The effects of the South Korean carrier’s decision to file for court receivership at the end of August is being felt widespread across thousands of businesses throughout the world.
Source: South Carolina Ports Authority
It might have sounded like hyperbole when Gerry Wang, the chief executive officer of containership lessor Seaspan, said last month the fallout from the filing for receivership by Hanjin Shipping was “like Lehman Brothers to the financial markets.”
But it’s hard to overestimate the wide-ranging effects of the collapse of Korea’s largest container carrier, not only to transportation and logistics companies, but to the thousands of businesses whose shipments have been disrupted.
Or, as Wang put it, “It’s a huge, huge nuclear bomb. It shakes up the supply chain, the cornerstone of globalization.”
“It’s not just about the financial viability of the liner operators, it’s some serious global shippers have been hurt with their supply chain,” Neil Dekker, head of container research at the London-based consultants Drewry, said of the chaos that ensued following Hanjin’s announcement.
Korea’s Yonhap news agency reported Hanjin handled 40 percent of Samsung Electronics’ shipments and 20 percent of those of LG Electronics.
Attorneys for HP Inc., formerly known as Hewlett Packard, explained how the problems at Hanjin are reverberating through the economy at a U.S. bankruptcy hearing in New Jersey. When Hanjin filed for receivership, it had in its possession 500 containers of HP product—including 314 in the Americas and 142 destined for or in transit in the U.S.—worth tens of millions of dollars.
HP said customers not receiving goods could cancel purchase orders or contracts with it, and the company could wind up paying $100 per day in liquidated damages or suffer deductions, say 5 percent per week, from its invoices until delivery is complete.
Similarly, HP noted its customers, as well as its customers’ customers, could suffer substantial losses.
“Without a prompt resolution to the shipping standstill, national and international commerce, inclusive of local, state, and federal agencies that are customers of HP, will be adversely affected,” it said. One example: computer printers don’t work without toner and ink.
And in the highly competitive personal computer business, “Delays can result in the next release of computers rendering these devices less competitive in the market and causing HP to lose sales.”
But HP’s problems are a only drop in the proverbial bucket: Korea’s maritime ministry estimates Hanjin’s financial problems may delay the shipment of as many as 540,000 TEUs and cause further disruptions for the next three months, according to Yonhap.
Prior to Hanjin’s insolvency, the biggest bankruptcy by a container carrier occurred in 1986 when McLean Industries, Inc., the parent company of United States Lines, filed for protection from its creditors under Chapter 11 of the U.S. bankruptcy code, reporting assets of $1.56 billion and liabilities of $1.49 billion on Sept. 30 of that year.
Those figures pale in comparison those listed by Hanjin when it filed for protection in Seoul Central District Court on Aug. 31. As of June 30, Hanjin Shipping had total assets of 6.6 trillion won (U.S. $5.9 billion) and liabilities of 6 trillion won, according to its court filings, a sharp decline from assets of over 10 trillion won and liabilities of 9.4 trillion won at the end of 2013.
The company said it had roughly 140 container or bulk vessels and offered about 60 regular services globally. It ranked as the ninth largest container shipping company, transporting over 100 million tons of cargo per year.
According to industry analyst Alphaliner, Hanjin operated 98 containerships as it filed for reorganization, including 37 owned vessels with 274,078 TEUs of capacity and 61 chartered ships with 335,458 TEUs of capacity; by Sept. 20, it had already slid to 10th place with 80 containerships.
In addition, Hanjin also operated 13 container terminals, two distribution centers, and six off-dock container yards.
Although the company’s assets slightly exceeded its liabilities, Hanjin has incurred a net loss each term during the past three years. The company reported a net loss of 463 billion won in the first half of this year, and losses of about 22 billion won in 2015, 463 billion won in 2014 and 712 billion won in 2013.
Hanjin is not the first container in financial trouble to have been involved in a vessel sharing agreement (VSA), but it is the first of the new “alliance era,” in which just four giant VSAs control 90 percent of transpacific trade, and nearly 100 percent of Asia-Europe trade.
Speaking in September at Intermodal Expo in Houston, Michael Burns, vice president of the retailer Big Lots, said that even though his firm did not have a contract with Hanjin, it was still affected because it did business with other members of the CKYHE Alliance, of which Hanjin was a member along with COSCO, “K” Line, Yang Ming, and Evergreen. (And there are still other carriers outside the CKYHE Alliance with which Hanjin also did business.)
Source: BlueWater Reporting
Source: BlueWater Reporting
Statistics from ocean carrier capacity database BlueWater Reporting illustrate why the effects of Hanjin debacle have been so widespread and detrimental, particularly in the transpacific trade. Hanjin may be the ninth largest carrier globally, but according to BlueWater Reporting, it was the fourth largest in the transpacific, where it had an 8 percent share of overall capacity and the CKYHE Alliance had a 38 percent share. By comparison, Hanjin had a smaller 5 percent share in the Asia-Europe trade, but the CKYHE carriers still have a 25 percent combined share.
The National Retail Federation said shortly after Hanjin filed for receivership that the company’s action “left tens of thousands of cargo containers full of holiday merchandise in limbo around the world.”
“Some are sitting on docks in Asia where they were waiting to be loaded onto Hanjin ships. Others are aboard Hanjin vessels not allowed to dock because ports and longshoremen are worried they won’t get paid. Others already unloaded are stuck at U.S. docks because trucking companies won’t pick them up unless they are paid.”
Some progress seemed to be made during September, albeit slowly, as about one third of ships were unloaded and containers evacuated from terminals.
Commissioner William P. Doyle said the Federal Maritime Commission was able to help some shippers caught up in the mess.
As an example, he described a lumber and log exporter who had booked cargo with Hanjin and had boxes at marine terminals in ports scattered around the U.S., as well as on a train moving to the West Coast, when Hanjin filed for receivership.
The shipper was told to remove its containers from the terminals, pay for drayage, and that it would have to pay demurrage for the time when the containers were stuck at the port, charges that amounted to $225,000 after just a few days.
Doyle said the FMC was considering “issuing a show cause order for where are these fees coming from,” before the BCO and the terminal operators were able to come to an amicable resolution. The exporter was able to reload his product into other containers and rebook with other carriers.
Other shippers are facing problems because terminals are refusing to accept empty Hanjin containers when shippers seek to return them, and are told there will be detention charges on the chassis that hold those containers.
“What are those detention charges when the shipper is ready, willing, and able to return the equipment because it has Hanjin’s name on it? Those are some of the issues we are looking at,” added Doyle.
Missed Opportunity? After some cargo owners complained about being hit with unreasonable charges for detention and demurrage through no fault of their own during periods of port congestion, including during the 2014-15 contract negotiations between West Coast longshoremen and employers, Doyle says some indicated they would file a petition with the FMC about it.
He said that never happened, but if it had, the FMC might have been “well on our way to addressing” the issue, something that might have been useful to shippers caught up in the Hanjin bankruptcy.
Those drawn into the Hanjin maelstrom include forwarders and NVOCCs; suppliers, such as fuel companies; service providers, such as tugboat operators and pilots, terminals and port authorities, railroads, drayage carriers, dockworkers, and warehousemen; and providers of transportation assets, like ship charterers, container lessors, and chassis companies.
While Hanjin still had not announced any layoffs as of Sept. 20, there were reports that some employees were already leaving the company.
Thousands of workers—crews on ships, longshoremen, drayage drivers, and warehousemen—were idled or had their lives disrupted, something that four members of the California congressional delegation and FMC Chairman Mario Cordero highlighted at a press conference the day before Labor Day.
NVOCCs and forwarders, the middlemen who booked nearly a third of third of Hanjin’s 691,000 TEUs of U.S. import volume this year for resale, were truly stuck in the middle when the maelstrom began to swirl. Many said they had to deal with a deluge of calls from angry or concerned customers with Hanjin providing limited information, if any, about individual shipments.
U.S. Recognition Of Korean Proceedings. Hanjin filed for receivership on Aug. 30 and on Sept. 1, the Seoul Central District Court approved a filing for the company to be put under a court-led rehabilitation.
The company then filed for protection in U.S. Bankruptcy Court in Newark, N.J. on Sept. 2 under Chapter 15 of the U.S. Bankruptcy Code to extend the protections provided by the Korean court. These included a stay of seizure or arrest of Hanjin’s assets located in the United States and preventing contract counterparties from modifying or terminating U.S.-based contracts solely on the basis of the bankruptcy proceedings.
Hanjin told the U.S. court it needed “certainty that contract counterparties will not terminate or exercise remedies under their agreements, will continue performing thereunder, and will be subject to and bound by any decision by the debtor to affirm or disclaim such agreements.”
Although the company was able to obtain protection from creditors in some other jurisdictions, this certainly was not universal, and in some cases, Hanjin ships were arrested when they entered ports to discharge cargo.
Once Hanjin obtained protection in the U.S., several ships began offloading cargo in Long Beach, Los Angeles, and Oakland. One ship arrested prior to the company filing in the U.S. court, the Hanjin Montevideo, remained moored in Long Beach.
By Sept. 19, Hanjin said 28 of its vessels had completed discharging cargo, while Yonhap reported that 34 of its containerships were still stranded at sea. A Korean judge, the news agency added, had instructed the company to return chartered ships to their owners once the cargo was discharged.
Chances Of Survival. Of course, Hanjin’s story is not a new one. Businesses often seek protection from creditors in bankruptcy court, reorganize, and continue operating, but the long-term survival of Hanjin seems to be a long shot to many analysts.
“Hanjin is over, their time has passed,” Alan Murphy, chief executive and partner at SeaIntel Maritime Analysis in Copenhagen, told American Shipper. “Any saving grace through a white knight or government intervention had to have happened no later than Sept. 2. The proverbial ship has sailed. Shippers have been burnt badly and are losing millions every day their cargo is stuck at sea. They are not coming back.
“I find it very difficult to see Hanjin re-emerge as a large global carrier again,” he said. “Perhaps as a much smaller entity it can be done, but not at a scale matching where they were” prior to filing for receivership.
Dirk Visser, Dynamar’s senior shipping consultant and managing editor of its publications and the DynaLiners newsletter, also said he is sure this will be the end of the line for Hanjin.
“It will take months before all cargo has reached consignees, if not auctioned before then by stevedores or other parties looking to recover their claims on the carrier,” said Visser, adding he thought it unlikely shippers would “want to place one fresh container for carriage by Hanjin and so (the company’s) income is bound to dry up nearly immediately.”
Indeed, Hanjin stopped taking new bookings after entering receivership and other members of the CKYHE Alliance said they would neither load Hanjin cargo on their ships nor tender cargo to Hanjin.
It’s still not entirely clear why things deteriorated so quickly at Hanjin though.
Both it and Hyundai Merchant Marine (HMM), Korea’s second largest container carrier, have had financial problems in recent years, as have most other container carriers because of rampant overcapacity and plunging freight rates.
Earlier this year, some observers thought that Hanjin was the stronger of the two carriers, but it now appears that HMM, which is in the midst of its own financial restructuring, has come out on top.
On the very day Hanjin filed for receivership, Korea’s Financial Services Commission announced the Korean government would “promote acquisition of Hanjin Shipping’s healthy assets by Hyundai Merchant Marine in a bid to maintain competitiveness of the shipping industry.”
HMM announced it was deploying “extra loaders”—vessels not associated with a particular liner service—from Korea to carry goods to both the U.S. and Europe.
“One of Korea’s key industries, the government will make sure to maintain the shipping industry’s competitiveness. Hyundai Merchant Marine (HMM) would acquire Hanjin Shipping’s core assets such as ships, overseas sales network, and key work forces to retain Hanjin Shipping’s competitiveness as much as possible,” said FSC.
Other carriers were also quick to step into the breach. The 2M Alliance of Maersk Line and MSC said it would commence a service from China and Korea to the U.S. for at least for two or three voyages, but their long term plan was unclear. The two companies gave contradictory information about the permanent rotation of the service. Maersk said it would call Los Angeles, while MSC said its North American destination would be 1,500 miles up the coast at Prince Rupert, Canada.
The Korea Herald newspaper said HMM, Korea Marine Transport, Sinokor Merchant Marine, and Heung-A Shipping planned to launch a “mini alliance” at the end of September that would deploy 15 vessels on four Southeast Asian routes, effectively replacing Hanjin capacity between South Korea and Singapore, Malaysia, Indonesia, Vietnam and Thailand.
Drewry’s Dekker said it is not clear why HMM seems to have emerged from its financial problems, though “it’s given that both lines were very sick.”
Earlier this year, China’s two leading container carriers, COSCO and China Shipping merged at the behest of the Chinese government.
With hindsight, it’s conceivable Korea could have followed a similar playbook—a scenario discussed in the March edition of American Shipper’s Container Analytics column, (See “Who’s next for line M&A?” on page 30)—and come to some sort of agreement where the two companies would merge and the Korean Development Bank would “give them a bit of a lifeline financially to sort their affairs out and get a decent structure in place, sell off some assets and so on,” said Dekker.
“But that obviously didn’t happen, and I couldn’t tell you why. I don’t know.”
The Chaebol Conundrum. Much of Korean industry is organized into family-led groups called chaebols. In a 2013 paper, David Murillo of ESADEgeo Center for Global Economy and Geopolitics and Yun-dal Sung of the Sogang Business School wrote that Korean chaebols are “more family-held, hierarchical, centralized, and rely more on government relations than their Japanese counterparts,” known as kiretsu.
An commentary published on the BBC website last month concluded that chaebols are “not quite” in crisis, but that recent problems “have revived the long-standing debate about whether they’re fit for purpose.”
Hanjin is part of the same chaebol that owns Korean Air Lines. While all shipping companies are dealing with an extremely difficult market, the BBC said “there is a wider question over whether the umbrella conglomerate has the right structure and attitude to deal with adversity.”
“Many of the Korean chaebols have not been performing well,” Kim Woo-chan, a professor of finance at the business school at Korea University, told the British broadcaster. “They’re entrenched against shareholders. When it comes to appointing top management, they tend to appoint members of the family.”
But “there does now seem to be a political will to impose change,” said Kim. “Lawmakers seem more open to introducing legislation which might make chaebols open up to outside ownership and management.”
On Sept. 19, Reuters reported that a Korean judge had ordered Hanjin ship charters to be cancelled and for chartered vessels to be returned to their owners as they completed deliveries. Hanjin charters tonnage from a number of higher profile companies including New York Stock Exchange-listed Seaspan and Danaos.
Seaspan’s Wang had, at least initially, taken a hard line in negotiations with Hanjin, telling security analysts in July that his firm would not consider a rate reduction. Hanjin chartered three 10,000-TEU ships from Seaspan and four similar size ships from Greater China Intermodal Investments (GCI), an investment partnership Seaspan established with the Carlyle Group and other investors.
“We believe that is the violation of contract in the spirit of a major OECD country having $1.5 trillion of GDP with almost 50 percent driven by, or derived from exports,” he said. “That is not a good action. We do not support that. We have never had such a situation before with any of our other customers and Hanjin Shipping has been the only one.”
At Danaos, the time charters associated with Hanjin ships represented approximately $560 million of the lessor’s $2.8 billion contracted revenue backlog as of June 30, 2016. They included three 10,100-TEU vessels built in 2011 and five 3,400-TEU ships built in 2010 and 2011, and accounted for 17 percent of Danaos’ revenue in 2015.
HMM was an even bigger customer of Danaos, accounting for a 28 percent of revenue in 2015, and Danaos was one of several companies that agreed to help HMM by renegotiating charter rates.
John Coustas, chief executive officer of Danaos, expressed disappointment after Hanjin filing for receivership “that the Korean Development Bank has failed to support an important participant in the global containership business.”
“Danaos actively supported Hanjin in its efforts to restructure its operations and we are hopeful that Hanjin will be able to achieve a restructuring of its business and emerge from court receivership as a financially stronger company,” he said.
Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.