Shipping Industry Facing Liquidity Crisis

Heung-A Shipping Finally Applies for Workout

Demand Slumps After US-China Trade War
COVID-19 Further Reduces Chinese Cargo Volume
Significant Impact on Small and Medium Coastal Shipping Companies

[Asia Economy Reporter Minji Lee] The shipping industry is facing a deepening recession as the trade dispute between the United States and China coincided with the outbreak of the novel coronavirus infection (COVID-19). Shipping companies, struggling to improve their financial structure due to continuous deficits, are already facing liquidity crises.

[Image source=Yonhap News]

According to industry sources on the 12th, liquidity risks in the shipping industry are expanding as cargo volumes are expected to decrease significantly due to the impact of COVID-19. Although the government is actively investing to rebuild the shipping industry, the timing for credit recovery is expected to be delayed as the market conditions show no clear signs of improvement.

Recently, Heung-A Shipping, the fifth largest domestic shipping company, applied for a financial restructuring (workout) to its creditor financial institutions, with KDB Industrial Bank as the main creditor bank. This was a bold move to normalize management after being unable to endure continuous losses. Since 2016, when the shipping industry engaged in a 'chicken game' by lowering freight rates to the minimum level to expand market share, Heung-A Shipping has continuously recorded losses. The company posted operating losses of 13 billion KRW in 2017, 37.5 billion KRW in 2018, and the loss scale increased to 38.2 billion KRW as of the third quarter of last year. During this period, its credit rating dropped from B- to CCC.

The shipping market remains uncertain. The Baltic Dry Index (BDI), which indicates shipping market conditions, stood at 616 points in March, down 43% from 1,090 points at the end of last year. In mid-February, it fell to 411 points, marking the second lowest level in history following the first half of 2016. Hyundai Merchant Marine, a major domestic shipping company, has also recorded losses for nine consecutive years due to low cost competitiveness and has been affected by weak demand following the US-China trade war.

Credit rating agencies foresee that if cargo volumes for shipping companies decrease further due to the impact of COVID-19, market risks could increase. In particular, as ports in Asia, centered on China which accounts for 22% of total shipping cargo volume, are not operating normally, small and medium-sized companies responsible for coastal shipping are expected to suffer greater damage.

Seong-Gwi Sun, Head of Evaluation Team 3 at Korea Ratings, said, "If cargo volumes in the shipping industry generally decrease, small and medium-sized companies with more one-off cargo rather than long-term contracts will be the first to be hit," adding, "Over time, if the negative impact of COVID-19 spreads throughout the shipping industry, it could affect credit ratings."

This content was produced with the assistance of AI translation services.