It has been well documented in recent times that the shipping industry is in financial distress. In August 2016, Hanjin, the world’s 7th largest shipping company filed for receivership after recent debt restructuring talks broke down.
In order to make some sense of this, let’s put some numbers to this perceived financial distress. According to the FRISK® Stress Index, the worst hit sector is SIC Code 441 (Deep Sea Foreign Transportation of Freight), where the risk of bankruptcy is currently 408% higher prior to the last financial crisis.
As of March 2016, it costs circa £350.00 to move a 40-foot container from the Far East to Europe, which is barely enough to cover the cost of fuel, handling and Suez Canal fees. With costs that low, it’s now cheaper to store your unwanted house items in a container travelling around the high seas, than it is to keep them in a storage facility!
A significant over supply of capacity during recent years is what is at the heart of this issue; with a recent slowdown in demand and freight rates so low that they barely cover costs. Shipping companies have therefore responded by cutting rates, making the situation even worse. While financially healthy companies can survive lower prices, weaker and more highly leveraged companies cannot:
- Hanjin, South Korea’s largest shipping company and International Shipholding, a U.S. based carrier filed for bankruptcy in August.
- Paragon Shipping continues to hang on by a thread.
- Maersk and Hapag-Lloyd AG have reported substantial year-over-year drop in revenues.
It is thought that the industry’s recovery will take 18-24 months or more. But this has far reaching effects, especially to the retail industries around the world in the run-up to the so-important peak Christmas sales period. Significant numbers of containers and ships are in danger of being stranded and not making it into their destination ports on time.
This is a classic example of supply chain risk and it is unlikely that many companies have contingency plans that can be exercised in time to alleviate the situation. Global supply chains offer tremendous opportunities for margin gains but also carry such inherent risks, which need to be understood and then addressed if continuity of supply is to be assured.
There are many other supply chain risks and here at The Logistics Business we work with clients to identify, quantify and mitigate them. If you would like to discuss this key topic further, please contact us 01527 889060 or email firstname.lastname@example.org for an exploratory discussion.