TAEFL Shipping Department examines an industry all at sea
The shipping industry was rocked on the last day of August with the news that the world’s seventh largest container line, Hanjin Shipping, had filed in South Korea for court protection from its creditors. That move followed the breakdown in negotiations with creditors to implement a debt-restructuring programme.
The court action highlights a crisis in a container sector severely affected by the downturn in global trade in recent years. It emerges that the South Korean-owned Hanjin Shipping, which accounts for 3% of world container capacity, has been unprofitable in four out of the last five years.
Apart from the drop in orders, this performance seems to be due to competitive pressure forcing shipping rates down while the fixed charter rate was high on vessels entering into long-term leases in 2010. Of Hanjin’s fleet of 132 container and bulk ships, 59 are owned; the remainder leased.
As the result of mounting pressure from creditors, it is understood that some 65 of its ships – just under half the total – are currently at risk. An estimated $14 billion worth of goods is currently on board Hanjin vessels.
Potential chaos in ports worldwide
The immediate effect has been to create chaos in ports across the world as the authorities there are preventing the ships from docking: they believe there is a serious risk that Hanjin Shipping will be unable to settle port charges. For its own part, Hanjin could not risk docking in case containers and their contents were seized by creditors.
This impasse has created a legal limbo in which a growing number of Hanjin vessels are waiting at sea until an acceptable solution has been found. As the ships have limited supplies of food and water, the issues must be resolved within weeks at the latest if these vessels are to avoid being forced to dock.
The situation is being exacerbated by the growing number of containers waiting at ports for shipment. Many have been impounded by the port authorities as collateral for debts owed to them.
If other shipping companies were asked to retrieve the Hanjin containers it would be extremely costly, especially as the owners have already lost the fees already paid to Hanjin. The vessels owned by Hanjin may have to be sold at sea, if they cannot be brought into dock and unloaded. That cargo may reduce the cost of the ships.
The action in the Seoul court was to prevent creditors taking hold of the ships in more than 40 countries. Hanjin Shipping would have an opportunity to reorganise its debts and prevent the further seizure of assets; a number of ships already having been seized or distrained.
On September 6, the South Korean government indicated that long term loans may be offered to Hanjin in order to keep the shipping company operational, subject to collateral being available. The parent company, Hanjin Group, may provide the funds needed to cover the goods currently at sea.
It is reported that Hanjin’s South Korean competitor, Hyundai Merchant, may consider taking over some of its assets, including vessels, network and staff. Shares of Hyundai Merchant surged more than a quarter; the largest gain in more than two months. Hyundai Merchant itself is part-way through a debt restructuring program led by its creditors.
Significant progress was made on September 9 in the US, however, when Hanjin Shipping won court protection for its ships bound for the US. This will allow the company to unload four vessels without the risk of their being seized by creditors. The court in Newark, New Jersey. confirmed a provisional order made three days earlier.
Implications for Christmas trade in the US and Europe
The problems revealed in the attempts to re-structure the leading carriers’ debts could not have surfaced at a more difficult time for the shipping industry. It is the busiest time of the year for container traffic, with hundreds of ships carrying goods scheduled to arrive in time for Christmas. Hanjin Shipping, for example, carried goods for high profile retailers such as Nike and Hugo Boss.
With the cargo either being held at sea or impounded in a port means that both manufacturers and retailers might not receive the goods they had forecast. This will lead to reduced stock levels or the acceptance of very high rates to have stock flown over from the Far East.
What does this mean at present? TAEFL’s shipping department expects that shipping costs will rise sharply in the current uncertain global situation. If the renewed attempts to find a debt reorganisation fail, the largest bankruptcy in the shipping industry would be only a step away. While all options are being considered – including State loans, bank finance and the sale of specific assets – there is no certainty. A dark cloud hangs over the future of shipping.