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Summary of the Shipping Industry Outlook (October 2016)

Core Content

The shipping industry, responsible for carrying approximately 90% of global trade, has been in decline since the 2008 financial crisis. The downturn has been marked by increasing costs, overcapacity, and liquidity issues. The collapse of Hanjin Shipping in August 2016 highlighted the severity of the situation, with the global shipping industry facing a negative outlook for the next 12–18 months.

Main Industry Segments and Their Challenges

Dry Bulk Shipping

• Overview: Dry bulk ships transport raw materials like iron, coal, and food.
• Market Trends: The Baltic Dry Index has seen record lows over the past two years, though it has recently stabilized.
• Key Factors:
  • Economic slowdown in China, a major consumer of iron ore and coal.
  • Rapid growth in the global dry bulk fleet, driven by post-2008 orders, leading to oversupply.
• Solution: Short-term relief comes from removing vessels from the operating fleet, as market corrections through insolvencies are insufficient.

Container Shipping

• Overview: Container ships transport consumer goods in standardized containers.
• Market Trends: The industry has experienced the worst financial distress since the 2008 crisis.
• Key Factors:
  • Oversupply due to increased vessel size and economies of scale.
  • The average age of the global container fleet is decreasing, with older, less efficient vessels becoming uneconomical.
• Examples:
  • Maersk reported an 82% drop in profits in 2015.
  • Cosco Shipping recorded a record loss of Rmb7.2 billion in H1 2016.

Tankers

• Overview: Tankers transport liquids and gases in bulk.
• Market Trends: The sector has seen a more manageable oversupply compared to dry bulk and container shipping.
• Key Factors:
  • Prudent fleet growth and expansion in longer haul trade routes.
  • Growth in super-refineries in the Middle East, India, and China maintaining demand.
• Forecast: While challenges remain, the outlook is less severe than in other segments.

Key Considerations for Stakeholders

For Owners and Operators

• Capital Access: Continued access to capital is critical for operations.
• Operational Efficiency: Focus on bunker management, procurement, and asset utilization.
• Balance Sheet Management: Reduce debt and divest non-core assets.
• Governance and Transparency: Improve transparency to attract financing.

For Lenders

• Vessel Valuation: Vessel values have fallen, potentially leading to recovery below par.
• Refinancing Challenges: Traditional lenders may divest, making refinancing more difficult.
• Bond Maturities: Significant bond debt is maturing, increasing the role of bondholders in restructuring.
• Insolvency Management: Close monitoring of operations and potential portfolio sales or loss-sharing arrangements are necessary.

Case Study: Hanjin Shipping

• Overview: Hanjin Shipping, South Korea's largest container carrier, filed for receivership on 31 August 2016.
• Impact: The insolvency led to cargo being stranded, ships idling, and ports refusing entry.
• Lessons Learned: Proper planning and coordination in insolvency processes are essential to avoid further damage.
• Reputation Risk: Hanjin's insolvency may have long-term reputational effects, making recovery uncertain.

Industry Outlook

• The shipping industry is expected to continue its decline, with liquidity remaining a major issue.
• An increasing number of insolvencies and vessel arrests are anticipated.
• The "too big to fail" concept is no longer applicable, and market forces are being increasingly challenged by lender and government interventions.

Key Players and Contacts

• David Soden: Partner, Deloitte Restructuring Services
• Bob Frezza: Managing Director, Deloitte CRG
• Andrew Grimmett: SEA Restructuring Services Leader
• George Cambanis: Global Leader, Shipping & Ports
• Thomas Mazur: Partner, Deloitte Germany
• Rob Woolsey: Assistant Director, Restructuring Services

Conclusion

The shipping industry is in a prolonged downturn, with overcapacity, liquidity issues, and economic headwinds contributing to its distress. The Hanjin case illustrates the potential consequences of poor insolvency planning. Stakeholders must focus on restructuring, improving efficiency, and managing debt to navigate the current challenges. The role of lenders and governments in supporting the industry is critical, but the long-term solution may lie in market-driven adjustments and proper insolvency management.