Two shippers have filed for bankruptcy protection this month and more could follow. Japanese dry bulk carrier Daiichi Chuo Kisen Kaisha said it had liabilities of $1.5 billion and could not make money on ships it had chartered or finance ships it had ordered.
On September 15, Global Maritime Investments Cyprus Limited filed for bankruptcy protection with $167 million in debts. The company is trying to protect its assets as it begins to liquidate its business. Global Maritime said that market overcapacity has pushed down rates, cutting into the shipper’s profits.
The general rule of thumb is that for shipping companies to be profitable, they need to charge between $800 and $1,000 per TEU (twenty-foot equivalent unit). The Shanghai Containerized Freight Index data showed that the spot freight rate for a container going from Asia to Europe or the Mediterranean was $313 last week.
The Shanghai index measures the spot rates, not contractual rates, and it has been plunging since February. The China Containerized Freight Index, which isn’t as volatile as the SCFI, dropped to $859 for the West Coast and $1,118 for the East Coast for the week ending September 25. The Mediterranean slid another 3.1 percent to $901 and for Europe, it’s down another 3.4 percent to $939.
The rates have dropped due to overcapacity because the shippers keep adding new and larger ships. Earlier this month, China Shipping Container Lines said it was spending $10 billion to buy around 10 ultralarge container ships. The idea is that when fuel costs are high, it’s more economical to use a ship that can carry 20,000 containers.
Ship capacity is expected to increase 8.6 percent this year, but demand is only up between 2 and 3 percent. If the freight rates don’t even cover the cost of fuel, shippers will either cut or cancel shippings.
Laure-Anne Boschwitz of Maersk Lines Shippers said, “Spot rates in the global container markets are by and large determined by supply of containers versus demand for container transport. Over the past few years, supply has been higher than demand leading to reductions in spot rates. In 2015 this effect has been accelerated by disappointing global demand, which turned out to be much lower than market consensus forecasts.” She went on to say that “current rates are unsustainably low.”
On the one hand, apparel companies could benefit from the fierce competition for their business by receiving lower shipping prices. But if routes get cut, they could be left scrambling to book a ship.