29/09/2016
I thought this article was worth sharing as valuable read if you have Ocean freight business.
Shippers struggle to gauge financial health of alliance partners (Source: Journal of Commerce Date: 09-29-16)
NKY Line was the only one of the big three Japanese carriers to make a profit in the last financial year.
Shippers are being urged to have a good look at the financial situation of carriers before committing their cargo, but that is going to be a complicated procedure once the new alliances are in operation from April 2017.
Even if a shipper selects a healthy carrier, few members of those three alliances - 2M, Ocean, and THE Alliance - are in good shape, and there is no guarantee containers will travel only on a particular carrier.
The Drewry Z score index of publicly listed carriers shows the top five shipping companies are safe from bankruptcy, but those five lines are spread across the three alliances that kick off next year. For instance, Ocean Alliance member Orient Overseas International Ltd, the parent of Orient Overseas Container Line, is at the top of the list based on its 2015 annual results. CMA CGM is at No. 3 with slightly negative first-quarter earnings before interest and taxes, but the financials of the other two partners, Evergreen Line and China Cosco Shipping Lines, are not very pretty.
Evergreen's EBIT for the quarter ending March 31 was a negative $131 million, while China Cosco Shipping in August recorded a first-half loss of $1.08 billion. Much of the Chinese line's losses are from its bulk shipping sector and the absence of government subsidies on the first half for the early scrapping of ships.
THE Alliance lines also have some impressive losses among them. Hapag-Lloyd's first-half loss was $159 million, while the three Japanese lines' financial year ending March 31 saw MOL with a $1.5 billion loss, "K" Lines with a loss of $470 million and NYK Line the only one in profit at $166 million. Yang Ming's fist-quarter net loss was $116 million. Hanjin Shipping was to be member number six until its banks walked away.
If the 2M Alliance does end up including Hyundai Merchant Marine, it will have a loss-maker for a partner with a sizeable amount on debts on its books. Maersk Line itself made a $151 million loss in he first half.
Drewry expects container lines to lose between $5 billion and $10 billion this year as freight rates remain low amid surplus capacity and weak demand.
"With so much uncertainty shippers will probably look to hedge their bets with the alliances at the beginning and see which one works best for them in the long-term," according to the analyst's Container Insight Weekly.
Drewry said the uncertainty over what the industry will look like is "less than ideal" as shippers prepare tenders for shipping contracts. "None want a repeat of the Hanjin situation with billions of dollars' worth of cargo stranded outside ports and they will want to know in advance which carrier will be sharing ships to avoid those that they consider to be financially risky," it noted.
But John McCauley, vice president of transportation and logistics at Cargill, said at a recent conference that if financial health was the only criteria used by shippers when choosing their carrier partners, no one would be shipping anything.
"Many shippers are having to reassess their tactics," he said. "Do we go by carrier or by alliance? That's important so we can keep a balance of the service requirements we need and ships that are going to deliver our products. "
"There is sufficient competition between carriers to ensure we have enough choice. We look at the financial strength of an organization, their ability to invest, the quality of customer service. Price shouldn't be the sole determinant," he said.
"Like everyone else, we will refine and look at our carrier selection process. The other soul searching will be less about the sourcing and more about how Hanjin was managed."
McCauley said the collapse of the South Korean carrier had shocked the industry. "Hindsight is great, but when you look at the extent of business affected -- $14 billion of business impeded and in some cases thrown into the toilet - and ask if the industry could manage it better? With the inability of any individual customer to influence what is going on, I am not sure it could have."
