Much of 2017 will be spent digesting the enormous impact of the collapse of Hanjin Shipping.
Just under 100 container ships were thrown into an already soft market, and the challenge of absorbing such a capacity increase is overwhelming. The only way to get to a capacity balance is to increase demand and reduce supply, and in the case of the Hanjin fleet, that means a rapid step up in scrapping. Hanjin itself in 2014 and 2015 had scrapped more than 15 of its large (4,000-TEU) ships, but now returning the ships to the owners has forced the owners to confront the realities of the market. The weakness of the market might best be exemplified by the scrapping of a 4,500-TEU ship of just seven years vintage as it came free from Hanjin. A $60 million investment in 2009 is fetching about $6 million in scrap, just seven years later.
The next step in capacity reduction will come in the form of global consolidation. Maersk’s move to buy Hamburg Sud, CMA CGM’s acquisition of NOL , Hapag-Lloyd’s merger with United Arab Shipping Co., and the merger of the three Japanese liner giants — NYK Line, MOL, and “K” Line — all point to a rationalization of capacity. This trend may well continue, and we will be ultimately left with a small cadre of mega-carriers.
Liner companies though cannot sustain the current level of losses — a $3 billion industrywide loss in 2016 — so, ultimately, freight rates will have to increase in spite of the oversupply.
Out of ashes, phoenixes rise, so there will be many sitting on the sidelines waiting to take advantage of this very distressed situation, and this will manifest itself most likely in the strong companies acquiring distressed tonnage at bargain prices. We can only hope that the players are smart enough not to rush to the shipyards and order newer and bigger ships.