The problems that sank South Korea’s Hanjin Shipping last week could be just the tip of the iceberg, analysts say, with the long-running global economic downturn having left the industry drowning in excess capacity.
With growth refusing to budge and consumer demand still slack, the world’s freight carriers have more ships than they can fill — a quarter of cargo space lies empty.
That has led to fierce price cuts and cutthroat competition, badly impacting the bottom lines of some of the giants of the seas.
Those problems played out this week when Hanjin, the world’s seventh largest shipping firm filed for bankruptcy in Seoul, seeking court protection after creditors rejected its latest plan for dealing with its hulking $5.37 billion of debt.
A third of its fleet is either stuck in port or unable to dock, with port authorities fretting the company will not be able to pay its bills.
The company said last Friday that about a third of its cargo fleet – some 40 vessels – is marooned at sea or has been impounded at ports.
10 Hanjin vessels were either seized or denied access at Chinese terminals in Shanghai and Tianjin over the past 48 hours, according to local media reports, with another vessel impounded in Singapore earlier the week.
An estimated 540,000 containers are expected to face delivery delays, according to the reports.
Hanjin officially entered court receivership on September 2, the Seoul Central District Court announced.
The court will decide whether to keep Hanjin afloat under a recovery program including debt rescheduling or to declare it bankrupt. Hanjin Shipping’s assets will in the meantime remain frozen, and the court-appointed new management is required to come up with a new rehabilitation plan by November 25.
Analysts say Hanjin’s cashflow management has been problematic, but caution that shipping companies worldwide are vulnerable to the same conditions of oversupply and low trade volumes.
Nearly 80 percent of goods and commodities traded globally are transported by sea.
The industry had boomed as China’s manufacturing and export-heavy economy mushroomed over recent decades, moving a record 9.6 billion tons of cargo in 2008, according to Richard Clayton, maritime and trade principal analyst at IHS global business consultancy.
Those volumes plummeted when the global financial crisis struck.
Recession is nothing new for an industry used to riding out the occasional economic storm, but the length and depth of the downturn was different this time, said Clayton.
“The thing about shipping is that you order to anticipate an upturn,” he said, adding it could take up to five years to take delivery of a vessel after ordering it.
“We saw a rise in orders in 2010 and 2012 but there has been no (economic) upturn,” he said.
“China’s economy is down, and too many ships have been delivered. This has led to competition within the industry, which drives prices down.”
Beijing’s attempt to pivot away from exports towards domestic demand is also impacting the industry, he said.
Clayton estimated that some 25 percent of global container capacity now sits empty.
Shippers desperate to cover at least some of their costs have slashed prices — the cost of chartering a container vessel has plunged from 2008 highs of $200,000 a day to just under $5,000 a day, according to a July report by brokers JLT Speciality.
And those kinds of prices are hurting — in an April report, Drewry Maritime Equity Research estimated the industry will lose at least $6.0 billion this year. This week France’s CMA CGM, the industry’s third largest player, behind APM-Maersk and Mediterranean, said it had lost $128 million in the second quarter alone.
The company is “experiencing a market environment that remains difficult, with excessively low freight rates weighing on our revenue and margins,” said group Vice-chairman Rodolphe Saadé.
Losses like that are driving a round of mergers, said Rahul Kapoor, director of Drewry Financial Research Services in Singapore.
Successful partnerships are resulting in companies that are “much bigger and stronger in terms of balance sheets,” Kapoor said.
Recent moves include CMA CGM’s purchase of Singapore’s Neptune Orient Lines (NOL), and a June marriage between Hapag-Lloyd and United Arab Shipping Co.
“I think (Hanjin) expanded after the global financial crisis, expecting the market to recover and the cash flows to come,” he said. “The problem was the market just did not come back. They were waiting for the market recovery so that they could retire their short-term debt, long-term debt. That was their major undoing.”
Without a consolidation partner, Hanjin, which was considered among the “lower tier” of major shippers with just 618,133 TEUs (twenty-foot equivalent units) of capacity, had trouble achieving the scale necessary to stay afloat.
For Kapoor, Hanjin is the exception in the industry, not the rule.
“They are all vulnerable to the underlying markets which remain weak, but there is no further bankruptcy that is threatening any other company in the market.”
According to a Seoul-based legal analyst, Hanjin’s troubles are typical of many of the large South Korean family-owned conglomerates known as chaebols.
The Hanjin conglomerate began as a trucking business started by founder Cho Choong-Hoon just after the end of World War II, and grew steadily over the next several decades.
The business passed on to son Cho Yang-Ho in 2014, at which point the shipping business was already foundering, according to Lee Ji-soo of the Law and Business Research Center in Seoul. Since then, the Hanjin Group has spent about 1.2 trillion won ($1.07 billion) trying to save the shipping company.
Cho himself took control of the shipping business from Choi Eun-Young, the widow of his younger brother Soo-Ho, who died in 2006.
“Without expertise or understanding of the industry, Choi Eun-Young was appointed as the CEO only because she was a relative,” Lee Ji-soo said. “It is a typical chaebol story.”
Oversupply vs stagnant trade
According to industry analysts BIMCO and Drewry, the fundamental problems of oversupply of capacity and weak trade are persisting, although there have been some small signs of improvement recently.
Drewry reported that global container throughput grew just 0.5 percent in the first quarter of the year, and did not grow at all in Chinese ports. Demand improved a bit in Q2, picking up to 3.2 percent growth in China, and 2 percent on a global basis, but as BIMCO pointed out, “global container demand is still struggling to achieve a GDP-to-trade multiplier of one.”
“Unfortunately, the effect of a positive demand growth has been crippled by carriers deploying too much tonnage into the trade lanes,” BIMCO said.
Through Q2, the worldwide container shipping fleet now exceeds 20 million TEUs, and has grown by 1.5 percent this year, according to both analysis firms’ latest reports. A total of 598,000 TEUs of capacity (85 new ships) have been delivered, while only 303,000 TEUs were withdrawn for scrapping.
BIMCO also pointed out that most of the more than 1 million TEUs of idle ship capacity is among smaller Panamax-class vessels, which have been rendered almost obsolete by upgrades at the Panama Canal and many ports to accommodate ships up to 13,000 TEU capacity.
“Cascading, in the chase to reap economies of scale, has damaged earnings on all trade lanes, as ships way too big for requirements have been introduced aggressively. But without enough cargo, running ships with too much capacity brings down utilization and profitability,” BIMCO said.
“For the full year to balance out between supply and demand growth, we need demand to grow in Q3 and Q4. Year-to-date the balance has worsened. Demand has been slow, part of the idle fleet has been reactivated and new ships have outstripped the number of ships being demolished,” BIMCO said.
What happens next
Analysts Drewry and Alphaliner both said that in general, the Hanjin bankruptcy would help the process of consolidation in the industry. Hanjin’s core assets are to be absorbed into Korean rival Hyundai, in a deal worth between $260 million and $400 million, according to several news reports.
As of now, Hanjin and South Korean officials are scrambling to gather enough funds to cover the costs of cleaning up the current chaos of ships, crews, and cargos stranded around the world. Earlier this week, Hanjin filed for bankruptcy protection in the US, which would allow its ships waiting outside US ports to dock and unload without fear of seizure by creditors.
That may prove difficult, however, as a request by the South Korean court to Hanjin’s biggest creditor, the state-run Korea Development Bank, to match a pledge of 100 billion won from the Hanjin Group (which includes Korean Air) to give the shipping line temporary operating funds was rejected late this week, leaving an estimated $14 billion in cargo still stranded, according to an AFP report.
In terms of local impact, the effects of the Hanjin collapse fortunately seem to be minor. In a text message, a spokesman for South Harbor operator Asian Terminals Inc. said that the number of Hanjin containers in ATI’s yard was “less than 100,” and that consignees were able to retrieve them quickly with usual processes.
Likewise, International Container Terminal Services Inc. Vice President and General Manager of the Manila International Container Terminal Christian Gonzalez said, “On our part, Hanjin’s volumes and revenue contribution are marginal and all our accounts are up to date and settled. There are very few containers in MICT and none in Subic. Could [the bankruptcy]affect release of containers? No, because Hanjin has issued clearance that so long as all charges paid the importer may claim their containers so long as they return the empties to Hanjin’s designated container yard.”