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
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Hello Everyone,
Overnight, the news concerning the implications of Hanjin Shipping receivership has intensified, especially the supply chain focused concerns.
The Wall Street Journal quotes freight brokers in Asia as indicating that upwards of 540,000 containers are expected to face delivery delays ranging from a few days to more than a month. Meanwhile, the president of the U.S. based Retail Industry Leaders Association issued a letter to the U.S. Department of Commerce and Federal Maritime Commission indicating that the Hanjin development places an enormous challenge to U.S. shippers that could have an enormous impact on the U.S. economy.
Meanwhile Hanjin itself has acquired a court injunction protecting its ships from seizure in Korean waters but has yet to initiate such actions for European, U.S. and other global ports. Some reports indicate that upwards of 10 Hanjin container ships have been seized or denied access to Chinese ports alone.
The implications for sudden rate increases to move containers on existing shipping lines are also evident. The WSJ reported that one U.S. importer received rate quotes of $2000 per container compared to $700 prior to the Hanjin development.
Sales and Operations Planning, procurement and line-of-business teams will obviously be dedicating a lot of attention in monitoring the ongoing cascading effects of this ongoing development.
We will keep our readers posted as to any major new developments.
Bob Ferrari
Hello Everyone,
We wanted to provide another update concerning the Hanjin Shipping bankruptcy crisis, one that appears to be somewhat more encouraging.
The Wall Street Journal and other industry media now report that over the weekend, the Hanjin Greece container vessel was able to dock at the Port of Long Beach and begin unloading containers. A Hanjin spokesperson indicated to the WSJ that an additional three more container vessels, the Hanjin Ddynia, Hanjin Jungil, and the Hanjin Montevideo were also expected to be unloaded at Long Beach in the coming days. The report further indicates that court papers indicate that a total of 13 Hanjin ships are destined to make their next port of call at U.S. ports.
The carrier filed for the equivalent of Chapter 11 in South Korea last month, and has subsequently gained Chapter 15 protection in the U.S. Still unclear at this point is the legal status among other major countries such as the EU. Chapter 15 affords a foreign company the benefits of U.S. bankruptcy law including protections from seizure of assets.
Reports further indicate that Hanjin has secured necessary additional funding to both unload ships and have respective containers moved to their owners beginning on Wednesday.
Thus the shipping line is proactively addressing the delivery of the large number of containers that were stranded at sea. Indications continue to point to an orderly liquidation of the shipping line in the weeks and months to come.
Bob Ferrari