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Hanjin Bankruptcy Demonstrates Fragility of Ocean Freight Market Prior to "Black November"

The recent bankruptcy announcement of Hanjin, a major shipping line, on the Friday before the last Labor Day long weekend, was a shock to everyone working in the global logistics shipping industry.   However, the announcement should not have come as a surprise, as the ocean cargo market has been suffering for some time by a condition of overcapacity, low rates, and a flat global market.  Many ship builders and ocean carriers overextended themselves while the economy was growing, and these expectations resulted in a huge amount of investment that has resulted in too many ships and carriers competing for too little cargo.  This challenge has been also impacted by the growing discontent on the part of retailers and customers who are unhappy with the trend towards larger slow-steaming ships, which leaves more inventory on the water for a longer period of time.

Since Hanjin Shipping Company of South Korea filed for bankruptcy protection last week, the WSJ reports that dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world, as there are doubts as to who will pay the docking fees, container-storage, and unloading bills.  Some of the ships have even been seized by creditors!

Since then a number of actions have occurred to “fill the gaps”.   Splash 247 reports that South Korea’s Hyundai Merchant Marine (HMM) and compatriot carriers Korea Marine Transport, Sinokor Merchant Marine and Heung-A Shipping have formed a vessel-sharing alliance that plans to fill in for bankrupt Hanjin Shipping.The consortium, named the Mini Alliance, will deploy 15 vessels on four routes from South Korean ports to Singapore, Malaysia, Indonesia, Vietnam and Thailand from the end of September.  Also, American Shipper reports that a federal bankruptcy judge on Tuesday granted Hanjin Shipping’s request to have its rehabilitation in bankruptcy court in Korea be recognized under the U.S. bankruptcy code.    Judge John K. Sherwood of the U.S. Bankruptcy Court in Newark, N.J.  ordered Hanjin to keep vessels in the U.S. once they’ve been allowed to discharge cargo to protect the interests of maritime lien holders.

Meanwhile, Hanjin ships are sitting out in the water, cannot come to port, and crews are beginning to face shortages of food and water.  My own interviews with people in the field suggest that this is a problem that is not going to go away when Hanjin is fixed.  For instance, Hyundai (the big ship builder) recently went through a reorganization, and did not want to merge with Hanjin because of their own financial condition.  Two other massive shippers, Maersk and CMA, recently announced hundreds of millions of dollars in losses in their last quarterly financial announcement.  Steam ship lines are all suffering from over capacity and downward pressure due to fuel prices.  Many of the ships are leased, and the revenue from shipping is not enough to cover the lease and turn a profit.

It is also interesting to note that many of the major retailers seem to be shipping early this year.  Although retail shipping revenues seem to be up, many of the retailers seem to be moving towards a “black November” event.  Major retailers are spread across multiple shippers, and although Hanjin accounts for only about 3.2% of global container capacity, it still has resulted in more than half a million containers sitting on the ocean.

Other companies that provide drayage and other services are also sitting holding onto empty Hanjin containers – and there are questions on who is going to pay for the shipments?   One executive notes that “Holding the containers is at least a way of holding them “hostage” in return for payment!”  But it will become very interesting very soon….especially as the massive influx of containers begins to unjam and come in time for Christmas!