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After Hanjin - economic pressures continue to bite

The collapse of South Korea’s Hanjin Shipping in 2016 exposed the perilous state of some parts of the shipping industry. It is estimated that some 500,000 teu, worth an estimated $12bn, was on more than 100 ships around the world [i] when Hanjin filed for bankruptcy protection, throwing ports and retailers around the world into confusion. Previously one of the world’s top 10 shipping companies, the firm was declared bankrupt by a South Korean court in February 2017.

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It is estimated that some 500,000 teu, worth $12bn, was on more than 100 ships around the world when Hanjin filed for bankruptcy protection. Photo: Shutterstock.

“Hanjin will not be an exception,” says Nicolas Thoreau, Regional Head of Marine Hull, Asia, AGCS. “We have recently seen more bankruptcies, ranging from small to larger carriers. Mergers, acquisitions and alliances are more and more the new norm to building a sustainable future.”

For example, Thoreau notes that in Japan, the country’s big three container shipping companies - K Line, MOL and NYK Line - recently announced a joint venture (Ocean Network Express). “The move will allow Ocean Network Express to better meet customers’ needs by providing high-quality competitive services through the consolidaton and enhancement of the three companies’ global networks and service structures,” K Line said [ii].

“Market developments” remains the biggest risk in the shipping sector, according to those questioned for the Allianz Risk Barometer 2017.

/assets/Graphics/Safety%20and%20Shipping%20downloads/SS2017_TopRisksARB2017_large.png (Click to enlarge) 

Growth in trade has slowed at a time of record capacity in the shipping industry. According to shipping analyst Clarksons, [iii] the global commercial shipping fleet
currently totals 1,861.9m dwt, over 50% larger than at the start of 2009. In contrast, growth in global trade in 2016 [iv] was at its lowest level since 2009, according to the World Trade Organization.

“When debt levels are high and earnings are low, many ship-owners will look to make cost savings, with implications for maintenance budgets, training and
crew,” says Chris Turberville, Head of Marine Hull & Liabilities, UK, AGCS. This raises concerns about how such measures could impact safety and claims activity further down the line.

“When companies are stretched so thin, crew costs are an easy target and it is tempting to reduce manning levels or seek cheaper contracts,” says Kinsey. “Having spent 25 years at sea, including 13 years as a master, I know that the safety of crew and cargo is paramount. But safety decisions should not be made on the basis of cost.”

“Crew negligence and inadequate vessel maintenance are potentially increasing areas of risk in the current tough economic shipping environment, particularly if
ship-owners opt to recruit crew with less experience and fewer qualifications in order to save money, or choose to stretch maintenance work to the longest possible intervals,” adds Duncan Southcott, Global Head of Marine Claims at AGCS.

And efficiency measures may already be filtering through to claims, according to Thoreau. “While we see fewer large claims, we do see more attritional claims. These are smaller claims that should not really happen – a large percentage are purely maintenance-related and should not fall into the scope of insurers.”

Negligence/poor maintenance is already one of the top causes of liability loss in the shipping sector, so rigorous inspection and maintenance regimes are crucial, adds Adrian Laflin, Senior Claims Expert, Marine at AGCS. “Obtaining buy-in from all levels of the workforce is important in creating a transparent and effective mechanism for reporting accidents and other areas of concern, learning lessons and, ultimately, implementing preventative measures as a result. As we all know, prevention is the best cure.”

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[i] www.bdpinternational.com/news-advisories-events/trend-watch/hundreds-shippers-still-waiting-cargo-hanjin-boxes-held-hostage-pocket-ports/
[ii] worldmaritimenews.com/archives/221423/japan-trios-jv-to-be-named-ocean-network-express/
[iii] https://clarksonsresearch.wordpress.com/tag/demolition/
[iv] https://www.wto.org/english/news_e/pres16_e/pr779_e.htm


Consolidation and scrapping – a younger fleet and larger vessels

Encouraged by low interest rates, container ship ordering spiked in 2010 and 2013 to 2014, as ship-owners invested in larger and more efficient vessels. But with an estimated 5% to 6% of the global fleet idle, overcapacity has seen the value of vessels plummet and led to record scrapping levels in 2016 [i].

According to Braemar ACM, over 200 container ships were scrapped in 2016, taking around 700,000 teu capacity out of the market, compared with 185,000 teu capacity scrapped in 2015. 2016 also saw 6,000+ teu boxships scrapped for the first time [ii].

The expansion of the Panama Canal, which can now handle even larger New-Panamax vessels has also boosted scrapping – according to Clarksons the pace of demolition of ‘old Panamaxes’ has been running at more than twice the five-year average [iii].

The rise in ship demolition has also seen relatively young ships sent for recycling. At the start of 2017, the seven year-old container ship Hammonia Grenada was sold for scrap for an estimated $5.5m. When it was launched in 2010 it was valued at $60m [iv].

According to Clarksons, the average scrapping age for bulk carriers has fallen from 33 years in 2007 to 24 years. Economic pressures are also pushing the shipping industry to consolidate, with a number of major container ship operators in China, South Korea and Japan announcing mergers and acquisitions.

“Trading conditions in the container market are likely to result in consolidation. This will no doubt further the trend for larger and more efficient vessels in the LNG and
container industries in particular,” says Thoreau.

Larger operators will continue to seek efficiencies, which will drive them to switch to ever-larger vessels. “Despite overcapacity, we continue to see deliveries of vessels of 20,000 teu or more,” Thoreau adds.

“Using the latest technology, new vessels are usually larger, more efficient and safer. However, larger vessels also pose challenges, such as around salvage operations and the availability of suitable ports of refuge,” says Thoreau. “All sectors are concerned – from cruise, container, LNG to bulk and car carriers.”

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[i] http://www.telegraph.co.uk/business/2016/10/08/up-for-a-scrap-shipbreaking-enters-hits-record-level/
[ii] http://www.telegraph.co.uk/business/2016/10/08/up-for-a-scrap-shipbreaking-enters-hits-record-level/
http://splash247.com/boxship-owners-send-record-700000-slots-scrap-2016/
[iii] https://clarksonsresearch.wordpress.com/tag/demolition/
[iv] www.bbc.co.uk/news/business-38653546


 

How a $4bn loss scenario could occur

The increasing size of vessels has raised fears about the potential for higher losses if a major casualty does occur, particularly one involving two large vessels, such as a cruise ship and a container ship, for example. There are many factors to consider when evaluating the potential costs from such an incident.

Below, we consider a worst case scenario casualty involving a collision, followed by grounding of both vessels and pollution, in an environmentally-sensitive location. In this scenario both vessels are then deemed constructive total losses. The potential exposure could be:

/assets/Graphics/Safety%20and%20Shipping%20downloads/SS2017_LossScenario_large.png (Click to enlarge)

Structural integrity issues
Concerns over the structural integrity of some larger vessels – particularly ones that have been converted – remains an issue in the wake of a number of incidents and losses resulting from breaches in recent years. Shipping stakeholders need to come together to address this issue. In 2017, there have been reports of cracks being discovered on a number of converted very large ore carriers (VLOCs). Meanwhile on 31 March, 2017 the converted VLOC, the Stellar Daisy, sank off the coast of Uruguay with the loss of 22 crew. The cause of that incident had yet to
be determined at time of writing. [i]

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[i] http://www.maritime-executive.com/article/imo-calls-for-inquiry-into-the-loss-of-stellar-daisy