The recent collapse of South Korea’s Hanjin Shipping Company highlights the difficulties of the shipping industry as it endures its worst downturn for more than 30 years. Hanjin is the world’s seventh largest container liner but the markets for tankers, bulk carriers and the oil service sector are also hurting.

“If you look across the industry, all sectors have been hit” said Arthur Bowring, managing director of the Hong Kong Shipowners Association. “It’s a very depressing story.”

According to him, the current shipping slump may turn out to be worse than the 1980s, which ran for three to four years, as the current low interest rates may mean that it could last longer.

During the ’80s, interest rates were around 14-16 per cent. Once a shipowner ran into trouble, it was much harder to service interest payments at those high rates. The banks swiftly stepped in to repossess the ships and sold them on. With current interest rates at virtually zero, it is much easier for shipowners to keep up with interest payments.

“As a result there are a lot of zombie companies out there,” said a Hong Kong shipbroker who did not want to be identified. ­­­­­­­­­­­­­­­­­­­

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Hanjin, which accounts for about 3 per cent of global capacity, has filed for bankruptcy protection in the US and the South Korean courts after its main creditor, the Korean Development Bank, declined to continue to provide funding for the company. Hanjin Shipping, a subsidiary of the Hanjin Group, the 10th largest Chaebol, or industrial conglomerate in South Korea, has been making losses since 2011 and has piled up US$5.5 billion in debts. It has been trying to restructure its business since 2013 without success.

The root problem for most in the industry is that there is too much capacity for the current sluggish levels of demand. Hanjin made matters worse for itself by selling off much of its fleet after 2008 and chartering vessels. The rates at which those charters were fixed are 30 to 50 per cent higher than current market rates.

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Slower growth in demand and increased capacity has led to a significant decline in rates and therefore profitability.

Traditionally growth in global trade outstrips global growth but for the first time in many years, trade growth has now slipped below GDP growth. According to the Baltic and International Maritime Council (Bimco), the GDP-trade multiplier between 2000-2008 stood at 2.2. As GDP growth averaged 4 per cent over the period, it implied a growth of 8-9 per cent for containers. Since 2010, the multiplier has averaged 1.1 and is not expected to improve anytime soon, implying sluggish growth.

On the supply side, 208 brand-new ships came onto the container market last year amounting to an additional 1.67 million twenty-foot equivalent units (TEUs) of capacity – an increase of 8.1 per cent, according to Bimco.

Less supply is expected this year but the new ship buildings on order amount to some 20 per cent of current capacity and this will be delivered over the next few years. Unsurprisingly, there have been sharp declines in freight rates and a huge decline in the value of the vessels.

The dry bulk sector is also suffering from overcapacity. While commodity imports and exports to and from China have been relatively strong with the exception of coal, freight rates have been very low and reached record lows in the first quarter of the year. Bimco cites a capesize ship built in 2010 that was valued in 2014 by VesselsValue.com at US$49.7 million. Two years later the ship was valued at US$ 21.25 million.

Tankers performed well last year as China expanded its strategic oil reserves and were able to achieve rates of US$100,000 per day. But demand has weakened, while capacity is expected to have jumped by 5 per cent by the end of the year. Rates have collapsed to US$14,000.

Unsurprisingly given the parlous state of the industry, new orders have plummeted and shipyards in the main Asian shipbuilding countries of China, Japan and South Korea are struggling.

Analysts say that a higher level of scrapping is needed but ships built with a working life of 30 years are now being scrapped after only 15 years, and with a lot of debt attached to them.

At the same time, there needs to be an increase in underlying demand. But with protectionist sentiment rife across the globe, the outlook for new trade deals to boost demand is not promising. The industry looks set to endure more pain before it returns to balance and profitability.

Howard Winn is a former columnist of the South China Morning Post