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Hanjin Collapse Could Cause Container Shipping Rates to Surge in 2017

The global shipping industry is in shambles and it’s clear the effects of Hanjin’s ruin are not going away anytime soon.

“Everybody in this industry, not just carriers and shippers, should take the Hanjin situation as a wakeup call,” stressed Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, speaking in New York City on a panel titled “Are There Lessons Vessel-Sharing Partners Can Learn from the Hanjin Meltdown?” at the 28th Apparel Importers Trade and Transportation Conference, organized by the United States Fashion Industry Association (USFIA) and the American Import Shippers Association (AISA).

To review: Hanjin Shipping, one of the world’s largest container shipping companies, filed for court receivership in South Korea at the end of August after creditors refused to loan it more money and declared bankruptcy in the U.S. a few days later. Hanjin’s fleet, which once numbered 97 vessels, is down to 14 ships and all but three of those have been stranded or seized.

“Everyone is very familiar with the fallout, what happened, the seizure of ships, the cargo that’s frozen in transit, problems in the ports, canceled sales, missed deliveries. It’s a real problem and it’s not the end of the situation,” Conrad said. “Carriers are in pretty serious trouble.”

Low freight rates, as well as overcapacity, lit the match that fired Hanjin’s flameout, but those two issues have been shared by the shipping industry at large. And while low fuel prices earlier in the year provided a little cushion for the carriers, that padding has since disappeared.

“The price of bunker fuel on the West Coast on average was $284 a ton [on Nov. 8], on the East Coast it was $268 a ton. If you look at where it was in April of this year, only about six or seven months ago, the West Coast was $167, the East Coast was $176,” Conrad pointed out. “So we’ve seen close to $100 a ton increase in the price of bunker fuel for carriers in the space of about seven months. It’s anybody’s guess where that will go but I don’t see if going down dramatically in the next few months.”

Quoting data from Alphaliner, Conrad said that carrier operating margins declined 5.5% on average in the first quarter of the year, were down 9.2% in Q2 and likely even worse in Q3. In fact, the last time carriers had a good quarter—year, even—was in 2010.

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In addition, global container volume is on track for the worst year since 2009 and container lines expect to report between $8 and $10 billion in losses collectively for the coming year.

“Pretty much everybody who services you as a carrier is operating at levels that are well below what they are at breakeven,” Conrad said, adding, “I think you’ll see a significant increase in 2017 contract rates. It has to happen. The carriers I’ve talked to are saying the rates have to go up substantially.”

How substantially? Upwards of $500, with some Trans-Pacific carriers expected to charge $1,800 or $1,900 per twenty-foot equivalent unit (TEU) to the West Coast next year.

“That’s where they need to be. It’s really a question of necessity now to stave off another Hanjin situation,” Conrad said. “And of course in the short-term market you will see the continued use of these short-term GRIs (general rate increases) to try to bolster the short-term market and at least keep parallel with contract rates.”

What’s the new normal in 2017? Conrad expects apparel importers will have to do a lot more due diligence on carriers, looking at their strengths and weaknesses, their financial provisions, their schedule reliability.

“Rates are going to have to go up in order to supply sustainable revenue for this industry,” he repeated. “So I think the focus for all of you should be on service, commitments you get from the carriers as to whether they’ll be able to handle your cargo and what kind of contingencies they have place for things like Hanjin.”