Friday, March 4, 2016

LESS BAD NEWS ON FALLING RATES IS GOOD NEWS FOR CONTAINER LINES

Freight Investor Services
LEADING THE WAY IN FREIGHT AND COMMODITY DERIVATIVES

Got that sinking feeling?

Rates continued downward this week albeit at a slower pace falling just $26 to $231 TEU on the Asia-Europe trade. With rates at near all-time lows it’s no surprise to see the rate of decline waning.

Reports indicate that carriers are reluctant to keep discounting rates given how low they currently stand. The one exception to this is Maersk Line who are reportedly being a lot more aggressive in their spot pricing, publishing rates at under $200 TEU.

To add more pain to carriers, rates have also now been extended until the end of March suggesting that the previously planned GRI that initially had been announced for March 1st and subsequently pushed back to March 15th, will now not come into effect.

With rates to Europe declining and routes across the board extremely low the comprehensive SCFI index is now at an all-time low of 433.46 points adding more pressure to carriers such as HMM.

The Korean line has seen its share price plunge a whopping 21.04% after reports emerged that the company is seeking to write down its capital by a massive 86% to USD 143m as of April 21st in an attempt to improve its position.

It’s understood that if a company’s equity capital ratio stays below 50% for two years in a row it could be delisted from the stock market. According to a company spokesman the drastic action is a pre-emptive move to improve its financial position through share consolidation and avoid a possible delisting.

The company will seek shareholder approval of the move on March 18th with its shares to cease trading from April 20th until May 6th.

In another twist to the story Hyundai Group Chairwomen Hyun Jeong-eun has resigned from her position on the board and management of the shipping company. The same chairwomen had previously spent USD 24.4m of her own money to acquire 4m shares in HMM’s new stock issue in a plan to ease the company’s liquidity crisis. Reports indicate that her stepping down will allow board members to be more aggressive in pushing ahead restructuring plans.

With cost control the favoured method of carriers over the past few years is it time that they considered combining these efforts with effective revenue management? Back in December 2015 FFA’s for Q1-2016 were being priced in the region of $550 TEU.

By using risk management tools such as FFAs carriers could have secured a proportion of their income at the aforementioned level and therefore protected themselves from these latest declines. By not managing their revenue and therefore risk, they are now facing the consequences of lower rates and reduced income.


 
MonthSCFI AverageFFA RateFFA Cash FlowNet Income
Jan-16$671.50$550-121.50550.00
Feb-16$340.00$550210.00550.00
Mar-16$300.00?$550250.00550.00

 
Source: Hyundai Merchant Marine, Shanghai Shipping Exchange.