Drewry Issues Red Alert—Risk of Carrier Failure Still High - Global Trade Magazine
  October 14th, 2016 | Written by

Drewry Issues Red Alert—Risk of Carrier Failure Still High

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  • Shippers must undertake more due diligence of ocean carriers.
  • No ocean carrier is too big to fail.
  • Only Maersk and OOIL are in Drewry's cautionary “grey zone;” twelve others are in the struggling “distress zone.”

There is still much work to be done to clean up the logistical chaos created by Hanjin’s bankruptcy, but even so there are lessons from the mess that need to be learned to avoid a repeat occurring, a recent report from Drewry proclaimed.

First, no carrier is too big to fail. The expectation that some white knight would rescue an ailing carrier has been erased.

Second, while Hanjin’s financial position was extreme, “the risk of another following the same path as the Korean line cannot be discounted.”

For shippers above all, this knowledge means they must undertake more due diligence of ocean carriers than was previously the case.

Drewry’s Z-score carrier financial stress index sunk to its lowest ever point following the first-half 2016 results. The decline in the Z-score index coincided with the heavy reduction in container freight rates that dropped to historical lows in the second-quarter. As freight rates staged something of a recovery in third-quarter, Drewry expects to see an uptick to the Z-score when third-quarter 2016 results are published. The removal of Hanjin from the sample will also benefit the average score. “Nonetheless,” the report noted, “carriers will almost certainly continue to reside in the so-called distress zone.”

The level of financial risk varies significantly between the companies in Drewry’s basket of carriers. Based on the latest available financial reports the Z-score table shows that only two (A.P. 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 consultants have seen increased 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,” the report said.

At the same time, carriers will want to be sure of the financial health of their alliance and service partners, or potentially risk losing customers. The Hanjin situation exposed shippers who booked space from other carriers who happened to be Hanjin service partners. “Customers are now much more aware that the risks extend beyond their own chosen service provider,” said the report. “Some shippers will demand that their cargo be booked on the carriers’ own ships.”

Many large carriers, such as MSC and Hamburg Sud, do not publish their financial results. Others only report at the group level with minimal data for container operations. But some large shippers are now requesting access to financial information before booking cargo, in return for signing a non-disclosure agreement.

“As more shippers demand access to financial data during contract negotiations it will become harder for secretive carriers to hold down the drawbridge,” the report concluded. “Financial transparency is something that carriers will need to get used to.”

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