The shipping industry crisis – is it simply a story of over-capacity?

a container shipThere is little cheer for the shipping industry in the OECD’s latest Interim Economic Outlook published this week, predicting that global GDP growth is likely to remain at around 3% in 2016 with only a modest improvement projected in 2017.
But is slowing global growth really at the heart of the shipping industry crisis that led to the recent collapse of the world’s seventh largest container shipping company, the South Korean Hanjin Shipping?
Not according to a ship broker who was quoted in the Daily Telegraph recently and asked not to be named. In his view it is a problem that has been brewing for some time.
“They’re building larger and larger ships to increase their capacity so they can cut costs, but with each larger vessel ordered they’re making the market worse,” he said.
It is a problem that has been brewing for several years and has been compounded by companies reducing freight rates to gain a competitive edge, which ultimately results in a race to the bottom and the accumulation of large financial losses.
Other factors, such as falling commodity prices and the 2008 global financial crash have also contributed to the problems and led to the current situation where an estimated 200 unused container ships lie idle around the world.

Is there a solution?

It would take a crystal ball to predict what is likely to happen in even a couple of years and shipping owners are caught between a number of imponderables.
Firstly, it takes at least two years between ordering a new vessel and delivery and once built that vessel is likely to last at least 20 years. While in the short term it might make sense to go for economies of scale it is going to be very hard to predict what will happen to global growth and trade over a 20-year period.
Then, there is the question of what to do about existing, smaller vessels. At the moment, scrap metal rates are so low that it almost makes no sense to get rid of them.
Hanjin may only be the first casualty. According to the Economist earlier this month “of the biggest 12 shipping companies that have published results for the past quarter 11 have announced large losses”.
Clearly, it is very difficult for an industry like shipping to be as agile as businesses may need to be in a rapidly-changing global marketplace.
While customers are the beneficiaries, another factor is emerging as globalisation and the free trade of goods are coming under pressure.

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