Sink­ing ship­ping in­dus­try eye­ing merg­ers to stay afloat

More con­sol­i­da­tion and bank­rupt­cies in seaborne busi­ness ex­pected in 2017

China Daily (Hong Kong) - - HK | BUSINESS - By LIN WENJIE in Hong Kong cher­rylin@chi­nadai­lyhk.com

The global ship­ping in­dus­try is in the midst of a huge down­turn with weak de­mand en­gulf­ing it for the past few years. While pun­dits ac­knowl­edge that the sec­tor’s big­gest hur­dle is over­ca­pac­ity, the wave of merg­ers and ac­qui­si­tions means the hard times will even­tu­ally pass.

The Baltic Dry In­dex (BDI), which is used to re­flect the pros­per­ity of the ship­ping in­dus­try, plum­meted to a record low of 290 points in Fe­bru­ary this year. Although it re­bounded slightly to reach 1,204 points on Wed­nes­day, it’s still well be­low its all-time high of 11,793 points reached on May 20, 2008.

“The most chal­leng­ing part for the in­dus­try right now is over­ca­pac­ity — too many ships be­ing built with weak de­mand for sea­port trade. It will take a few years for the ex­ces­sive ca­pac­ity to be used up,” said Maersk China Chair­man Tim Smith.

Speak­ing at the Asian Lo­gis­tics and Mar­itime Con­fer­ence in Hong Kong, he said over­ca­pac­ity and fall­ing de­mand for seaborne trade have pushed freight rates to un­sus­tain­able lev­els in the past two years, caus­ing bil­lions of dol­lars in losses for the world’s big­gest ship­ping com­pa­nies and a near halt to or­ders for new ves­sels.

De­spite an 11-per­cent growth in con­tainer vol­ume, Maersk Line posted a loss of $116 mil­lion for the third quar­ter of 2016, com­pared to a $264-mil­lion profit in the same pe­riod last year. Av­er­age freight rates slumped 16 per­cent com­pared to last year.

The Dan­ish ship­ping com­pany or­dered 200,000 new ves­sels this year — a 90-per­cent re­duc­tion com­pared to last year’s 2.3 mil­lion — in a bid to cut sup­ply to meet the level of de­mand.

Fol­low­ing the bank­ruptcy of South Korea’s Han­jin Ship­ping and the merger of China’s two big­gest ship­ping lines — Cosco and China Ship­ping — Smith an­tic­i­pates more con­sol­i­da­tion, merg­ers and bank­rupt­cies in the com­ing year. He em­pha­sized this will bring more sta­bil­ity to the mar­ket, say­ing the sec­tor has been “highly frag­mented” for many years.

“Con­sol­i­da­tion is a good thing for the in­dus­try which will, in turn, bring more sta­bil­ity to the mar­ket. Next year, the top seven car­ri­ers will con­trol around 65 per­cent of the ca­pac­ity,” he said.

“The sit­u­a­tion can­not be worse, so we are cau­tiously op­ti­mistic that the mar­ket will be a lit­tle bet­ter in 2017.”

Although Maersk ended feeder ser­vices to 10 Chi­nese main­land ports this Au­gust, Smith still sees large op­por­tu­ni­ties on the main­land.

“We’re not try­ing to re­duce our foot­print in China, but to op­ti­mize the ef­fi­ciency of the com­pany’s ship­ping net­work. And one of the things we hope to ben­e­fit from is the growth of e-com­merce. China is lead­ing the world in e-com­merce. It’s a key place to watch,” he said.

The lo­gis­tics in­dus­try has al­ways been an im­por­tant eco­nomic pil­lar for Hong Kong, but the city’s sta­tus as a global con­tainer hub is be­ing chal­lenged.

Ac­cord­ing to a Hang Seng Man­age­ment Col­lege re­port, the main­land’s re­lax­ation of cab­o­tage rules poses threats to Hong Kong’s trans­ship­ment ser­vices.

The re­port projects that if the cen­tral govern­ment fully re­laxes cab­o­tage rules to al­low over­seas ship­ments to trans­port cargo be­tween main­land ports, Hong Kong would lose all of its trans­ship­ment busi­ness tied to the main­land — a pos­si­ble 14-per­cent fall in the city’s to­tal through­put. Ranked as the world’s fifth-busiest con­tainer port last year, the SAR would slip out of the top 10 in such a sce­nario.

How­ever, Smith re­mains pos­i­tive about Hong Kong’s role as an “ef­fec­tive and com­pet­i­tive port” for the trans­ship­ment busi­ness. He be­lieved the main­land govern­ment would not fully re­lax cab­o­tage rules as Hong Kong’s port po­si­tion is de­pen­dent on the cur­rent sta­tus quo. He noted that the Hong Kong govern­ment has also urged Bei­jing to keep the rules in place.

Zheng Tianx­i­ang, deputy di­rec­tor of the Cen­ter for Stud­ies of Hong Kong, Ma­cao and Pearl River Delta at Sun Yat­sen Univer­sity, said Hong Kong should re­con­sider its po­si­tion as a trans­porta­tion hub.

“If it con­tin­ues to in­crease its main­land-re­lated trans­ship­ment vol­ume, it’s in­evitable for the city to com­pete with main­land ports. I think Hong Kong should take ad­van­tage of its strength to fo­cus on in­ter­na­tional re­sources.”

To raise the com­pet­i­tive­ness of Hong Kong’s lo­gis­tics in­dus­try, the re­port fur­ther sug­gests that Hong Kong should up­grade its lo­gis­tics fa­cil­i­ties and ser­vices, es­tab­lish poli­cies and laws fa­vor­able to mar­itime trade, and ex­pand its ter­mi­nal ca­pac­ity.

DAVID PAUL MOR­RIS / BLOOMBERG

Con­tain­ers stacked up at the Hong Kong In­ter­na­tional Ter­mi­nal. In the wake of the bank­ruptcy of South Korea’s Han­jin Ship­ping, Hong Kong is urged to up­grade its lo­gis­tics fa­cil­i­ties and ser­vices so as to sharpen its edge in the race to be the re­gion’s trans­porta­tion cen­ter.

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