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Supply Chain News: Ocean Cargo Carriers Hunkering Down to Survive in Face Collapsing Demand

 

 

All Carriers said to be Facing Mortal Financial Risks


April 8, 2020
SCDigest Editorial Staff

Ocean container carriers have been on dicey finncial footing really since the Great Recession on 2008-09, with rates generally at levels not much above operating costs, and often below.

Bulk cargo containers have fared a little better overall, but also have suffered from rock bottom rates at various time over the last decade.

Supply Chain Digest Says...

Alfred Hartmann, the head of Germany large ship owners association, warned that repayment of some shipping loans "will turn out to be problematic."


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Now, rates are likely to fall even further, as overall trade volumes collapse due the coronavirus crisis to the point of putting the ocean cargo industry overall and individual carriers particularly in potentially devastating financial times.

Almost certainly the industry will come out the other side looking much different than it did before the crisis.

The ocean container analysts at Drewry wrote last week that "Ocean carriers' finely tuned skills in the art of capacity management are going to be sorely tested in the coming months," adding that "It is their daunting task to judge how much containership capacity is needed during the demand pullback, and also to be ready to service the market when the recovery begins, whenever that may be."

Failure to get that calculus right could mean bankruptcies, mergers, massive government bailouts and more.

"Demand is caving and supply chains are in distress," according to George Lazaridis, head of research at Greece-based Allied Shipbroking, as reported this week by the Wall Street Journal. "Nobody knows when restrictions will be lifted and the industry is in a battle for survival."

Bulk carriers moving various commodities are coping with falling demand and resulting rock bottom freight rates. That in part driven by changing buying behavior by China, by far the world's largest commodities importer, which saw deep drops in imports of iron ore and coal in the first quarter.

Things are even worse for container carriers.

The Journal also reported that container carriers canceled about half of their services out of China in the first quarter and are continuing to "blank" sailings on major trade routes for the second quarter as they try to preserve cash.

 

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Container carriers have rapidly cut back service, with the number of voided sailings rising from 45 last week to a huge 212 this week.

The CEO of one container ship leasing company with more than 20 vessels told the Journal that "I have to let go of a quarter of my staff and I don't know whether I'll still have a business at the end of April."

"The virus in China alone led to more than 120 blank sailings. The pandemic spread is likely to lead to substantially more blank sailings than this," said Lars Jensen, chief executive of Copenhagen-based SeaIntelligence Consulting, adding that "all carriers are facing mortal risks."

SeaIntelligence estimates the biggest international carriers will see combined losses ranging from $800 million to $23 billion this year. If the losses come in anywhere near the upper end of that range, the results will be catastrophic.

Especially at risk are smaller carriers that handle niche lanes such as China to the Philippines. These carriers generally have little financial reserves to carry them through the dark financial times.

And because they play a key role in shipping materials and components that are needed to make products that are shipped to the US, Europe of other large markets, supply chain disruptions could develop if they start to fail.

Alfred Hartmann, the head of Germany large ship owners association, warned that repayment of some shipping loans "will turn out to be problematic."

The market dynamics are getting strange.

"The anticipated early peak season in ocean freight is now reversing course as carriers rapidly blank sailings and shippers scramble to cancel orders, even leaving shipments at ports across the globe, or diverting to longer sailings to delay accepting goods," says Eytan Buchman of freight forwarder Freightos.

Will governments come in with bailouts to rescue bankrupt carriers? That is a major question, as even wealthy countries will be committing huge funds to consumers and other corporate bailouts, and it is not clear how much support legislators and voters in their home countries would support bailouts for a low visibility sector.

Do you expect financial disaster for the ocean container carriers? Let us know your thoughts at the Feedback section below.

 

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