Patrik Berglund, chief executive officer of Oslo-based ocean freight rate intelligence platform Xeneta, said Hanjin Shipping’s insolvency has “turned the market on its head,” but the real question is “how long will this last?”
Shippers utilizing ocean freight rate intelligence platform Xeneta are still “reeling” from the knock-on effects of ocean carrier Hanjin Shipping filing for bankruptcy in South Korea, according to a recent commentary from Patrik Berglund, chief executive officer of the Oslo-based company.
Xeneta, which crowd-sources over 12 million contracted rates and covers over 60,000 individual port pairs from more than 600 major international businesses, said shippers have been hurt by the fact that cargo remains stranded onboard Hanjin vessels, increased rates, and “claims of under-capacity from the remaining liners.”
That last part is somewhat surprising, the firm noted, given that the container shipping industry has long suffered from fundamental overcapacity, meaning the supply of vessels far exceeded customer demand. This, along with weak global trade growth, has contributed to downward pressure on rates, and in turn, has pushed liner carriers to the brink of bankruptcy, or in the case of Hanjin, pushed it right over the edge.
In the weeks since Hanjin filed for court receivership in Korea, container freight rates have increased on major east-west trades, but Xeneta warned in a note earlier this month the boost in rates was no more than a flimsy disguise for the “fundamental weakness” of the ocean shipping market.
This proved prophetic last Friday, when the boost in container spot rates to the United States appeared to have petered out, with prices to the U.S. either remaining the same or falling back from the previous week.
Hanjin’s insolvency has the potential to “redefine the container shipping landscape,” said Berglund. “For an industry that has struggled with collapsing rates, severe overcapacity (8.1 percent at the beginning of 2016) and devastated profit margins – with even Maersk down 90 percent year on year for Q2 – this marks an opportunity to finally regain the upper hand at the negotiating table.
“Hanjin’s failure resulted in an immediate capacity reduction of up to 8 percent in transpacific and Asian-European routes and this gives competitors an obvious fillip,” he said. “We’ve seen 2M (MSC and Maersk) moving to launch a new transpacific service, while the feedback we’ve received from our community details rising rates, stretched capacity, claims of broken contracts – when agreed at low prices – and a need to go to the spot market, where quotes of between one and three months are not being contracted.
“In many ways, the market has been turned on its head. Now it’s the liners flexing their muscles again. The question is, how long will this last?”
And Berglund hits the nail on the head there. Most analysts expected the Hanjin news to create a short-term surge in freight rates, especially on the spot market, but without any guidance from the Korean Bankruptcy Court yet on what the results of the proceedings will be, we have no way of knowing if the increase will stick.
If, for example, the court decides to allow Hanjin to continue operating as normal – either on its own or as part of a merger with fellow South Korean line Hyundai Merchant Marine (HMM), which recently underwent a financial restructuring of its own – it is unlikely we will see a significant reduction in available capacity. And if capacity remains stable, prices will likely subside to the levels seen prior to Hanjin’s announcement.
But if the court decides to liquidate the company completely, selling all its available vessel assets for scrap (an extremely unlikely scenario in the opinion of most analysts, myself included), we could see rates continue to benefit, at least in the transpacific trade, where the majority of Hanjin’s operations are concentrated. The figure quoted by Berglund of Hanjin supplying 8 percent of total capacity is accurate, but only for trade between Asia and North America.
According to an analysis by ocean carrier schedule database BlueWater Reporting, Hanjin previously deployed 45 vessels with an aggregate capacity of 329,139 TEUs in the transpacific, 8.37 percent of the total deployed capacity in the trade.
From Asia to North Europe, however, Hanjin was deploying just 117,828 TEUs on nine vessels, about 5 percent of the overall deployed capacity in the trade.
For the majority of shippers using Xeneta, Berglund said their first priority at present is rescuing the estimated $14.5 billion in shipments stranded at sea, but long-term capacity concerns are also top of mind.
“Short-term rates were already rising on the main Far East Asian to North European port route, the world’s most important trade channel, since hitting lows in March,” he noted. “Then the market average price for a 40’ container stood at U.S. $552, in late August it climbed to U.S. $1,172 and now its U.S. $1,834. Transpacific routes have climbed from U.S. $839 in March to U.S. $1,887 now.
“As the year comes to an end, the tendering/bidding season starts for many European shippers,” added Berglund. “This will be a wake up call for the large-volume shippers who have maybe become accustomed to basking in long-term contracts at low rates. In a changed market, the carriers won’t be as accommodating. Last term’s prices will suddenly be a distant memory.”
He said the container shipping industry has been “stuck on a rollercoaster for years, and this latest corkscrew will do little to ease the sense of fluctuating rates and jolts in supply and demand.”
Berglund said, “Stability is sorely lacking, and Hanjin could be the tip of the iceberg, as lenders tire of propping up players that have been limping along in this difficult market for too long. For the time being, the carriers will enjoy exploiting the change of fortunes and their overcapacity gives them the means to step in and fill Hanjin’s hole. But this isn’t the long-term fix the industry needs.”
Xeneta: Shippers ‘reeling’ from effects of Hanjin bankruptcy
