The global commodities bust has rocked the dry-bulk shipping industry, with a wave of bankruptcies washing across the sector and major players forced to restructure, divest or scrap assets.
On Jan. 5, the Shanghai International Shipping Institute issued a striking report after polling about 50 of the nation’s largest bulk shippers. The survey concluded that more than 60% of the firms it polled were struggling with long-term losses and about 40% faced liquidity problems.
“The market is extremely depressed and these conditions are likely to continue in 2016, exacerbating dry bulk firms’ losses, increasing costs and creating obstacles to obtaining financing. This will kick-start a wave of bankruptcies,” government-run SISI said in the report.
Already so far, more than half a dozen shipping companies from countries including Hong Kong, China, South Korea, Japan and the U.S. have filed for bankruptcy in the past two years. In 2015, bankruptcies gathered pace as orders dried up while new ships continued to enter the market.
Japan’s fifth largest dry-bulk shipping company Daiichi Chuo Kisen and its wholly owned subsidiary Star Bulk Carriers Co. filed for bankruptcy in September. Prior to that, in the first quarter of 2015, privately owned Danish company Copenship, South Korea’s Daebo International Shipping Co., China’s Winland Ocean Shipping Corp. and Hong Kong-based Shagang Shipping filed for bankruptcy proceedings.
The bad news rolled on into 2016. Japan’s “Big Three” shipping companies — Mitsui O.S.K Lines, Nippon Yusen and Kawasaki Kisen (K Line) — all slashed their earnings outlooks drastically in January.
Mitsui said that for the year ended March 2016, it expected to now report a consolidated net loss of 175 billion yen ($1.47 billion) from a previously projected profit of 17 billion yen. It will book 180 billion yen in extraordinary losses due to the retirement of vessels and other restructuring expenses.
Executive Officer Hideo Horiguchi told reporters the company had to streamline operations “because shipping fees of container and bulk vessels are unlikely to recover due to the Chinese economy’s slowdown and the deteriorating economies of Russia, Brazil and other natural resource [producing] countries.”
K Line also cut its projected profit from 12 billion yen to 5 billion yen for the full year ended March 31 and Nippon Yusen said profits for its December quarter would be down 40% at 15 billion yen.
This industry-wide crisis came as an inevitable consequence of the collapse of the shipping market itself. The closely watched Baltic Dry Index of dry-bulk shipping freights, a measure of global supply and demand for shipping of commodities such as minerals, metals and grains, continued to plumb unprecedented lows. The index peaked at 11,793 in May 2008 and has since embarked on a precipitous decline. It fell to 298 on Feb. 4, sinking below 300 for the first time.
Demand from China, the world’s largest importer of bulk commodities, is slowing much more quickly than expected. Compounding the problem is the delivery of ships commissioned during the commodities boom. Vessel capacity growth continues to outstrip demand — the order book for ships being built represents 16% of the existing global fleet.
Like the mining companies, whose cargoes make up the core business for dry-bulk carriers, shipping companies borrowed too much to expand their fleets when commodities prices and freight rates were soaring.
“The only solution is for shipowners to remove older, capesize vessels from the fleet until the market recovers, otherwise the industry faces many more years of losses,” said Rahul Sharan, lead analyst for dry-bulk shipping at Drewry. “Any market correction resulting from inevitable insolvencies will not alone be sufficient to correct supply-demand imbalances as vessels will simply be recycled back into the fleet.”
“In the absence of radical action, we expect dry-bulk shipping freight rates to deteriorate further through the course of the year and to remain weak in 2017,” Sharan said, adding that any recovery would be pushed out further “with little near-term prospect of a return to profitability.”
To cut some of that oversupply, dry-bulk ships with a total capacity of 40 million deadweight tonnage will be sold for demolition in 2016, according to the Baltic and International Maritime Council, making this year the busiest year on record for shipbreaking.
But even this will not be enough. In December 2015, Fitch Ratings Agency cut its outlook for the global shipping sector from “stable” to “negative.”
“We expect container shipping capacity to rise 6% in 2016 on top of a 9% increase in 2015, easily outpacing demand growth of 2% [in 2015] and 3%–4.5% in 2016,” according to a Fitch statement.
It also said that while container shipping companies that successfully implement cost-containment measures could remain profitable in 2016, the financials of smaller, unrated, especially dry-bulk shippers will remain stretched, “which will probably lead to more bankruptcies.”