Some governments in Asia are potentially prolonging the global shipping downturn as their subsidies to national shipping lines allow additional capacity to remain in the market.
The Taiwanese government recently approved a package of US$1.9 billion for Taiwan-based shipping lines including Yang Ming and Evergreen. The funding includes loans at preferential interest rates and a reduction in port dues.
This initiative followed South Korea’s announcement of their intention to establish a government-funded financial vehicle for shipping with initial capital of US$871 billion. In the longer term, the new shipping entity will provide US$5.7 billion to allow South Korean carriers to buy new vessels at attractive interest rates.
For many years, China has provided financial support for its state-owned carriers, COSCO and China Shipping. Subsidies between 2009 and 2015 amount to US$1.74 billion.
According to UK-based shipping analysts, Alphaliner, the increase in government intervention to fund struggling carriers could postpone a much-needed restructuring of the container shipping sector.
“The large amounts of financial aid, which state-related entities in Taiwan and South Korea provided to protect their nations’ ailing shipping lines, come amid a slump in earnings, while shippers have been spooked by Hanjin Shipping’s bankruptcy,” a spokesman for Alphaliner said.
So far this year, more vessels have been scrapped when compared to last year, with 500,000 TEU of capacity to be taken out of the container shipping market by year end. However, analysts say this is not enough and with the likelihood of Hanjin’s capacity to be re-introduced on Transpacific routes by Korea Line, supply will continue to outstrip demand.
The main worry is that government intervention in shipping might well lengthen the industry’s rehabilitation, as vessel overcapacity will continue to depress freight rates and carriers continue to lose money.
The bottom line for Asian governments is that the subsidies provide a guarantee of trade security and the long-term survival of their home-grown carriers to maintain essential transportation links that shipping provides to global markets.
What many of the analysts were forecasting prior to the recent intervention by Taiwan and South Korean governments, was further consolidation in the liner shipping sector. This would have likely led to further scrapping of ships, and more vessels laid up to create a more sustainable supply-demand balance.
Carriers would then be able to increase freight rates to move them out of the red and back into profitability. From a shippers’ perspective, the continuation of the major shakeout will leave them with fewer choices; and the mega carriers and alliances will be able to drive freight rates higher.