2017 Container Shipping Financial Risk (and How To Avoid It)

2017 Container Shipping Industry Financial Risk (and How to Avoid It)

It’s said that a rising tide lifts all boats.

That has a nice ring to it, but while the tide may have turned, financial stress continues to pound the container shipping industry.

Fortunately, there are a few simple ways to navigate these financial risks and protect your supply chain from disruption.

2017 Container Shipping Financial Risk: An Update

Consider recent events:

  • This past month, two large public shipping companies with weaker balance sheets filed for bankruptcy. Last week, Ultrapetrol, an energy container shipping company with $566 MM in debt, filed a pre-packaged Chapter 11. The week before, Toisa  and 23 affiliated vessel owing companies filed for Chapter 11, with over $1B in debt.
  • Maersk, the largest container shipping company in the world, posted a larger than expected $376 MM loss for 2016, due to lower than expected freight rates. In response, Maersk cut their dividend by half, reduced capacity, and acquired a competitor to consolidate market share. Even so, their CEO recently commented that industry financial distress isn’t over, and that at current rates, “carriers are losing significant sums of money every day”.
  • Since the Hanjin bankruptcy, the industry has undergone unprecedented restructuring and consolidation. According to Supply Chain Digest, “18 major ocean container carriers declined to just 10, and the sector has further consolidated into just 3 alliances, that share capacity and schedules while maintaining their own sales, marketing and pricing operations.”
  • Another sign that container shipping isn’t out of the woods: German banks have been slammed by recent losses from zombie shipping loans. As a result, future loans may be curtailed, which is a concern for shipping firms in need of financing.

2017 Industry Financial Stress: The FRISK® Stress index

The FRISK® Stress Index shows the current state of container shipping, globally.

As shown below, industry financial distress remains elevated. Even though industry bankruptcy risk was much higher in the first half of 2016, when the industry faced the worst conditions in 60 years, the index is still up +214% compared to the period before the last financial crisis.

For SIC code 441 (Deep Sea Foreign Transportation of Freight):

  • Of the 248 FRISK® scored public companies that comprise the index for this sector, 128 – over half -- carry a higher than average risk of bankruptcy in the next 12 months.
  • 30 of these companies are deep in the red zone  (with a FRISK score of ‘1’ or '2'); in other words, the risk of bankruptcy is substantially elevated for these high-risk companies.
  • The industry has a lot further to go for financial risk to return to 'normal' levels.
February, 2017 Bankruptcy Risk in the Global Container Shipping Industry

Is Yang Ming the Next Hanjin?

Before failing, Hanjin was the worlds 6th largest shipping company. As many supply chain execs will recall, tons of product was stranded on their ships in the critical pre-holiday season, unable to unload.

At that time, our industry analysis showed Taiwan container shipping company Yang Ming – the 9th largest shipping company in the world – was also struggling to stay afloat, with a FRISK® score of ‘2’.

Yang Ming is still bleeding red ink, and improving industry economics have taken longer than anticipated. The FRISK® score remains a ‘2’. And just last month, Drewry Financial Research Services (DFRS) raised concerns about the company’s overall leverage and financial viability. In response, the Taiwanese shipping company explained their financial recovery plan and source of funds, here.

While excess shipping capacity is slowly being absorbed, rates have rebounded from the lows of a year ago, and demand may ultimately rise, the slow pace of recovery will come too late for some. If the correction takes longer than expected, Yang Ming may run out of time. Counterparties should exercise extra caution. 

How to Avoid Supply Chain Financial Risks?

Supply chain disruption for financial reasons happen in every industry. 

So, beyond your global shipping counterparties, the question is a basic one: How to know if a major supplier is in financial trouble, and avoid disruption?

Here are a few thoughts:

  • As reported by Procurement Leaders in ”The Overlooked Supply Chain Risk”, 25% of supply chains have been impacted by supplier financial distress, while fewer than 20% of procurement organizations monitor for this risk.  The article shows that the most successful organizations have a clear process, often including collaboration between credit and procurement, as well as tools that make this easy.
  • Your procurement operation may need to broaden its view beyond cost-containment, and build processes that include an evaluation of supply chain financial health. For instance, we know of one large importer that had many containers held up by the Hanjin failure. An analysis of their process showed an annual container shipping RFP overly focused on cost vs. financial resiliency.
  • Supply chain financial stresses can grow quickly. In 2017, with global trade realities and political risks in flux, this is truer than ever. That's the value of a predictive supplier financial risk scores (like the proprietary FRISK® score) and ongoing financial risk management tools, and why a supplier financial risk assessment more than once a year is advised.

To learn about best practices for supply chain financial risk risk detection, and how leading organizations stay agile in the face of new financial risks, read the Procurement Leaders Whitepaper.

 And, contact us for a Supply Chain Financial Risk Assessment

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of more than 56,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96%-accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z”-Score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $150 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.