No cures for self-inflicted ailments

No cures for self-inflicted ailments

Tim Routh from China Sea Rates on lessons to be learned from the Hanjin crisis.

We on average see between 8,000 to 10,000 rates a week through our operation system www.freightcracker.com and that would supply rates to over 1000 outlets globally. We also have a global LTL/LCL rate solution as well. I wait each week for the Shanghai Container Freight Index as we beat it on price and I have watched its downfall and stagnation for years. The market’s poor performance has also delivered blows to the contracts of the larger shippers. They now have fixed and floating schemes and want more freedom to exploit lower rates. Nobody is safe as shipping is such a cross pollinated industry. Containers travel on other shipping lines and other shipping lines use other networks. One failure of a shipping company may be linked to several different situations, as Hanjin has shown us.

Now Hanjin has collapsed and the shipping market is suffering and trying to fix a solution to the situation. Yet nobody is looking at cause and effect across the market. A suggestion I have been given is that Hanjin is the Lehman Brothers moment of banking. No sadly this is not the huge meltdown of Lehmann Bros and I fear that it is still on the horizon, hidden in of the many vessels sailing on it.

To correlate Lehman Bros to shipping many have criticized Lehman was a credit issue and banking related, but I draw a shocking closeness to the banking issues in 2008/9 to the current shipping market. The main issue that caused the banking crisis in 2009 was an oversupply one. Credit which the banks were providing was normally traded to clients that matched a strict and high credit criteria or it only applied to a section of their market that was sound financially. Once the banks relaxed the issuing of credit they had an oversupply of credit. Shipping lines have a huge oversupply issue very similar to the banks. Several shipping lines have ordered larger vessels without doing supply and demand analysis correctly. What makes the oversupply issue worse is that it is self-inflicted and to date no shipping line has a proper answer.

The next similar issue to the banking issue is that the credit ratings of shipping companies have all dropped to below B grade and into Junk or C grade. Some shipping lines are not able to be rated they are so poor. Yet nobody seems to focus on the credit worthiness anymore, this occurred in a huge way with the 2009 banking collapse. Poor ratings, mixed ratings/exotic ratings and ignorant recognition of the credit worthiness of a company/person was a huge factor of the banking 2009 collapse.

Of the 30+ credit ratings reports related to shipping lines I have read 85% of the ratings agencies focussed heavily on shipping rates and mainly those of the Shanghai Container Freight Index. Their evaluation on the credit rating is market focussed for today’s reports, where as previously it was shipping company focussed. Their reports indicate the future ratings of the shipping lines based on freight rates. Those rates in the reports are much higher than today’s market rates. Maersk had to have $2,000 as an average container price over the first six months of 2016 to hold a rating. The rate that it was over the period was $300 less per container. This is a huge difference. These ratings are critical for companies as they determine lending ability, cash flow position and future company operations. Yet at no stage has anyone in the shipping industry done a full analysis. The entire shipping industry may be rated poorly. If this is the case then bank, investment and institutions have either started to exit their money or are planning to. Either way money will be tight. This will be the next hurdle for the shipping industry.

A huge issue is private shipping companies that do not make their financials public. One is the second biggest shipping company in the world and the shipping industry cannot gauge how that company is going. One of the big issues with Lehmann Bros was the amount of other companies and countries that were massively effected by their failure. I am not saying that private shipping companies must at all times report their financial affairs. Yet global and country authorities should set market points on shipping rates and a duration before any shipping companies must disclose their financials. For example the Shanghai to West Coast USA rate is $200 or less for six months. Then all companies would have to publish their financials, if they wish to ship cargo. Prevention is better than a cure. When Lehmann failed the US government had to bail out American International Group (the nation’s largest insurance company) with $40+bn.

This is not a theory, rather an explanation on how critical getting capacity and rates right are. In shipping the commodity we sell is time and space, the time being the vessel sailing and space being a sea container. This is our working asset or income. If that shipping space is not taken up during the time we have a zero asset. This means we make zero income. Banking or lending is similar. They issue credit and time. Another alignment with the 2009 collapse. A shipping line cannot close its assets and wait for market conditions improve, such as a copper mine.

The actual shipping market has lost depth and forecast. The traditional shipping market had several layers, but there was the top of the market and the bottom. Big importers and shippers at the top secured the best low and long term rates possible and the lower end of the market were forced into the spot market and usually attracted the higher rates. The lower end of the market subsidised the top and we had a happy medium rate in the middle. For the last three years all grades of shippers had access to the same rates. Not having scalability in a market means that there are no buffer or safety built into the income derived from the rate. It is simply poor returns across the market, no matter the shipper. Margins are small on big turnover.

A concern that is growing and unnoticed is the actual accounting practices the shipping lines use.

Each shipping line is global and has offices, assets, facilities and representation in regions and cities around the world. How uniformed are their account practices? Do they use the same software and procedures? There may be great differences with Middle East’s office account reporting to head office than say Brazil. I know firsthand of a shipping line that never handles and recognises aged debt and rolls said debt into the current years’ revenue. This is done on ‘detention’ charges. If this is happening throughout an organisation then their figures may be substituted with poorer ones in reality or an accounting black hole may be present.

In summarising I would offer that if two of the above points outlined continue to occur for the next 12 months then a minor shipping line will suffer the same fate as Hanjin. It may not be a collapse, but a forced merger. If you have greater multiples it will be a top five shipping line. Whilst the chances of a major shipping line being taken are low the fact that there has been no keen participation by these lines to raise shipping rates would tell you there is a subliminal long term goal of market share over profits in play. Given this it will be a question of who has the most to gain and who has the most to lose. My advice is not to look at history, alliance and service. Rather I would be focussed on which shipping lines have the best support and business model to stay healthy in these leaner times.

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