Will shipping crash repeat 2009? A decade-long slump

Is the era of crazy rates coming to an end? After soaring daily container rates for the past two years, the SCFI index has fallen 21.7 per cent this year. Now that supply and demand are reversing and shipping companies are building new ships, there are worries about a repeat of the 2009 market crash. How should the shipping company protect itself? Experts point to the "critical 40 percent"...

Over the past two years, global liner companies have been cashing in because of COVID-19. At the beginning of this year, Evergreen shipping general manager Xie Huiquan described: the company's good operation to the night dream will laugh!

However, this wave of dream will laugh, is likely to slowly ebb tide this year, even facing a crisis of reversal.

长荣海运总经理谢惠全

From the perspective of supply and demand, on the one hand, shipping companies scramble to build new ships, and the supply of shipping capacity will increase substantially in the next three years; On the other hand, inflation in Europe and America is depressing consumption, and freight demand is weakening.

Since the beginning of the year, Shanghai Export Container Freight Index (SCFI), no longer like last year's explosive rise, but also fell 21.7% from the peak, 22 has fallen below 4,000 points to 3996.77 points, 29 the latest index is a sharp drop of 108.92 points to 3887.85 points.

The same is true of the Baltic Container Freight Index (FBX), another freight forwarder. From a high of $9,167 at the start of the year to $6,343 today, it is down 30.8%.

The worry is that once the glory days of shipping are over, there will be a repeat of the market crash of 2009.

"In the shipping industry, like other traditional industries, there is no New Year every day. Everything is repeated and repeated. This is called the will of Heaven." Shipping research for many years, Kaohsiung University of Science and Technology professor Dai Guanghui said bluntly.

In 2007, the shipping industry peaked along with the global economy, and shipping companies poured money into building new ships. Unexpectedly, the glory was washed away by the financial tsunami the next year. Shipping companies around the world lost more than $20 billion in 2009 and then faced a decade-long glut.

Although, now the world's top several ship companies through the formation of three alliances, to share shipping space, cooperation in dispatching capacity, but Dai Guanghui believes that once the market conditions have changed, or may repeat the past internal alliance price competition to grab goods.

Xie Zhijian, former chairman of Evergreen and Yangming, believes that 60% of the profits of shipping companies are affected by the global economy and shipping supply and demand, and operators cannot control them. But the remaining 40 percent comes from business operations. This 40%, it is the ship company in the face of future economic challenges the key to self-preservation.

How should shipping companies make good use of cash on hand to strengthen the key 40%? There are three major directions:

Strategy 1

"Buy to let" reduces long-term costs

"When you make money, make sure you put it away until tomorrow." Xie Zhijian said that to take advantage of this boom, shipping companies must make good use of their cash to "buy for charter", improve the ownership rate of ships, containers and other assets, in order to reduce long-term costs and enhance competitiveness.

Otherwise, it is likely to be like Yangming in the past decade. On the one hand, Yangming was hit by the recession of global shipping, and on the other hand, due to too many leased assets, its operating cost was much higher than that of its peers, and eventually it faced huge losses and even nearly went bankrupt.

长荣、阳明前董事长 谢志坚

At present, MSC (Mediterranean Shipping Company) is the most excellent shipping company in the world, which is not the market leader.

MSC used to be No. 2 in the market, but in the past two years it has spent heavily to build more than 200 ships, quickly overtaking Maersk in capacity. The MSC currently has a total capacity of 4.46 million TEU, with 118 new ships awaiting delivery.

Taiwan shipping companies are not far behind. This year, Eva jumped from seventh to sixth in global capacity, with a total capacity of 1.57 million TEU and 57 new ships to be delivered; Wanhai has a total capacity of 417,000 TEU and has 44 new ships on hand to be delivered.

Yangming, by contrast, has the fewest ships in the top ten, announcing only five new ships of 15, 000TEU this year. Ship ownership rate is only about 31.6 percent, generally lower than peers.

Strategy 2

We will invest in upgrading logistics and port industries

In addition to buying instead of leasing, some shipping companies choose to invest upstream and downstream of the industry and transform into an all-round logistics company. Maersk is a typical case.

In recent years, Maersk has moved away from shipping, diversifying into businesses such as freight contracting, warehousing, cross-border e-commerce, and buying trucks and aircraft to create a complete end-to-end logistics solution.

Maersk will be able to provide one-stop services for future customers, whether they want sea, air and land transportation, warehousing, customs clearance services, cross-border e-commerce logistics. In addition, Maersk can also provide consulting and software services, which can increase profits due to its vast logistics data.

However, to this, Dai is reminded that the shipping company in addition to mastering more logistics channels, investment shipping surrounding the port, wharf industry is also very important. In particular, the current global logistics jam, caused by inefficient terminals, shows that its transformation is imminent.

For example, including port navigation safety, terminal operation automation, and even green port transformation investment, are now the direction of shipping companies can focus on. Shipping companies investing in their own terminals can also reduce their operating costs and achieve mutual prosperity.

"You can't keep looking at expanding capacity and gaining access, which will only lead to lower rates and worse market conditions." Dai emphasized that investment in ports and shared and win-win industries are the long-term solution.

Strategy 3

With environmental regulations coming into effect in 2023, continued investment is imperative

"In the future, if a company does not cooperate with environmental issues, it is basically difficult to go forward." Xie Huiquan stressed, and revealed that Evergreen has launched five energy-saving strategy.

In fact, in recent years, the International Maritime Organization (IMO) has become more stringent on environmental protection requirements, and now even more decided that in 2023, if the carbon emissions of ships do not comply with the regulations, they may face the disposal of slowing down, refit and dismantling of ships.

Mr Hsieh points out that more than 50 per cent of the ships on the market are at least 10 years old and inefficient, and will be hit by the new regulations.

Dai believes that at present, global shipping companies are not prepared enough. For example, few shipping companies have actually introduced LNG (liquefied natural gas) -powered container ships, for example, they have been talking about low-carbon alternative fuels for many years. In terms of sulfur emissions, only 16% of ships around the world are equipped with desulfurization towers, indicating that there is still considerable room for improvement in environmental protection.

In the future, how to increase the proportion of energy-saving fleet and even develop more green alternative fuels such as LNG, methanol, ammonia and hydrogen will be a big topic that shipping companies have to face under the continuous wave.

It can be expected that the competition of shipping companies in the future will no longer be to seize the opportunity of port, but to compete with each other in terms of their own physical fitness, port logistics and sustainable layout when the market conditions return to normal.