- Posted by Juan Pulgar 07 Nov
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Monday 10 October 2016, 11:37 by James Baker
FOLLOWING the collapse of Hanjin Shipping at the end of August, shippers are expected to pay much closer attention to the financial risks when selecting carriers in future, and carriers will need to be sure of the financial health of their alliance and service partners, or potentially risk losing customers.
Many shippers were caught in the Hanjin fallout unwittingly, having booked from other carriers who were service partners of Hanjin. Those shippers are now more aware that the risks extend beyond their own chosen service provider and some shippers will demand that their cargo be booked on the carriers’ own ships.
“There is still much work to be done to clean up the logistical chaos created by Hanjin’s bankruptcy, but even so there are lessons from the sorry mess that need to be learned to avoid a repeat occurring,” analysts at Drewry said.
“First, all stakeholders must understand that no carrier is too big to fail. Second, while Hanjin’s financial position was at the extreme edges and its demise is not expected to create a domino effect, a number of major carriers are still struggling and the risk of another following the same path as the Korean line cannot be discounted.”
Knowing this, any company doing business with ocean carriers must undertake more due diligence than was previously the case, Drewry added.
Getting financial visibility is not always possible, however, as many large carriers, such as MSC and Hamburg Süd, for example, do not publish their financial results and others only report at the group level with minimal data for container operations.
“The demand for financial transparency is increasing and we are aware that some large shippers are now requesting access to hidden financial information before entrusting their cargoes, in return for signing a non-disclosure agreement,” Drewry said. “As more shippers demand access to financial data during contract negotiations it will become harder for secretive carriers to hold down the drawbridge.”
Drewry’s proprietary index of container line financial stress shows that while Hanjin may have been an outlier, many other lines are also struggling. The latest data shows the index at its lowest level since it started during the 2008-2009 financial crisis.
“The decline in the index has coincided with the heavy reduction in container freight rates that dropped to historical lows in the second-quarter,” Drewry said. “As freight rates staged something of a recovery in the third quarter we expect to see some uptick when the third-quarter 2016 results are published, while the removal of Hanjin from the sample will also benefit the average score. Nonetheless, carriers will almost certainly continue to reside in the distress zone.”
While the level of financial distress among container lines varied, Drewry said only Maersk and OOCL scored high enough to make it into the cautionary zone, while the remainder fell into its distress zone.
“Hanjin’s bankruptcy has exposed the high level of financial risk that exists and has created renewed demand for financial transparency,” Drewry said. “Privately owned carriers will risk losing shippers’ trust if they do not provide any data on their level of indebtedness and balance sheet strength.”
Meanwhile, SeaIntel chief executive Alan Murphy points out that many shippers are questioning who might be next.
“Clearly, financial stability has been catapulted into a major competitive advantage in this environment,” he said.
But determining which line, if any, might follow Hanjin would not be easy. “The key aspect here is the creditors’ willingness to give more favourable terms or even additional cash, and these matters cannot be ascertained purely by looking at the balance sheets,” he said.
Moreover, shippers need to look at non-operating owners as well as carriers. Rickmers Maritime Trust has warned that without an agreement with its creditors it may not be able to continue operating, and while it may be able to secure funding, it highlighted the issue of non-operating owners, Mr Murphy said.
“As the carriers redeliver vessels, these owners get increasingly distressed and may eventually fold. If that happens then there will be an impact on all carriers having vessels from the bankrupt owner in their service, potentially causing operational disruption across numerous trades, alliances and carrier networks.”
For shippers there is no easy quick-fix to this problem.
“The best approach is for the shippers to do their homework in terms of risk management, both from the perspective of assessing the viability of not only the carriers but also the creditors behind the carriers, as well as the possibility to achieve a de facto risk mitigation spreading the cargo on multiple carriers,” Mr Murphy said.