German shipping industry : Tough times ahead
Germany has been one of the major players in the Maritime shipping industry for a long time but in the last decade it is facing lot of challenges to hold its ground. In 2008, Germany accounted for 8.3% of world’s merchant fleet which has now shrunk to 5.9% in 2018 and many experts believe that this phase is far from over. Container shipping share of German Maritime shipping has reduced down drastically from 32% to 19% which is worrisome news for the industry as container shipping has always been the backbone of the German shipping industry.
Germany’s geographically crucial location has offered competitive edge to its shipping industry, as Its Central location in Europe facilitates easy access to shipping routes. Besides that, higher global exports of Germany and availability of necessary infrastructure for shipping industry are some of the important reasons why Germany became one of the largest seafaring nations in the world. But in last few years the trend has reversed and today German shipping industry is fighting for its survival.
Roots of this great German shipping crisis can be found in the crash of shipping finance sector over the last 10 years. During the uptrend of the industry German financial institutions issued disproportionate loans to the shipping companies expecting high returns which was quite obvious too considering the boom in the industry. 2007-2008’s global economic crisis led to decrease in the demand of the international container traffic which hit the German shipping industry hard because of its heavy dependence on the container shipping sector. But, instead of gauging the situation and accordingly taking preventive actions to minimise the risks, German companies invested heavy in new larger vessels to take the benefit of easily available finance.
Currently, German banks and other financial institutions own more than 25% of the loans to the shipping companies of which large volume of loans are granted to container carriers. In the last 7-8 years freight rates are decreasing consistently and reached the bottom in last couple of years.
Blown by thinning operational margins and deflation in the container trade most of the shipping companies are becoming loss making units. There are hardly any big companies who are making profits on consistent basis. Smaller companies are failing to control the expenses and are being acquired by larger players.
Number of shipping companies are filing for bankruptcies as their funding is dried up and they don’t have enough liquidity to carry the operations. Ship-owners are unable to clear the debts they took for expansion and the financial institutions are calling in their debts with an objective to minimise their losses. Top Banks have stopped the fresh funding in shipping sector to avoid the capital lock up and numerous investors are reducing their shipping portfolio increasing further pressure on the sector.
On the other hand, companies declaring the bankruptcy are also causing heavy losses to the financial institutions. Depreciation rates of the vessels are very different now, most of the vessels financed are aged and have lost their value. So compared to the valuations of the vessels at the time of issuing credit to the current situation, banks and financial institutions are able to recover only 20% -25% of the issued credit amount.
With no signs of revival, the situation is only going to be worse for the German shipping companies. Selling out the vessels or declaring the bankruptcy is only going to compound the problems for the industry. For an industry of such magnitude, crisis impacts are not going to be limited to Germany only; it will leave its impingement upon other countries as well.
Options must be explored to contain the situation now. Raising the capital from alternate sources like high yield bonds and private equity should be explored. Continuing the operations with gradually consolidating the profits and growth should be the primary objective of the German Shipping Industry. After all, at this point, survival is all that matters.