The impending bankruptcy of Korea’s container carrier Hanjin Shipping should serve as a warning that carriers do have breaking points and that they will not always be rescued, shipping consultancy Drewry said.
In 2009 when the container industry posted operating losses of nearly USD 20 billion and many lines were said to be minutes from bankruptcy, none died. The “zombie” carriers’ survival methods were varied and complex, ranging from off-hiring ships to requesting government support, but ultimately they worked.
“Having survived the worst crisis the industry has ever faced the assumption grew in strength that major carriers could not be killed off,” Drewry said, adding that some smaller players have fallen by the wayside this decade, however, none were remotely in the same league as Hanjin Shipping, which with a containership fleet of around 100 ships and total capacity of 620,000 TEU ranks it seventh in the world.
Hanjin’s move into administration shatters the complacency that major carriers are immune to failure and can stomach prolonged years of low rates and financial losses.
The company was in financial trouble as its operating loss amounted to approximately USD 580 million from 2010 to the first-half 2016, with most of the damage emanating from the container division.
While Hanjin’s compatriot Hyundai Merchant Marine (HMM) negotiated a debt restructuring plan, which included reduced charter rates, sale of non-core assets and reaching a deal to join 2M carriers Maersk Line and MSC in a new alliance next April, Hanjin’s self-rescue plan has not proceeded as smoothly as over at HMM.
Vessel charterers, most publically Seaspan, refused to lower their rates and despite selling a number of assets the plan to sell two tranches of new shares to sister company Korean Air fell short of raising the sums expected by creditors.
The lack of progress led to Hanjin’s directors calling for court receivership on August 31.
“While the company is not technically bankrupt during administration it is difficult to see how the company will be able to continue trading as customers are now desperately trying to locate and find alternative ways for their goods to be delivered. It’s unlikely any would entrust their cargoes to Hanjin again,” Drewry said.
Drewry added that the immediate collateral damage of Hanjin’s situation would be widespread.
Ports and terminals that have recently accepted Hanjin ships and containers will not only lose a customer but might not get paid for work carried out; the same applies to container lessors, and charter shipowners, particularly Seaspan and Danaos, which were Hanjin’s biggest suppliers of non-owned ships.
Furthermore, shippers unaffected by Hanjin’s situation are expected to feel a short-term shock as the reduction of capacity will inflate freight rates. Notwithstanding the general rate increases (GRIs) already in-place freight rates out of Asia surged the day after Hanjin’s announcement. The World Container Index reported that spot rates from Shanghai to Los Angeles in the US and Rotterdam in Europe, increased by 42% and 39%, respectively, on September 1 against the previous week.
“Perhaps the most far-reaching consequence of Hanjin’s situation, alongside the recent defensive M&A activity, will be that all stakeholders will now finally understand that carriers cannot survive on a diet of ultra-low freight rates if they want to see healthy competition,” Drewry concluded.