Container lines on brink of cashflow crunch
Global carriers are still being paid for freight shipped from Asia before China shut down factories, but now face a hole in their finances as the impact of blanked sailings and reduced volumes starts to be felt.
The recovery in containerised exports from China may prove short-lived as retailers in North America and Europe respond to a slump in consumer spending, with serious consequences for container lines that had been hoping for a return to relative normality during the summer.
There is a fast-growing opinion that there will be no quick return to normal any time soon for the big container lines.
CONTAINER lines face an imminent cashflow crunch that will expose the financial fragility of some carriers.
Until now, most have had ample money in the bank, reflecting the way in which their invoices are paid. So far, this has disguised the full impact of extended factory closures in China as the country battled to contain the coronavirus outbreak.
However, senior industry sources are warning that this financial cushion will soon disappear, forcing some lines to start asking for extended credit from their vendors. Terminal operators are likely to be approached first as carriers strive to shore up their finances.
“Cashflow is about to fall off a cliff,” one source told Lloyd’s List.
Because most cargo shipped from Asia to North America and Europe is moved on a free-on-board, or fob basis, consignees do not payment for their goods until the merchandise has arrived at the destination port. Then carriers typically offer 30 days credit before invoices must be settled.
That means that container lines are still being paid for freight that was shipped from China in January before the lunar new year holiday and the subsequent lockdown.
Those ships would have arrived in the US by about mid-February, and in Europe from late last month.
There will still be outstanding invoices, but most should have been paid by the end of March, leaving the global carriers with a bleak few weeks as they feel the full effect of the slump in Chinese exports during February and March.
In an industry where “cash is king”, this is likely to prove very difficult to manage.
“Lines might have been doing okay at the beginning of March, but from the latter part of March and into April, some carriers will have a real challenge with their cashflow,” one source said, speaking on condition of anonymity.
Terminal operators, which for the most part are in a stronger financial position, will have little option but to agree to extended 30-day credit terms for their customers.
With the exception of Singapore’s Pacific International Lines, which is in discussion with creditors, there is no hard evidence yet that lines are asking for more time to pay their bills. But it is just a matter of time, according to industry insiders, and carriers are likely to receive a sympathetic hearing initially.
“So I don’t think it is going to force carriers out of business in the short-term, as their suppliers who are cash-healthy will recognise that they have to give additional credit,” said a senior executive
Container lines are hoping the cash squeeze will only last a few weeks, given that export volumes are rapidly recovering in China and that many more ships will soon be arriving in North America and Europe.
But orders for the merchandise on those vessels were placed before the coronavirus epidemic worsened into a pandemic that has left most of the big consumer nations in lockdown, and retail outlets shuttered.
Exports out of Asia consist largely of fashion items, electronic products, and white goods, for which there is likely to be little demand in the months ahead, with the possible exception of freezers. Very little food is shipped in the Asia to Europe or eastbound transpacific trades.
So not only are there concerns that this recovery in Asian exports will be very short-lived as retailers review their requirements for the rest of the year, but also the prospect that consignees will face severe cash flow problems of their own. That means they may not be in a position to pay their freight bills.
Several scenarios are being discussed in industry circles, including the possibility of some more container line consolidation as a carrier with a strong balance sheet takes advantage of the situation to acquire one struggling with depleted cash, or a well-financed terminals group taking a stake in an ailing customer.
None of those contacted by Lloyd’s List over the past couple of days are expecting a rapid recovery for the global economy, or a quick return to normal any time soon for the big container lines.
“I see a U-shape, drawn-out recovery that will have implications for years to come, and some container lines are very vulnerable to what is about to happen,” warned an executive who has experienced previous pandemics and financial crises, and regards this as being in a different league.
Source: Lloyds List