LONDON: 'They just keep slitting each other's throats with lower rates," the shipbroker says. His sense of desperation is common in the industry, but he still asks not to be named. Tomorrow he will be fixing deals for the same shipowners who have flooded the market with new vessels in recent years, driving shipping rates lower as the glut of unused vessels grows.
"They're building larger and larger ships to increase their capacity so they can cut costs, but with each larger vessel ordered they're making the market worse. For at least the last five years it's been a fight to the death," he says.
Container shipping could lay claim to being the world's first global industry. More than 50,000 merchant ships registered in more than 150 countries carry as many as 16,000 20ft containers at a time via a complex network of trade routes. From raw materials to finished goods, the shipping industry carries the lifeblood of the global economy, supporting 90pc of world trade.
But after years of falling freight rates, deepening company losses and mounting debt, the shipping market is reaching a crisis point. In recent weeks the first major fatality came. South Korea's Hanjin Shipping, the world's seventh largest container carrier, controlled a fleet of 141 ships worth around $1.76bn and transported more than 100 million tons of cargo a year. But its final set of financial results at the end of June revealed $5.5bn of debt. Two months later it entered administration.
The bankrupt Seoul-based shipping giant has 230 branch offices in 60 countries. In the company's London office, employees heard of the company's collapse from news reports, rather than senior management.
"We were told by our sales manager, and from what I understand he found out through the media," one employee says. "We knew nothing. It was a few days later our financial director called a team meeting to say he no longer has authority to call the shots in the company. He can't guarantee we will even be paid at the end of the month."
It is the clearest sign yet of the shipping market's deep dysfunction, a situation partly of its own making. Owners and builders have struggled for the past eight years: first against the financial recession, then with a faltering Asian economy and finally the global commodities crash.
Before the recession, tanker freight rates were in the region of $45 a metric tonne, according to the information provider S&P Global Platts. Over this past summer the rate averaged just $9 a metric tonne, and it slipped below $5 a tonne the day Hanjin folded.
For shipowners, falling freight rates have piled on further pressure to undercut their competition with even lower rates, by investing in bigger, better ships. In the face of crippling oversupply, freight rates have plummeted and a zombie fleet of some 200 unused container ships idle at anchor around the world.
Gavin Simmonds, director of policy at the UK Chamber of Shipping, believes that a major industry failure has been written on the wall for some time. "There have been persistent rumours that overcapacity will bring a big casualty this year. [Hanjin's failure] is an inevitable shaking out of overcapacity," he says. "Everyone is building like crazy for economies of scale with the larger ships. It's a hard decision for owners to scrap older ships, because scrap metal prices are so low at the moment."
There are now an estimated 400,000 containers stranded on Hanjin vessels, holding goods worth $14bn, from Samsung electronics to waste paper. More than half of the vessels have been blocked from docking at their destination ports, while others are held by port authorities over Hanjin's unpaid fees.
Cho Yang-ho, the chairman of parent company Hanjin Group, has given a $36m cash injection to Hanjin Shipping, but unwinding its operations could still take considerable time. In the company's London office at Canary Wharf, the days are long and uncertain. "All we are left to do is explain to the customer that even though they booked cargo to a certain destination, their cargo won't be making it there. We're leaving cargoes at the closest transhipment port but I need to explain that we're still charging them the full tariff. My workdays are far from pleasant at the moment," he says.
Peter Vincent is the director of a freight forwarding company, Coastal Global, which offers logistic solutions to major shipping lines, including Hanjin. "For a number of years we've all been wondering when someone would fall, but to be honest I didn't think it would be a company as large as Hanjin," he says.
Coastal Global has between 20 to 30 customer containers currently stranded in Felixstowe, on the Suffolk coast. The port authority has refused to release the cargoes until it can claw back some of Hanjin's debts. According to Mr Vincent, the port authority has come up with an "arbitrary" release fee of approximately pounds 480 per container and a deposit of between pounds 2,000 and pounds 3,000. "It's as though they've looked at the debt that Hanjin has left, and the number of containers they have in their hands, and are simply using the situation to secure some form of payment by passing the buck to the clients of Hanjin," he says.
But the true cost crunch will come from those vessels already en route to ports in China. A total rate is typically agreed to cover the total transportation cost from, say, Manchester to Xiamen via Hong Kong, Mr Vincent says. Now the orphan vessels will be forced to terminate their journey in Hong Kong, where the local Hanjin office has been instructed by the administrators to charge additional "commercial rates" on top of the full payment already received to complete the journey.
"This has resulted in some cases in the rates quadrupling, which needless to say will add pressure to an already tense situation," Mr Vincent says.
In the short term, Hanjin's paralysis has lifted prices in the market, providing much-needed respite to its peers. But few expect this to last.
Jonathan Roach, a shipping analyst with Braemar, says that in the week after Hanjin's collapse, the cost of shipping a container from Shanghai to Northern Europe rose from $695 to $949 for a standard shipping container. Ship owners are charging an extra $200 per unit, but shippers "are happy to pay that to guarantee space for their cargo" and the owners are no doubt happy for the brief relief.
"The rise is shipping rates is welcome for the industry. Every little helps and they need it," Mr Roach says. "With a major player going out of the market, prices have been going up, but it's a knee-jerk reaction. There is still a lot of overcapacity in the market."
Although some Hanjin vessels may be scrapped, the majority, understood to be high-quality vessels, will be sold off and ultimately remain in the market. Three bulk carriers, used for carrying commodities such as iron ore, coal and grain, have reportedly already been sold for a total of almost $39m. Another two container ships worth between $18m and $22m have also been put up for sale. Many more are expected to be put on the block but uncertainty surrounding the future of the company is likely to delay progress.
The isolated crisis of the Hanjin collapse is unlikely to derail the industry in any meaningful way as rival shippers scramble to absorb the lost customers. "The Hanjin failure certainly won't spoil Christmas," Mr Roach says. "Hanjin's collapse is not going to cause havoc on the high street. It's a short-term crisis until the situation sorts itself out, but there are plenty of ships idle."
Peter Norfolk, a former shipping broker turned analyst for S&P Global Platts, has watched the sector closely for almost 20 years, and says that change is coming slowly. "Shipping has always moved in long-term cycles, but we're finally starting to see ordering of new vessels die away. It does happen eventually," he says.
Last year around 240 new container ships were ordered, but this year only 60 new vessels appeared in the global order books. The rate of vessel scrapping is also beginning to rise, though the decision to dump a vessel is not an easy one, Mr Norfolk says: "Ship owners will look at how much they could reclaim by scrapping a vessel, which is very low, versus the operating costs and freight rates. It's not always economic to scrap a vessel."
It can be difficult to understand why ship owners continue to order vessels, seemingly ignoring the growing oversupply of ships in the self-defeating pursuit of bigger, newer fleets, he admits. "If you're a ship builder and you have cash, what are you going to do with it? You'll build more ships - it's what they do.
"What you need to remember is that there is a lead time of around two years between ordering a vessel and the finished product. The ship itself will run for around 20 years. So shipping companies are making decisions today based on what might be needed decades from now. The danger of not investing in newer, lower-cost vessels is that if the market bounces back you won't be in a position to compete."
In the meantime, Hanjin's peers will be hoping the bounce-back is sooner rather than later.