Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over three years, Supply Chain Matters has continually warned of pending disruption concerning the deepening global overcapacity conditions among global ocean container carriers. This week marks a clear definitive statement of that disruption, the unraveling of the financial implications. The declaration of receivership by Korean based Hanjin Shipping Company should be viewed as the first of many other cascading developments and consequent implications of multi-industry supply chains. It could not come at the most critical period for shippers, the ongoing peak period of inbound holiday related products and components.

Developments concerning Hanjin began on Tuesday when South Korea’s sate-owned Korea Development Bank withdrew its financial support indicating that a funding plan by the carrier’s parent group was not adequate enough to address outstanding debt of $5.5 billion. The South Korean government then indicated that it wanted domestic rival Hyundai Marine to buy designated healthy assets of the financially troubled Hanjin, in-effect eliminating the option of a merger among the two Korean carriers. Hyundai itself had already embarked on a creditor-led restricting program of its own On Wednesday, Hanjin management had little option but to declare the firm in receivership, a form of creditor protection. According to industry sources, the ocean carrier represents the seventh-largest shipping line by overall capacity.

As global transportation managers are well aware, a carrier’s filing of receivership precipitates another of subsequent actions.  Many global ports will not accept nor export cargo on the carrier’s vessels because of uncertainties as to whom we pay charges or more importedly, whether specific vessels will be seized by creditors as captured assets in jurisdiction outside the control of Korea’s legal system.  We noted reports of two vessel seizures thus far, one involving the Port of Singapore, the other Shanghai.

According to business media reports, a South Korea court has yet to determine whether he carrier should be liquidated or given the opportunity to survive under an extended creditor-enforced restructuring, which has been in-effect since May. From our lens, we would be surprised if extended restructuring is approved given the history of events.

Today, The Wall Street Journal reports that the repercussions of the carrier’s receivership were nearly instantaneous. The carrier has stopped accepting cargo as U.S. and other global ports began turning away its inbound ships. Ports have further indicated that they will not accept outbound containers routed for Hanjin vessels, causing exporters to now scramble to rebook on other ocean carriers and secure other non-Hanjin containers. Other industry sources are quoted as indicating that shippers are now experiencing new rate surcharges by remaining carriers. That is to be expected since the entire container industry is experiencing current market rates that just cover the cost of fuel.

Once more, the WSJ reports that the receivership would likely lead to the carrier’s exclusion from the six-member shipping alliance termed The Alliance.

Compounding the developments concerning Hanjin Shipping are reports of major cutbacks and restructuring among Korea’s shipbuilding industry, the major producer of new container ships.  Last week, STX Shipbuilding, Korea’s fourth-largest shipyard, announced a sweeping restructuring including the potential sales of a profitable shipbuilding yard in France. Three of the other major Korean shipbuilders, Hyundai Heavy Industries, Daewoo Shipbuilding and Samsung Heavy Industries are each under restructurings from creditor banks.

Likewise, other existing global ocean container lines have reported recent financial performance amounting to aggregated operating losses amounting to billions of dollars. Thus on both the supply of new vessels, and the demand for ocean container shipments, meaningful developments are occurring that will lead to further developments.

We therefore conclude that the ocean container industry has now reached the point of inevitable financial crisis, and our multi-industry readers should expect consolidation related consequences in the weeks and months to come. Global financial networks and interrelationships are now coming to the realities of an industry that has been too slow to address its gross overcapacity situation.

In March of 2015, The Boston Consulting Group published an industry perspective concluding: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declared that overcapacity had fueled a downward spiral of decreased earnings and marginal shareholder value. Obviously, that spiral has now reached a phase of far more consequence and the question will be which carriers survive and which carriers are forced into other actions.

 

Bob Ferrari

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