Shipping Industry Suffering from Overcapacity - Research Paper Example

 Shipping Industry The shipping industry is going through economic hardships as global trade has collapsed and freight rates have fallen because of overcapacity. Freight rates have steadily declined over the past few months, with the European market witnessing the biggest decline. Where previously one or two shipping companies vying for cargo, now there are about seven to eight companies applying for a cargo.Shipping lines during boom times had expanded capacity in order to meet the growing cargo demand. They are now are now in a tight spot because of the slowdown in trade worldwide. The slowing down of seaborne trade has had a negative impact on trading volumes. This has forced cargo shipping lines to implement cost cutting measures and also adopt other measures such as reduction of fuel consumption, deferred delivery of new vessels, taking ships out of service and parking them and sending ships for scrapping. "The problem is partly to be blamed on some of the shipping lines themselves which expanded slot capacity growth beyond the levels of actual trade growth. As a result, the shipping industry is facing serious challenges," says Rohan Masakora (2009), who is the Secretary General of Asian Shippers Council. "When comparing merchandise movements from Asia to Middle East and vice-versa, it seems there is a greater imbalance on some trade routes creating a need for more re-positioning of empty containers, which is a burden on [shipping] lines," he further added. Such adverse conditions are predicted to last until 2014 according to experts. Further the imbalance of trade between the Middle East and Asia is also affecting the bottom lines of shipping companies. There may be consolidation in the industry but this may result in smaller lines becoming targets for acquisition. As mentioned earlier the shipping industry itself is to be blamed. Some bankers are also to be blamed. In the brief period when interest rates were low and world trade was booming, freight rates sky rocketed. This in turn led to a rush of new ordering. According to Anthony Hilton (2009), “This sparked off a collective loss of reason in the industry, which led to a rush of new ordering, the likes of which the world has never seen”. In earlier times the decision to order a ship was taken after much thought with the availability of finance in mind. Suddenly the new entrants started ordering without consideration of money availability and on credit which was easily available from the banks. There was a spate of over-ordering of ships of all kinds. The lines that are most likely to fail are among the smaller carriers. “I don’t believe that the big companies will go out of business,” said Anil Jay Vitarana, president of United Arab Agencies. He also said that “They have deep pockets. Eight of the (top) 10 are not totally liner operators.” Whereas the Japanese carriers have large Japanese trading companies supporting them the Chinese carriers are not likely to fail as they are largely controlled or backed by governments. But many other carriers do not have such guardian angels, and shipping executives are expecting some carriers to fail. Many of the top-tier operators like Maersk and CMA CGM have initiated vessel-sharing agreements between Asia and North America. “A year ago, we would have called them strange bedfellows,” Vitarana said. “People will find ways to survive.” The shipping industry lacks political clout that can put pressure on governments to bail them out. This is mainly because carriers do not employ large numbers of workers from the countries where they are based. Only some big shipping companies eventually may lobby to put pressure on Governments to intervene. But there is no guarantee that Governments will yield to pressure. Many shipping lines are bound to fail in this scenario. Some container terminals too are facing trouble. Terminals that had taken funds from investment banks and infrastructure funds in the boom period are in trouble. The decline in U.S. containers has forced some of the recent terminals who have failed to meet the agreements with lenders, may be forced to sell to repay the loans. In the same way, carriers that operate terminals may be forced to sell some of them in order to survive. The global economic crisis has caused cut-throat competition and it is believed that all companies may not survive. In such conditions it is inevitable that some shipping lines will collapse while some have become vulnerable. Many experts feel that CSAV of Chile, CMA CGM of France, Hapag Lloyd of Germany and Zim of Israel are the most vulnerable. The main reason for this is overcapacity For many months now, owners, bankers, operators and brokers have been speculating as to which line the most vulnerable was following the worst shipping downturn in the history of the shipping industry. CSAV has been singled out frequently. One reason for this again is overcapacity. Also it built up a global network without having a core market in any of the big east-west corridors. The death of Ricardo Claro, the founder of CSAV founder is likely make the carrier vulnerable to acquisition. As such CSAV is facing difficulties in raising capital to bail out. Hapag-Lloyd is another shipping line that is vulnerable because freight rates have fallen. Even though it is recognized as probably the most efficient in the industry is struggling to fight bankruptcy. The current prices have resulted in it not making any profit on any of the routes and it needs about 1.75 billion euros to survive. Prices are the main reason for its financial woes. Shipping companies are currently receiving only about $500 to per container from Asia to Europe which is much less than the amount they need to cover costs. Another reason is that its ships have been cruising at half the normal speed for months now in order to make the trips last longer and to camouflage its excess capacity. An estimated 500 of its container ships are idle and lying parked round the world. It also has those ships which it had over-ordered during the boom period. These ships would be soon coming out from China and Korea. The company had over ordered largely due to the soft loans it got from governments who wanted to keep their yards open and operating. In addition Hapag-Lloyd has been hit by another crisis and that is the urgent need to transfer a substantial amount from its profits to its parent company TUI that has been ailing for some time now. The Hamburg shipping company has not been able to build reserves and is in dire need of outside help. Its condition has made other ship owners, shipping company executives and bankers around the world nervous. Their fear is that if a company like Hapag-Lloyd is finding it difficult to survive and has become vulnerable then any shipping company can become the next victim. CMA CGM container line too has announced a restructuring as it faces losses due to the biggest crisis that has hit the shipping industry. The company, which is based in France, has the world’s third-largest container ship fleet as a result of the fast expansion it made through acquisitions and purchases of ships during the boom period f the shipping industry. CMA CGM has for long been seen as one of the companies most vulnerable to reduced earnings and traffic volumes. This is due to the fact that the company has huge obligations to find money for the new ships it had ordered like many other companies during the shipping industry’s boom period. It is estimated that it has about 50 per cent of its existing fleet of ships on order. Zim Integrated Shipping Services which is Israel’s largest container shipping line, is a perfect example of how shipping lines overbooked new ships. The company with a view to grow wanted to increase its fleet strength and had at one time 41 ships on order. Today Zim is trying to slim down its expansion plans and is negotiating with shipbuilding firms to cancel or at least defer delivery some of the new ships ordered. Zim Integrated Shipping Services which operates only one Asia-Europe service is doing away with this service and instead is buying slots from other carriers to service existing commitments. Israel Corp., the holding company that controls 98 percent of Zim, however has moved in to rescue it by infusing about $150 million after Zim reported a third-quarter loss. It is clear that those shipping lines that can manage over-capacity and contain maintenance costs and have a clear and focused management plan may survive the present market conditions that experts say will continue up to at least 2014. Further it appears that consolidation of shipping companies is inevitable. This will result in fewer and larger carriers surviving. All shipping companies may not be in a position to run individual vessel services in all routes but may have to come to vessel sharing agreements with other liners. References 1. Anthony Hilton (2009), Over-capacity could sink shipping industry, http://seekingalpha.com/instablog/183929-sober-realist/21098-over-capacity-could-sink-shipping-industry 2. Rohan Masakora (2009),Quote retrieved from  http://www.business247.ae/Articles/2009/11/Pages/11112009/11122009_ce87a456616d483781e6dff8cedf7dbd.aspx on 18/11/09 3. Vitarana Jay Anil (2009), Quote retrieved from http://www.thinkmaritime.com/2009/01/12/container-shipping-industry-faces-an-abundance-of-questions on 19/11/09 . . Read More