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Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.


Shippers demanding more financial transparency from carriers

Tuesday, October 11, 2016 > 09:58:55

(Lloyds Loading List)

With the risk of carrier failure still high following Hanjin’s collapse, cargo owners are demanding more financial transparency from carriers before entrusting them with their cargo, according to industry analyst Drewry.

Drewry said its ‘Z-score financial stress index’ had sunk to its lowest ever point following lines’ first-half 2016 results. And while there is still much work to be done to clean up the logistical chaos created by Hanjin’s bankruptcy, “there are lessons from the sorry mess that need to be learned to avoid a repeat occurring”.

Firstly, all stakeholders must understand that no carrier is too big to fail, Drewry noted. “Secondly, while Hanjin’s financial position was at the extreme edges and its demise is not expected to create a domino effect, a number of major carriers are still struggling and the risk of another following the same path as the Korean line cannot be discounted,” it added.

“Knowing these things, any company doing business with ocean carriers must undertake more due diligence than was previously the case.”

Drewry noted that the decline in its Z-score index had coincided with the heavy reduction in container freight rates, which dropped to historical lows in the second-quarter.

“As freight rates staged something of a recovery in the third-quarter, we expect to see some uptick to the Z-score when the third-quarter 2016 results are published, while the removal of Hanjin from the sample will also benefit the average score,” the analyst added. Nonetheless, carriers will almost certainly continue to reside in the so-called ‘distress zone’, it added.

“Drewry consultants have met an increasingly demand from exporters and importers for carrier financial risk indicators and advice on risk management; we believe that this will lead shippers to award more volumes to those carriers who are closer to the safe zone, and provide visibility into their financial health,” Drewry continued.

It noted that the level of financial risk varied significantly between the 14 selected carriers that its index analysed. “Based on the latest available financial reports, the Z-score table shows that only two (AP Moller-Maersk and OOIL) of the 14 selected companies scored high enough to make it to the cautionary ‘grey zone’, with the remainder struggling in the ‘distress zone’,” Drewry warned.

With shippers expected to pay much closer attention to the financial risks when selecting carriers in future, carriers themselves will need to be sure of the financial health of their alliance and service partners, or potentially risk losing customers, Drewry added.

“The Hanjin situation exposed many shippers who booked space from other carriers who happened to be service partners and customers are now much more aware that the risks extend beyond their own chosen service provider. Some shippers will demand that their cargo be booked on the carriers’ own ships.”

But getting financial visibility is not always possible, as many large carriers, such as MSC and Hamburg Sud, do not publish their financial results, Drewry observed. Others only report at the group level with minimal data for container operations.

“The demand for financial transparency is increasing and Drewry is aware that some large shippers are now requesting access to ‘hidden’ financial information before entrusting their cargoes, in return for signing a non-disclosure agreement,” Drewry said. “As more shippers demand access to financial data during contract negotiations, it will become harder for secretive carriers to hold down the drawbridge.”

Drewry said its Financial Research Services unit had released a report ‘Container Shipping – A Financial Health Check – Macros and Micros’ that gives an independent view on the financial health of the industry and major companies, highlighting “how container industry debt is climbing again and that carriers do not have enough cash to meet their interest expenses”. It added: “Ballooning debt and negative cash flows for an extended period of time will exert serious strain on carrier business viability, which will increase the pressure on carriers to sell assets to stay afloat, or submit to a takeover.”

Drewry concluded: Hanjin’s bankruptcy has exposed the high level of financial risk that exists and has created renewed demand for financial transparency. Privately owned carriers will risk losing shippers’ trust if they do not provide any data on their level of indebtedness and balance sheet strength.”

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