The recent declaration of bankruptcy by South Korean ocean carrier Hanjin Shipping is a symptom of what ails the container shipping industry, not the cure, as some analysts seem to suggest.
The recent declaration of bankruptcy by South Korean ocean carrier Hanjin Shipping is a symptom of what ails the container shipping industry, not the cure, as some analysts seem to suggest.
For years now, the industry has been beset by a combination of tepid global trade volumes and persistent overcapacity, which has caused rates to plummet to historic lows with little hope of a bounce-back.
Some think the short-term spot rate increase seen in the days following Hanjin’s initial bankruptcy announcement might be some sort of panacea for the industry, but this bump is just that – a short-term reaction to instability and uncertainty in the market during the buildup to ocean shipping’s busiest season. It is not a permanent solution to the industry’s fundamental imbalance between supply (i.e. global containership fleet capacity) and demand (actual shipping volumes).
Olaf Merk, ports and shipping expert of the OECD’s International Transport Forum, and others have made the inevitable comparison to the 2008 economic recession, saying Hanjin could be the shipping industry’s version of Lehman Brothers. But Lehman and the other banks were making money hand over fist before they got greedy and implemented much riskier investment strategies and predatory lending processes. This is hardly the case in the ocean shipping market, one that has for decades struggled to turn a profit without the assistance of government subsidies.
In fact, after several top lines reported disappointing first half results, Lars Jensen, chief executive officer of SeaIntelligence Consulting, predicted carriers will lose as much as $10 billion for the full year in 2016.
Given this, Hanjin’s situation seems to much more closely resemble that of the U.S. automobile industry during the financial crisis. Both were heavily subsidized, and even with the writing on the wall, refused to make the operational changes necessary to recover. Instead, they sat tight and waited for the government to rescue them with massive bailouts. In the case of Hanjin, however, that rescue isn’t coming anytime soon, according to South Korean President Park Geun-hye, who said the country “will not sit silently by as corporate managements, who do not aggressively try to recover their businesses, wait for the government to solve everything.”
To be fair, container spot rates have increased on the major east-west trades in the weeks since Hanjin filed for court receivership in Korea. But Oslo-based ocean freight rate intelligence platform Xeneta, which crowd-sources over 12 million contracted rates and covers over 60,000 individual port pairs from more than 600 major international businesses, recently warned the boost was no more than a flimsy disguise for the “fundamental weakness” of the ocean shipping market.
This proved particularly prophetic the past two Fridays, as the increase in container spot rates to the United States appeared to have petered out, with prices to the U.S. market falling back from the prior week. Container spot rates measured by the Shanghai Containerized Freight Index from Shanghai to the U.S. West Coast on Friday slipped $16 (0.9 percent) compared with the previous week to $1,726 per 40-foot container (FEU), and to the U.S. East Coast, rates fell $14 (0.5 percent) to $2,433 per FEU. This followed a week in which rates slipped $7 to $1,742 per 40-foot container (FEU) to the U.S. West Coast, while prices to the U.S. East Coast were unchanged at $2,447 per FEU.
And much remains unclear about how the bankruptcy proceedings in South Korea will actually shake out. Most analysts expected the Hanjin news to create a short-term surge in freight rates, especially on the spot market, but without any guidance from the Korean Bankruptcy Court yet, we have no way of knowing if the increase will actually stick.
A survey conducted by American Shipper shortly after the announcement indicated 38 percent of shipper and ocean intermediary respondents believe the most likely outcome of Hanjin’s predicament is that its assets will be liquidated and acquired by multiple competing carriers; 33 percent think Hanjin will be forced to merge with fellow South Korean line Hyundai Merchant Marine (HMM), which recently underwent a financial restructuring of its own; and 14 percent think Hanjin will most likely be acquired by a carrier other than HMM. Only 10 percent of respondents said they believe Hanjin will be able to restructure and continue operations, but this remains a possibility as well, albeit a slim one.
If the court allows Hanjin’s vessel assets to continue operating as normal – either under the current company, as part of a merger with HMM, or after being acquired by another carrier – it is unlikely we will see a significant reduction in available capacity. And if capacity remains stable, prices will likely subside to the levels seen prior to Hanjin’s announcement.
But if the court decides to liquidate the company completely, selling all its available vessel assets for scrap, we could see rates continue to benefit, at least in the transpacific trade between Asia and North America, where the majority of Hanjin’s operations are concentrated. According to an analysis by ocean carrier schedule database BlueWater Reporting, prior to the announcement, Hanjin operated 45 vessels with an aggregate capacity of 329,139 TEUs in the transpacific, 8.37 percent of the total deployed capacity in the trade. By comparison, Hanjin was deploying just 117,828 TEUs on nine vessels between Asia and North Europe, about 5 percent of the overall deployed capacity in that trade.
In the opinion of most analysts (me included), however, this is an extremely unlikely scenario. While some vessels, especially smaller, older ones, may be disposed of for scrap in order to raise working capital needed for continuing operations, the larger, newer ones, especially those in the 13,000-TEU range currently deployed in the transpacific trade are likely far too valuable to sell for scrap. It should also be noted that Korean media reports indicate the court has ordered Hanjin to return its chartered ships to their owners, which will likely be re-chartered and re-deployed by other carriers.
The chart below, built using BlueWater Reporting’s Carrier Dashboard application, breaks down Hanjin’s overall fleet by vessel class. Of the 84 ships currently deployed on direct region-to-region liner services, nine have a capacity of more than 13,000 TEUs, representing 117,828 TEUs in total, around 21 percent of the carrier’s total 566,547-TEU deployed fleet. Hanjin deploys 10 vessels with capacities between 10,000 TEUs and 12,999 TEUs (17 percent of its total fleet capacity), 17 between 7,000 TEUs and 9,999 TEUs (26 percent), 28 between 4,000 TEUs and 6,999 TEUs (26 percent), and 20 at 3,999 TEUs or less (10 percent). The overall average age of these vessels is around seven years old – far newer than most containerships sent to the scrap yard – and that number falls to just over three years for those vessels over 10,000 TEUs.
Source: BlueWater Reporting
If, as we suspect, Hanjin’s insolvency does not have a significant and permanent impact on global containership fleet capacity and, by extension, container freight rates, the question then becomes: if the ocean shipping industry is unable – or perhaps unwilling is the better word – to address the fundamental imbalance of supply and demand, and governments are no longer willing to subsidize loss-making operations, will Hanjin just be the first of many to be pulled under?
Ben Meyer is Managing Editor of American Shipper and Research Analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.