The global shipping market has faced the dire consequences of low demand and an oversupply of vessels in recent years. Sectors across the industry have experienced dangerously weak freight rates, causing several high-profile failures and a much larger number of smaller casualties.

The dry cargo sector has been the worst hit, with earnings rates for many bulk and general cargo ships falling below operating costs intermittently, particularly after finance repayments are taken into account. Although some dry bulk freight rates have experienced an upturn in the last six months, it only takes a cursory glance over rates in the last two years to see that we remain far from the boom years of the early 2000s. Losses and debts also continue to mount at many of the major legacy container lines.

Meanwhile, tanker rates rose substantially in 2015 only to fall back in 2016 and 2017 to-date. Given the massive influx of tonnage due for delivery in 2017 and 2018, alongside its associated debt, the outlook for the sector looks unclear.

Siteam Leader - 2009 Built 46000 DWT Tanker
Siteam Leader – 2009 Built 46000 DWT Tanker

The challenges facing each sector will only be compounded by the ballast and fuel regulations due to come into force from 2019. The 2020 IMO sulphur cap is expected to cost the shipping industry between $50 billion and $100 billion annually. Similarly, the Ballast Water Convention rules, recently delayed until 2019, could cost a further $100 billion. While these costs will ultimately be passed to end-users in the form of higher freight rates, the uncertainty and price shock will undoubtedly increase risk to all market participants.

Today’s heightened risk in shipping has wide-reaching consequences. Bunker traders working to tight margins on high receivables in a cut-throat business face months of profit being wiped out by solitary bad debts from ship operators or other traders. At the same time, many large shipowners are increasingly keen to go direct to major suppliers rather than risk going through traders unnecessarily. Other owners and operators require proof that suppliers have been paid before they will make payment to traders.

ƒVoyage charterers must pay close attention to the owners they are fixing with. Struggling owners with large debts can see vessels or bunkers arrested, often part-way through the loading of cargo, or before discharge can take place. In some cases, owners close to bankruptcy have been unable to pay for the fuel required to complete voyages, and ships have ended up stranded at anchorages far from their destinations. The cargo delays and contractual breaches that inevitably result from these issues come at a heavy cost for charterers. Given that even a modest Handysize grain cargo is worth around $3 million, the potential exposures for cargo interests can be substantial.

ƒShipowners in-turn face the risk of defaults on hire from troubled timecharterers, which typically have no recoverable assets and can be incorporated in non-disclosure jurisdictions. Although it is possible to withdraw ships from non-paying charterers, and insurance may cover the lost hire, it is very difficult to recover the additional costs they might incur as a result of the termination. Owners must also repay the timecharterers for the value of any bunkers ROB when the contract was terminated.

ƒContainer shippers can no longer rely upon the notion of “too big to fail”, and must look beyond straightforward comparisons of freight rates when choosing which lines to use. In the event a line ceases trading, cargo can be tied up for months both at load/discharge ports and at sea or in transshipment hubs. The August 2016 collapse of Hanjin left approximately $14 billion of cargo in limbo. Similarly, container lessors will face a long wait before their key moneymaking assets are returned.

MSC Bremen - Built 2007 Container Ship
MSC Bremen – Built 2007 Container Ship

ƒFinancial institutions must take difficult decisions relating to whether they can continue to back indebted shipowners, at a time when earnings rates may not always cover all costs and asset values have fallen. However, shipping industry participants can arm themselves against these risks by closely vetting their potential counterparties and evaluating individual business opportunities. This can range from obtaining basic Know Your Customer (KYC) data to ordering enhanced credit reports. In the low-disclosure shipping environment, company ownership, liabilities and financial issues are often concealed, generating countless traps for the imprudent. Carrying out due diligence not only helps mitigate the risks inherent in the market, but also gives participants an informational edge over competitors who may exercise less care. It must therefore be seen as an essential component of all transactions.