Its being called the shipping industrys Lehman Brothers moment and has sent shock waves across the manufacturing and shipping industries. Logistics News ME examines the facts around the bankruptcy of Hanjin Shipping Co.
It was called the Lehman Brothers moment of the shipping world by Seaspan CEO Gerry Wang and the tip of the iceberg for flailing shippers by the LA Times. Quoting Alphaliner, the Financial Times concluded that in terms of the container numbers involved, Hanjins bankruptcy is more than six times larger than any previous shipping collapse.
Firms around the world have felt the fall-out from the news that Hanjin Shipping Co the worlds seventh largest container carrier filed for bankruptcy protection on 31 August, triggering a domino effect throughout the global supply chain and leaving major manufacturers in chaos as they scramble to find alternative carriers ahead of the retail industrys busiest season.
Recent events arent a complete shock. Hanjins Q1 financial results reflected the strain of global factors such as falling freight rates and low demand for iron ore and coal, to produce an operating loss of $97m and a net loss of $221m; on which disposal of old vessels, interest expense and foreign currency translation loss/gain are reflected.
Over H1, total sales reached $1.3bn with the container division recording sales of $1.23bn and an operating loss of $74m. The bulk division recorded total sales of $78m and an operating loss of $30m.
In a statement the company explained Hanjin Shippings operating profit for the container division decreased as to the decline of total sales caused by a record breaking low level of freight and increased gap between the supply and demand within the market. Its bulk business also suffered from its lowest ever freight level triggered by low iron ore and coal demand during the first quarter.
But while for some these may be extenuating circumstances, driven by external factors and beyond the control or foresight of even the most experienced business leaders, for others it is the outcome of irresponsible business practices. The company spent too much during the latest boom time and failed to prepare for a drop in demand for shipping certain goods.
Speaking to Bloomberg last month, Wang said: The industry has been money losing for some time. In the long term it is not sustainable. The fallout from Hanjin Shipping is a huge nuclear bomb that shakes up the supply chain. Youre talking about $120bn of goods on those ships that are stuck before delivery to major retailers. There is a material impact to the supply chain and people are suffering from the consequences of this.
However, when asked if recent events are merely the inevitable consequence of how the shipping industry is set up, he responded that in fact this is a process of self-adjustment.
With specific reference to the three ships Seaspan has on lease to Hanjin, he added: You deal with cycles. We lease those ships on a long term basis to ride over the waves until hopefully we get stability in the core process. Thats our business model. The whole supply chain has been shaken up. Over the long term we dont know what will happen. Freight rates have doubled in Asia to North America and to Europe they are up 30 40%.
Immediate fallout
As manufactures find alternate ways to transport their goods, Hanjins competitors are enjoying a boost to business. Maersk has opened a new trans-Pacific route to absorb the demand and Hyundai Merchant Marine Co., South Koreas second-largest container line, plans to deploy 13 more vessels to the U.S. and Europe to help ease cargo disruptions.
China Cosco, CMA CGM, and others were offering additional capacity for trans-Pacific importers, but the Journal of Commerce reported Hong Kong to LA spot rates spiked 40% mid-September, to $1,743 per 40-foot container. The cost of shipping goods from China to East Coast ports rose from $1,700 to $2,400.
But it is the potential impact on the retail industry that could send a trickle down pinch to consumers. The details of the bankruptcy filing are preventing ships from unloading. The ships have been protected by a US court ruling to help get things moving but the immediate outlook remains bleak.
Add to this that Hanjin Shipping carried nearly 8% of Americas trans-Pacific trade volume and the busiest period of the retail year is about to begin; a storm can be seen on the horizon. A backlog at the ports will not only impact Hanjins ships on which $14 billion worth of goods is in limbo but cause a traffic jam of subsequent shipments.
Meanwhile 89 of Hanjins 97 ships have become ghost ships, stranded at sea with their crew still on board.
Sustainable business
The term sustainable business has been used by many analysts when picking over the evidence to make sense of Hanjins collapse. Some blame Hanjins habit for sending half empty vessels around the world, operating at a loss on a regular basis, while others say that a frivolous approach to buying and leasing more ships during times of stronger performance were irresponsible.
Its as if the airlines went out and bought 20% more aircraft than they had customers to buy tickets, and then wondered what happened, said Paul Bingham, a trade economist with the Economic Development Research Group Inc., in Boston, told the LA Times, echoing: It was unsustainable.
The companys finances have been laid bare over recent weeks. Chairperson Cho Yang Ho infused $36 million three days after group affiliate Korean Air Lines Co., the biggest shareholder, approved $50m. A former chair pledged $8.3m on Monday from her personal wealth in relief, but millions more in costs are owed to cover fuel, cargo handling, and other unpaid costs.
Hanjins owners will cover around one sixth of this, estimated to be around $91m, to help contain the fallout and the government has been asked to provide low interest loans.
According to Bloomberg, should the company go into liquidation and its vessels are sold, the industry will still be facing the same oversupply of capacity that has plagued it for the last few years. The excess capacity has been driven by demand for bigger ships that can carry more containers at lower cost per box, driving rates down to a record low.
Global reaction
Moodys Japan K.K. says that its outlook for the global shipping industry over the next 12 to 18 months is negative, in its report titled Shipping Global: Low Freight Rates and EBITDA Decline Drive Negative Outlook.
The negative outlook reflects our expectation that earnings will worsen, with freight rates likely to remain depressed amid ample supply, says Mariko Semetko, a Moodys VP and senior analyst.
We expect that the aggregate EBITDA of Moodys-rated shipping companies will fall by 7% to 10% in 2016, adds Semetko. Such a result is much worse than the low-single-digit percentage decline we forecast in March 2016, when we changed our outlook for the industry to negative from stable.
The JOC has called Hanjins collapse by far the largest container shipping bankruptcy in history and Hanjins exports are important to the South Korean economy. Wang says it is up to the government to ensure a robust national carrier is in place.
I am looking over the long term and I believe in the resilience of the South Korean economy. I think they need a national shipping carrier sponsored by the government to become a critical link in their economy and I would look forward to working with such a firm. But I am cautious in the short term, he said in an interview with Bloomberg.
The question now is what next? Globally, even with the absence of Hanjin from the market a supply/demand balance could not be restored, although some believe it could narrow.
The world number one, Maersk Line, has warned investors and shareholders that its financial performance this year will not be as strong as previous years.
Moodys report pledges the ratings agency will consider changing the outlook for the global shipping industry back to stable if shipping supply growth exceeds demand growth by less than 2%, or demand growth exceeds supply growth by up to 2%, and if aggregate EBITDA growth is within a range of -5% to +10% year-over-year.
Moodys also says it will consider a positive outlook for the global shipping industry if the oversupply of vessels declines materially and the aggregate year-over-year EBITDA growth for companies that Moodys rates appears likely to exceed 10%.
But with so many external factors at play, not to mention rate issues within the industry, how and when this is likely to play out remains anybodys guess.
In Numbers: Hanjin
97 shipping containers in fleet
89 ships stuck at ports worldwide
$ 14bn value of good stuck on stranded ships
7th largest container shipping line in the world
2.9% market share
$549m in unpaid costs to meet
Source: Bloomberg