Wednesday, March 11, 2009
South Korea: Shipping firms struggle to avoid domino effect
Wednesday, 11 March 2009
Korea’s shipping companies are struggling as the global economic downturn has hit the industry hard, and shipping rates have fallen sharply, market watchers said yesterday. Korean exports plunged 31.4 percent in the first two months of this year, as companies slashed production in anticipation of increasingly weak demand for their goods and consumers worldwide reduced purchases in the face of a worldwide downturn.
“The shipping industry is the first sector hit by a global economic slump,” said Kim Hyung-yeol, an analyst at NH Investment and Securities. “[The] global recession saps cargo demand, while a surge of new ship deliveries raises capacity.”
Last week, Samsun Logix Corp., the country’s seventh-largest shipping line, was placed under court receivership after facing a credit crunch.
The shipper’s business performance was not bad last year. It logged 136 billion won ($90 million) in operating income on sales of 2.4 trillion won, although it suffered a net loss of 36 billion won due to heavy financial costs. In the past few years, the country’s shipping lines, such as Hanjin Shipping Co., enjoyed a heyday of rising demand. The Baltic Dry Index - an indicator of shipping charges for dry cargo ships - surged to a record 11,793 in May last year.
But by December it had fallen as low as 663, and it now hovers around the 2,000 level. “Although the BDI recovered to some degree, it is unlikely to continue its upward trend,” Kim said, adding that shipping rates may fall again down the road.
Market watchers say one of the factors driving some shippers into a corner is their unusual practice of renting out infrastructure. Usually, shipping companies charter out some of their vessels to other shippers. But in the current uncertain macroeconomic backdrop, it is not assured that their charter counterparties can pay the agreed rates. Also, chartered-out ships are re-rented to other shipping lines, which increases the chances of a shipper facing counterparty risk. “Renting out the ships is not a real problem. More important is who is renting them,” an official at a local shipping company said, asking not to be named. “If a charterer fails to make payments for it, it could lead to a chain of bankruptcies.”
In an uncertain market, shippers also run the risk of contract renegotiations as their charter counterparties may struggle to make payments in the wake of the global economic crisis.
“They [charterers] want to cut the rates to a level that we cannot accept,” the official said.
Last week, Korea announced that it would encourage state-run companies to buy vessels from local shipping lines to help them better tackle slumping trade volume and plunging ship prices. Indeed, several shippers are seeking to sell vessels at cut-rate prices to secure cash and repay debts.
“It is positive for the shipping industry as the measures could help reduce the risk of several shippers facing default,” said Song Jae-hak, an analyst at Woori Investment and Securities. “But the measures would not be enough to alleviate the sector’s problems because of falling exports and an oversupply of new ships.”
The Korea Shipowners’ Association, which represents 164 shipping companies, also said in November it plans to set up an asset management company to buy vessels from members. According to the association, the country’s 177 shipping companies own around 820 vessels.
Source: Yonhap
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