Last month, Korea’s Hanjin Shipping Co., the world’s seventh largest shipping line by capacity, filed for bankruptcy protection with the Seoul Central District Court. Struggling financially, Hanjin’s debt had reached $5.5 billion as of the end of June, and the company had losses in four of the last five years. Hanjin announced that it would stop releasing equipment for new bookings and essentially stop accepting bookings for an interim period.
These financial woes may not be limited to Hanjin. According to Hankyoreh’s Concerns rising that Hyundai Merchant Marine may be another financial black hole, Hyundai Merchant Marine (HMM) posted an operating deficit of more than 400 billion won ($361.9 million USD) in the first half of 2016, and the company is expected to post a massive operating deficit in excess of 1.5 trillion won ($1.36 billion USD) over this year and the next.
“Hyundai Merchant Marine has so far barely managed to stay afloat thanks to a debt-for-equity swap by its creditors,” the article stated. “If it fails to find a way to navigate the downturn in the shipping market on its own steam, it will ultimately have to ask its creditors for another huge round of assistance.”
HMM has since thrown its hat into the Hanjin ring by proposing a purchase of some of the struggling carrier’s assets. In Korean Lender to Back Hyundai Merchant in Hanjin Assets Takeover, Bloomberg reported that KDB (HMM’s biggest shareholder) “would consider taking over any viable assets, if there are any.”
Assessing the Implications
As shippers around the world continue to monitor this developing situation, concerns over shipment delays and other issues are likely to mount, particularly with the busiest season of the year just around the corner. Hanjin’s receivership filing has created new worries for shippers as the company has been removed from the current CKYHE vessel sharing alliance, and as ports and terminals around the world refuse to work Hanjin vessels. Whether this will create a domino effect in the marketplace remains to be seen.
In the case of Hanjin, a U.S. judge has signed an order granting the carrier provisional protection from creditors in the U.S. This should enable some vessels to dock and unload at U.S. ports, according to Reuters’ Hanjin Shipping gets U.S. court order, cash to unload ships. Hanjin had asked U.S. Bankruptcy Judge John Sherwood to issue an order to prevent creditors from seizing its ships or property, and to allow cargo owners to make arrangements to retrieve goods stranded in warehouses.
Here at Odyssey Logistics, we’ve been working with customers to assess the situation and develop any necessary contingency plans. John Nikolich, Odyssey’s VP of International Transportation Management, says containership operators have faced significant year over year losses as a result of over-capacity, cutthroat competition, costly fuel increases (save for the last 12 months), and significant overhead cost on land and at sea.
“Yet with each passing year, as another shipping line got closer to the brink of financial disaster,” he points out, “it seemed there was always a government entity or a hungry group of investors ready to infuse a significant amount of capital to keep it afloat.” Of course, it’s too early to tell if other carriers might suffer the same fate as Hanjin; we only know that carriers have faced years of significant losses and that change (in some form or another) will be necessary for many carriers to survive into the 2020’s and beyond.
To deal with these issues, both shippers and NVOs must have a diverse carrier base to minimize their exposure to any one single carrier in this uncertain climate. “It is possible that banks, creditors, lenders, and even governments will start to take a hard look at the impact of multi-year losses,” says Nikolich, “and react as Hanjin’s creditors did.”
Shoring up Your Supply Chain
Not all of the news associated with ocean carriers is negative right now. In fact, many of these carriers have been taking significant measures to protect themselves from even bigger losses by reducing headcount, trimming back office services, divesting chassis, slow-steaming vessels, reducing port calls, and creating more dynamic vessel sharing alliances to maintain service levels without overextending their asset base.
“In many cases these strategies have worked, and carriers have convinced creditors and investors to remain on board as they take the next steps toward profitability,” says Nikolich, who expects a rise in global container shipping rates as a result of the Hanjin receivership filing and subsequent “ripples” in the market.
“It’s just a matter of by how much as rates are quite low to begin with,” he concluded. “Unfortunately, shippers should not expect any proportionate change, improvement in service, or schedule integrity when carriers raise rates, as they typically claim that the increases are necessary simply to get back to breakeven.”
Odyssey is here, ready to help
Odyssey is ready to help your organization manage the current uncertainty in the international shipping sector. If you have any specific questions about your supply chain and how it will be impacted by these current events, please reach out to one of our experts.