Is the shipping industry going through a bottoming phase?

Having noted the recent bankruptcy of South Korean shipping co Hanjin in September and subsequent announcement of a merger between Japan's three largest freight lining companies, it's pretty obvious that the strain seen in the shipping industry has taken on a new form with the resultant actions of these corporations pointing to a dire situation.

However there's been a fair amount of reaction to news feeding itself through that shows the optimism of traders awaiting signals of a rebound one of which was Donald Trump's surprise victory in the US presidential race that saw market's momentarily flummoxed in a blind-sided attempt to verify both the positive and negatives a Trump administration would bring to the world economy.

Trump's acceptance speech drew the most attention when he stated his intended purpose when taking office to start a program aimed at revitalising some of America's biggest inner cities in a bid to seek out growth the US had missed out on in these past years with the added benefit of boosting employment.

But Trump's victory didn't stop there, it lit a flame underneath the hopes and desperations of a small Greek based shipping company called DryShips Incorporated that's had creditors on it's heels for unpaid debt and stockholders wary of its aspirations when weighing up the bleak outlook of even the biggest operators within the sector.

$DRYS running from $4 to $100. Trump winning. All we need now is Armageddon to happen next week. pic.twitter.com/HKSHEn6EK6

— $NIPER TRADE$ (@vicerock4) November 15, 2016

A highly shorted stock, the surge in sudden optimism from Trump's victory based on the premise of an uptick in demand for trade in dry goods, products which DryShips Inc. moves for commodity producers, would shift the dynamics in favour of survival as opposed to bankruptcy as has been the case for some time.

Nonetheless the degree of short interest in the stock had been so severe that it caused the price to explode from less than $10 to over $100 in a matter of days and subsequently back down to $10 again. The occurrence of such an event is stirring up conversation amongst traders who are debating the tangibility behind the move and what it could be suggesting about the shipping industry.    

If there's one thing that does stick out it's the fact that the shipping industry has been sold off heavily over the past few years and the sudden change in tone has entered the possibility of a bottoming out phase in the minds of traders. In saying that it's highly doubtful that the negative press the shipping industry is receiving at the moment will simply go away in a hurry.

It's by this thought that gives rise to the awareness of bit-size optimisms that begin to trickle through as to the state of the shipping industry and whether they hold enough substance to support the industry into the future. It's too early to say the definite direction but there's reasonable foundation to believe there's something happening in the sector.

The world shipping industry set to shape up in the coming months

Signs of weaker economic outlook continue to remain clear as the announcement of a merger between Japan's three biggest shipping companies highlighted a formative trend within the industry towards finding efficiency in shipments, a marked shift from an inoperative plan of biding time with a "wait and see" approach in the hope it would buy shipping co's time to weather the global trade storm blown in from the turbulent hard landing felt in China.

The move isn't the first in the industry over the last year but it does cement the position of strategy being utilised by shipping & freight companies in response to a poor patch of earnings that have pressed shareholders to push management to shield them from the devastation that's seen container rates drop dramatically due to a surplus of containers coupled with low demand in trade.

This couldn't have come at a worse time for the shipping industry as it faces the huge task of paying down debt loads taken out just a few years earlier when demand was expected to remain healthy and consistent. We saw South Korea's Hanjin Shipping Co file for bankruptcy protection in September saying it was unable to secure the necessary guarantees from banks to see it through, possibly a reason we saw many in the industry applaud the move to merge so as to avoid fresh fears of imminent insolvencies amongst the top shippers.          

Merger of Mitsui O.S.K. Lines Ltd., Nippon Yusen K.K. and Kawasaki Kisen Kaisha Ltd. will create world’s... https://t.co/eyr6t846P7

— Transworld Group (@TransworldTweet) October 31, 2016

However in as much as the merger will create cost benefits as well as spread the debt burden evenly across the company so it's able to cope easier, the next point of departure will involve the process of turning the business into leaner operations that do away with inefficiencies and returns shareholders decent profit. That requires a restructuring program that'll certainly see the labour force reduced in the hordes which won't be welcomed by labour unions.

More importantly the industry is setting the basis from which policymakers might consider changing stance on the way in which policy is being implemented in the overall economy. If the lack of tenacity in economic activity is hindering the prospects for growth then there's a case for a reversion from the status quo into a system that promotes efficiency over expansion especially when caught in stagnancy.

Are freight companies in the same boat as Hanjin Shipping Co.?

The strongest guage of world trade activity is often reflected in the profitability of the shipping and cargo industry where huge payloads of containers are carried across the world's oceans with colossal-sized freight liners that produce a cost efficient advantage when utilising this mode of transportation.

But as prosperous as globalisation has made the industry's business model is as fast as its crippled many companies in the sector with the protracted downturn in China's economic growth that had been the direct link of a flourishing boom in recent years.

To add further woes to the situation the overcapacity of containers and ships leaving ports with partial loads have all complicated the outlook by squeezing margins in an industry that requires a steady flow of mass quantity to produce maximum returns.

Hanjin Shipping is trying to stop its ships from being seized https://t.co/ekhUlh3xXA

— Fortune (@FortuneMagazine) September 5, 2016

Big name casualties are beginning to emerge with the seventh largest shipping company, Hanjin Shipping last week filing for bankruptcy in Seoul in a bid to ward off creditors who are becoming incredibly frustrated by the lack of service of its debts. The company is said to be over indebted by $5 billion with the Korean Development Bank and other lenders refusing to grant additional funding to the troubled company that could've possibly seen it through these desperate times.

And as if this wasn't enough, a number of the shipping company's freight liners have been seized in foreign harbours namely Singapore and China, with port authorities saying the seizure of assets were due to the high measure of debt owed to them in lieu of services rendered whilst docked.

Having exhausted contingency plans put in place to halt the slide, shipping companies have reached a point where they can no longer starve off the necessary action needed to once again find balance. If the period of downturn which has been expected to last for a brief time is now being revised and extended, the chances of more of the same outcomes we've seen occur with Hanjin Shipping is inevitable to increase.

Overcapacity, oversupply, and overproduction are terms that have become a frequent phrases that have featured more prominently in recent times as the world economy bears the weight of indecisive, reckless and fruitless policy yet they send a stark reminder to policymakers that the self correcting nature of free markets are necessary when or else fails.