FOR the past several weeks, I have been following the ongoing crisis in the world’s shipping industry, which will, probably within a very short period of time, possibly in the first few months of next year, become the next global economic disaster.
No one realizes this because the shipping industry, despite the impact it has on just about every person on the planet, exists in a rather narrow informational niche; it is not easy to make news about the sector interesting to the average media consumer unless something spectacular like a shipwreck, major oil spill, or a rash of pirate attacks is involved. And even when news of less drastic events reaches the public, it tends to have a distinct positive bias. Shipping industry sources and analysts alike, it becomes obvious from reading the various trade journals and dedicated news sites and publications, desperately want to believe that their world is not collapsing on them, and so strive to put the most optimistic face on things.
The sad reality is, however, that the global shipping industry as it exists now is on the verge of a chaotic collapse, almost nothing can stop it, and it will have serious negative repercussions throughout the rest of the world economy.
In fact, the collapse has already begun with the move by South Korea’s Hanjin Shipping on August 31 to file for court receivership—which has since evolved into full-blown bankruptcy proceedings—in its home country, following failed negotiations with its largest creditors to agree to a plan to restructure and manage the $5.6 billion in debt what was once the world’s seventh-largest shipping firm had racked up, most of it in just the past four years.
Hanjin’s collapse has led to utter chaos; in order to prevent its ships being seized by creditors—something which happened to at least three of them in different ports around the world immediately upon announcement of the company’s court filing—the company ordered its ships at sea to remain there. Even in locations where seizure is not a serious possibility, ports have refused to let Hanjin ships land and unload their cargo, fearing that payments for handling and replenishment of fuel and supplies will not be made.
Hanjin has been negotiating, virtually on a ship-by-ship basis, with ports and creditors to allow its vessels to land, but it has been a slow process, complicated by the fact that the company has to go hat-in-hand to various benefactors to raise funds to pay for it. As of the latest reports (midday Monday), 34 Hanjin ships were still stuck at sea or anchored off ports around the world; 35 more, which failed to make port anywhere else, are now on their way back to Korea. Altogether, the disposition of about $12 billion worth of cargo and approximately 2,000 crewmen—many of them Filipinos—is still uncertain.
When the story of Hanjin’s demise first broke at the end of last month, the prevailing mood was that even though economic conditions for the shipping industry were obviously very difficult, Hanjin Shipping—which is part of the Hanjin Group, one of South Korea’s family-owned chaebols—suffered from some unique difficulties characteristic of that problematic part of Korean society; for instance, the shipping concern was headed for a time by a granddaughter of Hanjin’s founder, not because she had any training or experience in the maritime business, but because she was the nearest available relative to fill the position.
As the story has evolved, however, the consensus has gradually shifted to a belief that Hanjin will be the shipping industry’s “Lehman moment,” and only the first of the big carriers to fall. Even Maersk Lines, the world’s biggest and arguably healthiest shipping company, is in financial trouble; in August it reported that its second-quarter profit had reached $151 million, which at first appeared to be a bright spot in an otherwise gloomy picture of the industry, but was considered a disaster by Maersk; in the same quarter a year earlier, Maersk recorded a $1.1 billion profit, meaning that for August this year its earnings had plummeted by an unprecedented 98 percent.
Hanjin’s demise may provide a slight breather for the industry; the line had a total capacity of about 600,000 TEUs (20-foot equivalent units), and having that vanish from the world’s oceans will make a sizable dent in the industry’s overcapacity, which is now over 1 million TEUs. But that still leaves a big part of the world’s shipping fleet lying idle, and does nothing to slow the gradual increase in excess capacity.
So why is this happening, and what impact will it have on the rest of the world? The problems for the shipping industry can be traced back to plummeting freight rates; from about $1,200 per container on the trans-Pacific routes a couple of years ago, rates have gone as low as $60 to $80 per container. Part of that can be attributed to the sharp decline in oil prices over the period, but it is mostly due to the rush by the shipping industry to take advantage of the economies of scale by ordering larger ships and forming alliances that essentially created massive freight lines. Competition to keep the giant ships full drove freight prices lower, and at just the point where it was becoming a strain on the industry—about 18 months ago, global trade began to stagnate. All of a sudden, global shippers couldn’t fill ships no matter how low they made their rates, because there simply wasn’t enough cargo to go around. Shippers began to lay up vessels, but the downturn simply continued, because capacity had grown so great that it couldn’t be removed fast enough and still allow companies to keep operating.
The implications for the rest of the world once the shipping crisis moves into its next natural phase, which is the disappearance of many of the world’s existing shipping companies, are grim, indeed. About 80 percent of the world’s goods at some point in their supply chain are handled by ocean shipping; slowing trade and a shrinking shipping industry are going to feed on each other, and lead to a rapid overall economic downturn. Ports and their associated business infrastructures will suffer, and the loss of business forces many landside enterprises to scale back or even close up shop entirely. The shipbuilding industry is already suffering, and other industries are likely to suffer as well, either unable to get the goods and materials they need or ship their products, or more likely, finding themselves facing much higher transport prices due to narrower capacity—higher prices that will ripple back through national economies to affect 80 percent of what consumers buy, including most basic necessities like food and fuel.
So far, shipping industry players and other experts are at a total loss for possible solutions, and the frightening reality may just be that there isn’t anything anyone can do to stop it at this point. If that is indeed the case, 2017 may be an interesting year to watch.