If your business relies on shipping goods into or out of the country, the recent upheaval in the container shipping market would have taken its toll. Trying to forecast company profits and losses while shipping costs are so uncertain can make it difficult for any business owner to keep a tight rein on expenditure.
Behind the Shipping Crisis
The collapse of Hanjin Shipping Co has resulted in significant changes in pricing across the industry, with prices spiking as much as 50 percent to ship a container from Asia to the United States.
Adding to the shipping industry’s woes, the shipping giant AP Moeller-Maersk recently reported plummeting profits in the uncertain economic conditions. The Danish-based company’s overall profits have been impacted by low oil prices, but its struggling container division added to financial problems.
South Korean container carrier company Hyundai Merchant Marine Co Ltd was forced to negotiate a deal with its creditors in an effort to avoid financial collapse in early 2016, while German-based shipping company, Hapag-Lloyd also predicted falling profits over the coming year.
Uneven Supply and Demand
Over the past few years, container shipping companies ordered newer, larger vessels in the hope that the industry would continue to see increasing trade in companies importing goods out of Asia. The result has seen a glut in the number of shipping vessels available, with more still due to be completed in coming years.
The spending spree increased capital expenditures for many of the world’s larger shipping companies, resulting in an increase in fees to ship containers. Yet export of goods declined, leaving approximately 7.4% of the available container ships sitting idle.
There is also a massive overcapacity of container ships, due to so many companies requisitioning new vessels while the industry was still flourishing.
Yet the Chinese economy has slowed, causing a greater impact on the shipping industry than anyone forecast. As the largest consumer of commodities in the world, China has long been the driving force behind the global shipping trade.
There is also the additional issue of uneven supply and demand to factor into shipping costs. While container ships may be leaving ports fully laden, they’re returning back to home ports with significantly reduced cargo loads.
The collapse of Hanjin Shipping Co saw many other companies scrambling to commit new services across shipping lines in an effort to meet international trade demand and provide alternative transport solutions for cargo.
Zombie Ships Sailing the Seas
The industry calls a ship that is only able to cover the interest costs on its debts but no hope of repaying the capital balance a ‘zombie ship’. A company accepting freight at low prices in order to generate any revenue at all in order to keep going could be causing more problems within the industry.
Large international shipping companies with significant debt exposure sending out zombie fleets risks financial difficulties moving into the future, simply as the revenue generated is likely to be insufficient to repay debt balances.
A Look at Shipping Costs Moving Forward
As shipping companies seek to recoup falling profit margins, it’s likely that costs could continue to fluctuate into the future. Many carrier companies are seeking to improve efficiency by utilizing larger ships capable of carrying more cargo per trip.
A major shipping consulting firm, Drewry, announced that an anticipated 150 container vessels were likely to be scrapped throughout 2016. Despite the reduction in existing older ships, it was unlikely to impact on the excess vessels ordered and built by various companies in the years between 2010 and 2015.
Likewise, the anticipated influx of new vessels over the next few years that were ordered before the crisis hit may result in even further fluctuations in cargo costs.
Mitigating the Risk
Any business concerned about the fluctuating container shipping costs and the potential impact it could have on business should seek advice from a qualified legal firm that specializes in maritime litigation.
It may be possible to mitigate the risk of uncertain pricing for future shipping costs by negotiating for Master Service Agreements for the marine or maritime industry.
If you want to ensure your business’s costs don’t spiral out of control, factor in options that allow you to set your preferred terms. Establishing a strong Master Service Agreement may be the key to negotiating specific pricing terms for future cargo shipping needs.
About the author
Scarlett Higgins writes about the import and export business in her articles which appear around the web. She has multiple years of experience working in this area and uses her industry knowledge for her articles.