Hanjin’s receivership and the fallout resulting from its failure may have lasting effects for the global shipping. Fortunately, the Korean Shipper confirmed on September 23, 2016, the company secured an additional $45 million through its last two board chairs. In addition to these funds, the carrier sought to complete a $54 million loan from Korean Airlines. The Korean bankruptcy court also approved $10 million to unload four vessels waiting to dock in the country.
It appears Hanjin is now current with payments to U.S. terminals in Boston, Charleston, Houston, Los Angeles-Long Beach, New York, Norfolk, Oakland, and Tacoma. With Hanjin’s accounts paid to up to date, Beneficial Cargo Owners (BCO) have the permission to retrieve all inland cargo without having to pay those terminal charges in lieu of Hanjin’s lack of finances. They can also retrieve any cargo delivered on alliance vessels as well. As of September 22, 2016, 35 of Hanjin’s 97 ships in operation were able to unload cargo, and more are following suit around the globe. South Korean Finance Minister, Yoo Il-ho, also added some good news with his indication that 90% of the cargo on Hanjin vessels will unload by the end of October. While this activity demonstrates some relief for the global container shipping industry, its overall wellbeing remains in doubt.
It seems natural to attribute Hanjin’s demise to management issues. However, much of the blame still rests upon the industry’s inability to recover from the economic crisis of 2008. Since then, container lines continue to move from one emergency to the next. Making things more difficult is the current issue of overcapacity resulting from the advent of building Mega Ships coupled with sluggish demand for products. In Hanjin’s case, the former shipping giant did not have enough cargo to return to profitability, and in the first quarter of the year reported $221 million in losses. Thus, Hanjin’s woes should not come as a surprise because the natural order of a market correction would eventually create a victim as a result of freight rates plunging so low.
Meanwhile, all the key carriers are still struggling to stay afloat even with the help of loans, as well as a series of mergers, acquisitions, and cost cutting. Only an uptick in the global demand for goods from China and increased world trade projections can help the industry. Otherwise, each carrier still faces the same dilemmas of not receiving a return on the investment in larger vessels to achieve fuel efficiencies and being unable to obtain enough business to address the overcapacity in the market. Some of these carriers may get a slight economic boost after acquiring Hanjin’s liquidated assets, but this acquisition may only have short term effects. Additionally, solvent carriers obtained more business after Hanjin entered receivership, allowing them to feel some relief from the lowest rates recent history.
Until Hanjin collapsed, nothing seemed to stop freight rates from reaching a bottom. The prices hit so low that the fuel efficiency was gone because the larger ships could not cover the cost of fuel. As a consequence, the rates spiked again but seem to have normalized in recent days. The overcrowded shipping industry was a profitable business before the great recession. But the aftermath from Hanjin now threatens small and medium-sized shippers as many of them are in jeopardy of closing. Creditor Liens placed on Hanjin containers could prevent thousands of services providers around the world from collecting revenues due to them from Hanjin. In turn, this would snowball into many of them not having the income to support monthly operations and pay debts.
Hanjin’s departure from the global shipping market is also leading to problems beyond just the container lines. Even though new positive signs arose with some vessels being able to dock and other ships received outstanding funds to pass through both major Canals, there still lies a threat to port operations and ocean carriers over the next several months. Terminal operators connected with a major shipping line are trying to adapt to the new climate, which is increasingly pressuring profit margins and returns of investment. However, the significant diminishment of demand growth coupled with higher costs from larger ships and the amplified business risks from shipping alliances, terminal operators, such as Cosco, are selling assets to raise revenue to purchase stakes in terminals or maintain current operations.
The combination of pushing for profits and the inopportune timing of Hanjin’s dilemmas led to shippers of perishable goods filling complaints with the Federal Maritime Commission (FMC) for overcharges to reclaim their goods aboard Hanjin vessels. As part of its freight services, Hanjin would cover the fees for port usage and container handling under normal circumstances. To avert the spoilage of perishable foods and to circumvent losing sales, these shippers paid exorbitant fees to terminal owners and truckers to ensure their goods were available when customers wanted them. For example, the DP terminal operator at Port Metro Vancouver held 24 Hanjin containers of Canadian Lentils bound for India and Bangladesh and demanded $450 per container to release the cargo. As a result, the price of food, retail items, and even furniture may see a small rise in costs for the short term through a temporary increase in ocean freight costs.
However, some retailers, especially those with storefronts, may eat these costs to remain competitive and also to avoid losing more customers to the booming e-commerce platforms. With Hanjin ships out of the holiday season mix, freight rates should continue to stabilize. Therefore, it is uncertain if cargo owners and shippers could recoup any additional out-of-pocket costs to retrieve goods. Hopefully, the industry and others related to its supply chain can withstand the far-reaching effects from Hanjin. The Korean Shipper’s issues are also causing problems for the other members of the CKYHE Alliance. Cosco K- Line, Yang Ming, and Evergreen are struggling with ports that do not want to accept or unload Hanjin containers aboard Alliance vessels. To avoid more distress last week, Hanjin alliance partner K-Line had to release a statement to reassure the industry of its solvency.
Enough indicators are alluding Hanjin will be liquidated. Liquidation will give the industry some short-term rate gains, but will not provide a permanent resolution because ocean carriers need sustained volumes. Unless volumes return, the only hope is for supply from the carriers to exit the market. Liquidating and redistributing Hanjin’s assets could perpetuate the industry’s current problems. Without increased global demand, the industry might as well scrap Hanjin’s fleet and commit to not ordering any new ships. However, if the industry views Hanjin as a correction and not a wake-up call, another major ocean carrier is bound to suffer the same fate.
