A gantry crane lifts a container onto a China Shipping Container Lines Co ship at a container terminal in Busan New Port in South Korea. South Korea's largest shipping company, Hanjin Shipping Co, filed for bankruptcy protection on Aug 31, as it grappled with a global trade slump, container overcapacity, depressed freight rates and excessive company debts. Cho Seong-Joon / Bloomberg

The dramatic collapse of South Korea's largest shipping company, Hanjin Shipping Co, has exposed the current hurdles faced by the global shipping industry, which is exacerbated by an imbalance in supply and demand.

Financial analysts predict Hong Kong-listed shipping companies will be bracing for business uncertainty in the years ahead.

Major firms listed in Hong Kong, including Orient Overseas (International) Ltd (OOIL), China COSCO Holding Co (China COSCO) and China Shipping Container Lines Co (CSCL), have all reported interim losses in the first half of 2016.

OOIL recorded a loss of $56.7 million after tax and minority interests attributable to shareholders. Mainland-domiciled China COSCO and CSCL also reported losses attributable to shareholders of 7.2 billion yuan ($1.1 billion) and 834 million yuan ($128 million), respectively.

"Notwithstanding the fact that there have been some tonnage withdrawals and pockets of volume growth in selected trade lanes, if deployed capacity continues to be substantially in excess of demand, the second half of 2016 will be challenging and difficult," OOIL Chairman Tung Chee-chen said in the company's interim report released in August.

The fallout from Hanjin has further exacerbated the woes that the global shipping industry is facing and would likely further dampen the business outlook of locally-listed firms.

The world's seventh-largest carrier, which accounts for a 3 percent share of the global shipping market, filed for bankruptcy protection at the end of August as it grappled with a global trade slump, container overcapacity, depressed freight rates and excessive company debts. It's believed the firm had racked up debts of more than $5 billion.

The filing came after Korea Development Bank - one of Hanjin's largest lenders - rejected a restructuring proposal on Aug 30 by the company, which tried to restructure debt under a voluntary creditor-led program since May.

Korea Air Lines Co - Hanjin's biggest shareholder - agreed in early September to lend $54 million to help pay for goods to be unloaded from Hanjin's stranded container ships. Together with the US bankruptcy court's decision to grant the company a reprieve from having its assets seized by creditors, Hanjin can dock and unload some of the estimated $14 billion of stranded goods after filing for bankruptcy protection.

The Wall Street Journal reported in mid-September that the firm was working to halve its fleet and the most likely scenario is that it will be liquidated.

"With the fall in oil prices, the immediate effect of the Hanjin fallout is poised to improve Hong Kong-listed shipping enterprises' operating performance in the short run," Castor Pang Wai-sun, head of research at Core Pacific Yamaichi, told China Daily.

"This is because the incident may prompt global major manufacturers to ship their goods as soon as possible before the peak season of Thanksgiving and Christmas holidays. These companies should benefit from short-term increased demand," he said.

However, Pang warned that the long-term business prospects for these enterprises still depend on global demand and oil prices, which remain unpredictable.

US-based credit rating agency Moody's Investors Service in June downgraded the outlook for the shipping industry over the next 12 to 18 months to "negative".

"The 'negative' outlook reflects our expectation that earnings will worsen, with freight rates likely to remain depressed amid ample supply," said Mariko Semetko, a Moody's vice-president and senior analyst.

Fellow ratings agency Fitch Ratings said slower growth and economic transition on the Chinese mainland will pose significant risks for the shipping sector due to its key role in global trade.

Economists also agreed that the uncertain global economic outlook spells an unlikely chance of the industry's revival.

"The outlook for exports remains murky as new export orders for the region have barely increased in August. Without a sustained rise in global capital expenditure, it is difficult to see exports from emerging Asia doing particularly well," Frederic Neumann, HSBC's co-head of Asian economics research, warned.

"We do not think that Northeast Asian countries have necessarily raised their (export) market share because of an improvement in their competitiveness," cautioned Louis Kuijs, head of Asian economics at Oxford Economics.

"Firstly, this is because the turnaround improvement in overall global demand had just recently begun and, secondly, the recovery cycle of manufactured goods export is not fully synchronized with that of commodities and/or investment goods," he said.

The economic think tank remains fairly cautious on how rapidly global trade momentum will improve, projecting that global trade will grow 0.4 percent this year and 2 percent next year.

"Slower growth in domestic demand on the Chinese mainland is likely to add concerns, but it's also interesting how continued US growth over the past year has not yielded much improvement in Asian exports. This could be a recurring theme in the coming months," said Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management.

The shipping industry is also forging various business mergers and consolidation, in an attempt to remain competitive, but analysts doubt the effectiveness of the ploy.

OOIL announced in the first quarter this year the formation of Ocean Alliance, which enables the shipping company to expand services networks and keep costs down through building a shipping carrier network with other partners. It will kick off in the second quarter of 2017.

"The large container shipping firms are trying to use alliances and mergers to improve capacity utilization, strengthen market power, reduce costs and thereby bolster profit margins," said Ron van het Hof, chief executive officer at global trade credit insurer Euler Hermes' business operation in Germany, Austria and Switzerland.

"Despite these measures, some shipping companies will incur heavy losses."

Fitch Ratings is worried that defensive measures such as cost cutting won't lead to an extended recovery in the sector. Rigorous capacity discipline along with a pickup in demand would be necessary to reach a sustained equilibrium, the agency said.

oswald@chinadailyhk.com

An Orient Overseas Container Line (OOCL) container ship sails past Busan New Port in South Korea. OOCL is a wholly owned subsidiary of Hong Kong-based logistics company Orient Overseas (International) Ltd. Major shipping firms listed in Hong Kong have all reported interim losses in the first half of 2016. Cho Seong-Joon / Bloomberg

(HK Edition 09/27/2016 page9)