) The reasons are many, but, essentially, the main problem here is the imbalance between the supply and demand of shipping services, on the one hand, and the weak freight rates that barely cover operating costs on the other.
That is, in a nutshell, too many new ships for an increasingly scarce cargo. Shipping companies operate with larger vessels to save money without generating enough cargo to fill them. This imbalance, which is increasing year after year, has caused the collapse of the shipping prices and is pushing the profitability of the operations within the sector to the limit. The companies that saved during the time of abundance try to come out with mergers in a market which is already in very few hands. Those that have not taken that road have been driven into bankruptcy by the strong crisis that the sector is experiencing worldwide.
The industry has not adapted to the new reality of the sector. Although for the first time in history the volume of world maritime trade exceeded 10 billion tons, shipments expanded two years ago by 2.1%: The lowest rate since the outbreak of the 2008’s financial crisis. By contrast, the capacity of the world fleet grew by 3.5% in the same period. In the container segment, the difference is even more abrupt. While cargo is growing at a rate of 2%, the tonnage that ships can carry 8% more.
Read also: Winners and losers in the drop of oil prices, by Suzzanne Uhland
Moreover, as environmental awareness takes its place in the industry, operating costs are rising as a result of the demands of reducing emissions, controlling ballast water and implementing energy efficiency technologies. For example, it is expected that the collective cost for the industry to implement the Ballast Water Management Convention, which will come into effect in September this year, exceeds 100 billion dollars per year.
The business division of shipping giant AP Moller Maersk is the latest episode of this impending doom. The slow growth of world trade and the oil prices have forced this logistic giant to restructure itself into two major independent divisions. To this must be added the near disappearance of Hyundai, which have unleashed an unprecedented crisis of profitability in the sector, or the suspension of payments of Hanjin (South Korea.) As for the latter, Hanjin declared insolvency in September of last year after its main creditor denied a new line of credit and remained without liquidity to such an extent that it was unable to meet its current expenses.
Maersk, a leader in the port container industry, has focused on transportation and integrated logistics, in the first place, as well as in its oil division. The objective of this executive decision is none other than to strengthen Maersk Oil’s position in the Danish, British and Norwegian areas of the North Sea. Some people consider it a desperate decision, others think that it’s the only way out to avoid an imminent bankruptcy. The fall in oil prices this year has tremendously shaken the company. However, since the announcement of changes in the management scheme in June, the group’s shares have gone up 20%, reaching a capitalization value of 28 billion dollars.
The more the supply, the more the stubbornness of the shipping companies by building bigger ships to save money. The big companies bet on this strategy in the middle of the last decade mainly because of the high prices of fuel in previous years and the fast expansion of the international commerce. The aim has been to take advantage of economies of scale, ie, to reduce the costs of transporting each container by increasing the quantity on each route. With current prices, shipping companies can barely cover costs, and the truth is that building larger ships does not necessarily mean that companies will be more competitive. What happens here is that it simply reduces the unit cost while the low rates make the competition much more intense. This is a paradox in action.
Evidence of this is that of the ten largest shipping companies in the world today, seven have seen their revenues reduced and only two have increased their profits since 2015. Although the sector is immersed in a wave of mergers and acquisitions, the situation has not improved whatsoever. Many of the shipping giants have not the support of their government either directly in their shareholding or through the granting of public subsidies or preferential lines of credit from public financial institutions.
Let’s hope the rest of this year is less dramatic, as this has direct consequences on our lifestyles around the world.
* Featured Image courtesy of whitecat sg at Flickr.com