First about Hanjin, we have a short chronology of events, which is part of the global shipping story that is currently struggling in a down turn.
Hanjin Shipping (OTC:HNJSF) is the largest Korean Shipping line having a fleet strength of 99, out of which 62 are owned. It is part of the Hanjin groups that also owns Korean Air.
Hanjin Shipping is among the top ten global container carriers, which has APM Maersk (OTCPK:AMKAF) as the global leader, followed by CMA CGM, MCA, COSCO (OTC:COIVF), Evergreen (OTC:EVGQF), Hapag Lloyd (OTCPK:HPGLY) as the key players. Hanjin moves 2.9% of the global containerized cargo.
In April 2016, Hanjin applied to its creditors for debt restructuring, in order to avoid formal insolvency proceedings. On 13 th May Hanjin announced to create a new alliance with Hapag-Lloyd, "K"Line, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and Yang Ming covering all East-West trade lanes.
On August 31, 2016, Hanjin filed for bankruptcy protection at the Seoul Central District Court and requested the court to freeze its assets, after losing support from its banks the previous day. The Korean Government is reported to have taken a decision to slowly move Hanjin towards liquidation. This would be the biggest bankruptcy in the shipping industry since its inception.
Those who were following the Shanghai Containerized Shipping Index (SCFI) would have noted a sharp uptick in the latter half of August as the index moved from 600 to 763. But still the current levels are a far cry from the levels of 1100 even two years back.
The global containerized shipping industry woes are well known. It is beset with over capacity and although the brakes were put on in terms of ordering new ships, the inventory in the pipeline were too many than the actual need.
Containerized Shipping Industry Analysis
The following data provides some insight on containerized shipping fleet size and the how the top ten orchestrate the bulk of the containerized trade.
|Data as of End Aug 2016: No of Container ships (Own plus Chartered)|
|APM Maersk||CMA CGM||MSC||COSCO||Evergreen||Hapag Lloyd||PIL||HSG||Yang Ming Marine||OOCL||Hanjin|
Let us look at the BIFA Report of 2015 to see how 2015 looked like for the container shipping industry capacity 'over-hang'. Global Shipping Consultancy Drewry reported:
" The recent slowdown in world trade has forced Drewry to halve its forecast for container shipping growth for this year to just 2.2% and revise down estimates for future years. Meanwhile, an additional 1.6 million teu of new capacity is being added to the fleet this year, equating to a growth rate of 7.7%. As a result, Drewry's Global Supply/Demand Index, a measure of the relative balance of vessel capacity and cargo demand in the market where 100 equals equilibrium, has fallen to a reading of 91 in 2015."
Alix Partners in their 2016 Shipping Outlook have given the exact position of the shipping industry in terms of financial performance. Industry consolidation, powerful alliances and mergers and acquisition have been the order of the day, but the results have still been lackluster. The real issue has been the cost of consolidation fueled by debt.
The summary of this report for 2015 says, "Cash from operations fell 12%-almost twice as fast as the EBITDA decline of 7% (figure 1). Those figures suggest that carriers have to fund working capital at a greater rate than they have previously. Likely causes include tighter payment terms imposed by, for instance, fuel vendors and longer payment cycles from shippers. In fact, heading into 2016, the finances of those carriers are worse than the latest last-12-months (NYSE:LTM-OLD) period results."
The data speaks for itself.
|Carrier Industry Financial Results||$ Billion|
|Cash from Op||12||10||15||20||18|
Creating a better supply demand balance is the need of the hour but the slate of vessel deliveries scheduled for 2016 and 2017 remains robust, and vessel scrapping activities remain muted. The woes of the industry are better reflected in the Altman Z Score.
Falling revenue, declining profit margins, and heavy debt loads have left the container carrier industry in distress, clearly indicated by the average Altman Z-score of 1.39. Any score less than 1.8 is considered as signs of financial distress.
Some of the leaders like Maersk have embarked on a cost cutting drive that leaves no stone unturned. But the cautionary public statement given by the new CEO Soren Skou on August 12, 2016 still says a lot,
"In a second quarter impacted by low growth and falling prices in nearly all our markets, the Maersk Group delivered an underlying profit of USD 134m. The result is unsatisfactory. Cost reductions and operational optimizations, however, made a significant contribution to mitigating the impact of the negative market conditions. The Group's expectation for 2016 of an underlying result significantly below last year is unchanged. To ensure the future strength, profitability and development of new growth opportunities of the company, the Board of Directors have initiated a strategic review of the company."
Hanjin bankruptcy therefore comes at a time that would aid the process of consolidation and alliances. But an industry that is trying to restructure, the looming bankruptcy of some of the others would weigh heavily in the debt markets.
But one has to go to the core of the problem. The problem is not containerized trade going down; in fact containerized trade has been doing moderately well going according to World Bank data.
What is strikingly different is the shifting of the epicenter of the global trade to the Far East as is evident in this data from Worldwide Shipping Reports.
57.6% of global trade through Exports happens from Far East as is shown in the pie chart attached. These far eastern ports import only a fraction of what they export. This means that world's center of gravity is located within few hundred square miles in the Far East. If there is such a mismatch between exports and imports, bulk of the containers move empty in the ocean between Atlantic and the Pacific. Only a fraction of this cost can be passed on by the shipping lines to the customers, such has been the problem of over-capacity. No wonder that most of the smaller shipping lines are operating at unsustainable margins.
The empty haulage syndrome and efficient use of traffic lanes through alliances would need new partnerships. This may not be happening overnight. But Hanjin bankruptcy would create new alliances and some of the current problems of ships stranded at sea would be only temporary.
Investors in the shipping industry must note that the journey to better margins would still take a while. In the meantime, the chartering lines and shipping lines would need to coordinate how the pie would be re-constructed that leaves better efficiencies in the lanes.
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