Hyundai strikes back with mega ship orders

Hyundai strikes back with mega ship orders

Hyundai Merchant Marine said it had reached an agreement with ship-owners to secure lower charter rates; a major breakthrough in its financial restructuring that enables state support for the purchase of mega ships by reducing its debt load. The purchase of mega ships will drive down the company’s slot costs, boosting its competitiveness in major East-West trades and potentially aid it in gaining membership in The Alliance, a major vessel sharing agreement involving Hanjin Shipping, Hapag-Lloyd, “K” Line, MOL, NYK Line and Yang Ming Line. 

The deal provides HMM customers some relief as well since there was speculation on whether or not the carrier would stay afloat given its high debt load amid a weak freight market and industry-wide overcapacity. KDB (Korea Development Bank) will take all necessary measures to make HMM a competitive global shipping company through reshuffling its organisation structure and inviting outside experts to consult on restructuring the fleet by ordering highly efficient mega-container ships to boost HMM’s mid-term competitiveness, said the bank which will become the company’s largest shareholder after its restructuring is complete. 

Danaos Corporation, Eastern Pacific Shipping, Zodiac Maritime Agencies, Navios Maritime and Capital Ship Management Corporation, which have leased container ships to HMM, agreed to reduce charter rates by 20%, while bulk carrier owners assented to a 25% discount. Of the 124 ships HMM operates, 85 are chartered. South Korea’s second largest container line will also swap charter fees for equity. Off roughly 2.5 trillion South Korean won ($ 2.15 billion) that HMM owes to charterers over the next three and a half years, the company will swap 530 billion won with newly issued shares and long-term bonds. 

HMM is now expected to reduce its cash outlay by 530 billion won over the same period, greatly stabilising the company. The company has raised more than $ 3.5 billion in its efforts to maintain liquidity and in addition to securing lower charter rates, also had to seek debt payment extensions from its bondholders.

Container shipping, more capacity cuts

Alphaliner said given the current market conditions, on top of the CMA CGM-APL consolidation and the uncertainties posed by some shipping lines will lead to significant capacity reductions, as carriers move to stop the severe rate slide of the past few months. Alphaliner noted how on the Asia-Europe trade, liner operators had finally seen some success in their efforts to push up rates following the removal of one Far East-North European string from each of the four alliances, in addition to the number of weekly services being cut from last year’s 21 loops to its current total of 17. 

Previous carrier initiatives to support rate increases by selectively voiding sailings had proven ineffective, as these such efforts only removed capacity on a temporary basis, creating short-term capacity that failed to lift rates on a sustainable basis, it said. The latest round of general rate increases exercised on the Asia-Europe route, implemented on May 1 were largely retained, said Alphaliner. 

While carriers failed to push through their attempted mid-May GRIs to their full extent, they still are currently going ahead with their June 1 GRI. Whether this is as successful as the GRIs effective at the start of May will be revealed upon the release of the latest Shanghai Containerised Freight Index. This is expected to keep spot rates on the route at above $ 700 per TEU, a significant improvement over the $ 200 per TEU that was offered in the first quarter, when rates on the trade had reached an all time low, said Alphaliner.

Asia-Europe rates down again

Spot market rates on the Asia-North European trade slumped 13.7% to $ 657 per TEU after container lines failed to implement planned 1 June general rate increases (GRIs), with prices per loaded 20 foot container on Asia-Mediterranean routes also falling 11.4% to $ 788 according to the latest Shanghai Containerised Freight Index (SCFI), published early this week to make allowances for a national holiday in China. 

Despite the Asia-Europe trade entering its peak season, lines have made a series of announcement cuts to supply, most recently last week the G6 Alliance confirming its intention to suspend its already depleted Loop 6 offering which in effect will pull 11 ships of 10,000 TEU – 13,000 TEU out of service. Nevertheless, the failure to implement planned 1 June GRIs came after two relatively successful GRI in May significantly improved average Asia-Europe spot prices form the unsustainably low levels see in April. 

Meanwhile, continuing overcapacity on the transpacific caused average freight rates to the US East Coast from Asia to slip 2.1% to $ 1,649 per FEU and those to the US West Coast fell 4.8% to $ 811 per FEU. 

East-West contract rates down by 29%

Contract rates on major container trades have continued to come under downward pressure in recent months, according to a new report from Drewry, with East-West contract ocean rates down 29% in the year to May. The analyst said that ocean freight rates for cargo moving under contracts on key East-West routes fell by 18% between February and May. The price war between carriers in the container shipping market continues and this is, for now resulting in substantial reductions in contract rates for exporters and importers buying under contract, said Philip Damas, Head of Drewry’s Logistics practice. 

The Drewry Benchmarking Club Contract Rate Index, based on average Transpacific and Asia-Europe contract freight rate data provided confidentially by shippers, now declined by 29% in the year to May. 

NOL admits was too slow to adapt

Container line Neptune Orient Lines (NOL) was unable to cut costs and adjust its business model fast enough in an industry where shipping services were increasingly getting commoditised, its CEO has acknowledged. Ng Yat Chung told Singapore’s Straits Times that without the kind of scale needed to compete on costs, the best choice was to sell, he said. Ng Yat Chung was speaking just prior to the announcement that NOL’s key shareholders had accepted rival shipping line CMA CGM’s all-cash offer for the group, which operates liner services as APL. 

The $ 3.38 billion offer is expected to close on 4 July. Ng Yat Chung told the Straits Times: “In this environment of extreme overcapacity and severe freight rates erosion, competition is based on cost. We have made good progress in that aspect and every year we’ve managed to reduce our losses. Unfortunately, we haven’t been able to cut costs fast enough to offset the collapse in freight rates.” 

He noted that NOL’s past successes were built on its business model as a premium service line, so its costs were always significantly higher than its competitors. But the world has changed, he said. The market growth has slowed down, there is severe overcapacity, so we had to recognise that the business model needed change. We didn’t have the right cost position in an industry that was becoming more and more commoditised. He acknowledged that the company had been a bit slow and reluctant to change, because the business model had worked in the past. 

There were arguments that when the cycle turns, things will be okay, he told the Straits Times. Unfortunately, this time round the down-cycle is probably as deep and as long as anyone can remember. Compared with our competitors, we also didn’t have the scale, which has become more important in this industry, noted Ng.

DP World warns against ‘One Belt One Road’

Huge investment in transport infrastructure will be critical if Eurasian countries are to see the full benefits of China’s push to develop maritime and land ‘Silk Road’ between Asia and Europe, according to one leading port executive. One Belt One Road (OBOR), sometimes also known as the ‘Belt and Road Initiative’ is a development strategy and framework proposed by Chinese Leader Xi Jinping to redirect China’s domestic overcapacity and capital for regional infrastructure development to improve trade and relations with Asean, Central Asian and European countries. 

At its heart lies the creation of an economic land belt that includes countries on the original Silk Road through Central Asia, West Asia the Middle East and Europe, as well as a maritime road that links China’s port facilities with the African coast, pushing up through the Suez Canal into the Mediterranean. It consists of two main components: The ‘Silk Road Economic Belt’ and the ‘21st Century Maritime Silk Road’. DP World Group Chairman and CEO Sultan Ahmed Bin Sulayem urged the 60 governments of the OBOR group of nations to work together more closely to improve transport and logistics networks. 

Commentators estimate that OBOR countries need another $ 5 trillion for infrastructure development from 2016 to 2020, he said. One way to fund it is by trading blocs find innovative ways of working together with a focus on infrastructure provision, development the financial markets, mitigating risks and eliminating red tape to attract investors.

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).)