Shipping and steel have a lot in common. Both are essential industries that never quite seem able to match supply and demand well enough to ensure steady profitability.
Both are highly cyclical and capital-intensive, requiring heavy investments that must be made years in advance, usually on the basis of imperfect forecasts. Once an investment is made in a ship or mill, it stays around for years, adding to capacity and lowering prices.
The oceans are littered with “zombie” carriers that remain afloat despite heavy losses. The same is true for steel, where mills may be idled from time to time but owners are unwilling to pull the plug on an investment they hope someday may turn around.
Shipping and steel intersect in the breakbulk market, where steel is a core commodity for multipurpose vessel operators and ports. When a weak economy or trade sanctions reduce steel shipments, breakbulk carriers and ports are the first to feel it. Shipments of finished steel are affected, and so are movements of ores, coal, and scrap, which fill bulk carriers that compete with multipurpose vessels.
Slowing economic growth has encouraged China’s country’s steelmakers to send excess production to the United States and Europe. To no one’s surprise, this has provoked retaliatory anti-dumping actions by the United States and the European Union.
Low steel prices have contributed to an oversupply of multipurpose vessels and sent rates to unsustainable levels. Rather than scrap ships when steel prices are low, carriers are hanging onto their vessels in the hope the steel market will recover, or that shipping rates will improve.
Despite their similarities, steel and shipping differ somewhat in one important area. Steel is a fungible commodity — if a customer can’t obtain hot-rolled coil from one source, there’s always another source that can provide similar quality. In recent years, it’s been fashionable to describe shipping as a commodity, but it’s doubtful that many of Hanjin Shipping’s customers would endorse that view today.
Hanjin’s collapse underscored that a carrier’s financial stability matters, something many had forgotten since the last wave of container line bankruptcies back in the 1980s.
Project cargo shippers and forwarders are acutely aware of the risks of dealing with carriers that have shaky finances or poor operating practices. Cargo loss, delay, or damage is a setback for any shipper. It’s disastrous for a large, complex module that can’t be replaced quickly enough to keep a billion-dollar project on schedule. Even the lowest freight rate can’t make up for that kind of fiasco.
Hanjin’s bankruptcy has raised many questions. The most intriguing may be: Will it encourage a two-tiered pricing system in which better carriers can charge more for superior service? And if not, why not?