In International Shipping News 21/10/2016
The shipping industry is meant to epitomize the word “globalization” but not in the true sense of the word, as shipping companies deal with the continuous onslaught of environmental and financial regulations. They are expected to be implemented globally in conjunction with maritime bodies trying to reduce the regulation impact on the balance sheet. The outcome sometimes is a mouse with an elephant’s trunk, meaning what looks good on paper is not always practical.
In principal, the rules regarding Emission Control Areas and ballast water treatment systems are important legislation to sustain the way we want to live in future generations. The ECA zone rules led to shipowners finding ways to reduce the sometimes crippling bunker fuel prices. Enter dual-fueled newbuilding orders and scrubber technologies. The unlikely respite to ever increasing operational costs came as a consequence of the oil price crash in Q4 2014 and the ongoing Saudi market share battle with US shale gas.
Shipowners are able to pass on the majority of bunker costs to charterers whether a ship is operating in or out of the ECA zones. In a sector like the container market beset with internal dominance price wars and a gaping supply/demand imbalance, the power of economies of scale continues to be an opportunity. Some shipowners have been able to offer below market freight rates in an attempt to gain market share on particular trade lanes.
Add the fact that the container shipping market outlook is underwhelming. Slower global trade growth and the unrelenting delivery of ever loftier sized container ships could compound the issue of low freight rates if nothing fundamental changes.
The Hanjin situation has shone a huge spotlight on the frenzied container market making a rare appearance into international newsrooms, as Hanjin has until 19 December to propose a rescue package to avoid bankruptcy. The true implications will not be resolved in the near future as the main symptom is inherent within the shipping industry, overcapacity.
Some owners are delaying deliveries into 2017 but along with planned demolitions this will be a token gesture for reducing capacity. The Panama Canal expansion offers exciting opportunities but the immediate impact for the container market is lower-capacity vessels making their final swansong to their rest beds. Their valiant service to our consumable good culture has brought home that globalization is relentless.
The impact has been on shipowners’ balance sheets have reached unsustainable levels for certain companies. One reason is the shipping industry is capital intensive and some of the traditional banks still have severe exposure levels. Some banks voluntarily reduced their appetite, but others were not so lucky and have gone from an active investor to a hunter role looking for the right moment to potentially re-enter.
You could argue it is now as freight rates, asset prices and operational costs are all at lower levels in some commodity markets. The huge obstacle to maneuver around is financial regulations and in particular how much capital banks need to hold to manage exposure levels.
All of these elements lead to a precarious list within the container market that may not be truly felt till shipowners either renegotiate their bank terms or seek new financial vehicles to perform their business strategies. The consequence could be one too many containers added to cause the ship to finally capsize.
Source: Platts
