A Shudder Passes Through the Ocean Container Freight Community as Hanjin Shipping Fails

SOUTH KOREA – One of the world’s largest container shipping lines, South Korea's Hanjin Shipping, has filed for court protection having failed in its attempts to secure support from its banks. Such drastic action from a major player in the ocean freight sector was bound to happen at some point, with overcapacity and falling rates continuing to plague the global industry, and as Hanjin struggled to pay back its debt of 6.1 trillion won (approximately $5.46 billion) according to the company’s figures by the end of June, Hanjin’s creditors could no longer find a viable reason to sustain the ailing company having already poured over 1 trillion won into the shipping line since 2013.

Hanjin applied for court receivership after its lenders, led by the Korea Development Bank (KDB) turned down a restructuring proposal saying that it was inadequate. Hanjin has been trying to reschedule its mounting debts with creditors since May, having failed to make a profit between 2011 and 2014. The company made a narrow profit in 2015 after significant investment from creditors and severe cost cutting measures, before falling back into the red for the first half of 2016. As a result of the receivership, some of the company’s vessels are already being turned away from ports over concerns that they would not be able to pay fees, adding to the mounting headache. The company now awaits a decision by the Seoul Central District Court on whether Hanjin Shipping should remain as a going concern or be dissolved.

Hanjin is by no means the only container shipping line finding itself in financial trouble with the company’s main competitor, South Korea's second largest (now presumably largest) box carrier Hyundai Merchant Marine (HMM), also at the mercy of its creditors though faring much better having met most of its obligations. One possible scenario is for HMM to acquire the core assets of its rival such as ships, international commercial network and key employees, a move intended to preserve Hanjin's competitiveness as far as possible, according to South Korea's Financial Services Commission (KSC) and a solution now being pressed for strongly by the Korean authorities after its efforts last year to persuade the two carriers to amalgamate.

The situation however presents complications of little concern now to Hanjin but which might impact on the rest of the stakeholders in the business of ocean container freight carriage. As with its competitors Hanjin has signed up to at least one Vessel Sharing Agreement (VSA) and the knock on effect which its probable demise may have can only be surmised. With 2.9% of the global market share, Hanjin looked set to form the ‘THE Alliance’ with NYK, Hapag-Lloyd, K Line, MOL, and Yang Ming, starting operations next year.

It will now fall to international regulators to review any VSA in which a partner fails financially. We have already seen APL taken over by French line CMA CGM thus changing the dynamics of the G6 Alliance and leaving HMM out in the cold, whilst that very company’s attempt to sign up to THE Alliance was, somewhat ironically, rebuffed because of the presence of Hanjin and, as a result, it turned to negotiate with Maersk and MSC to join the 2M VSA. HMM incidentally was rescued by the very same KDB which, having accepted its restructuring plans, promptly rejected those of its main rival, something which saw HMM shares take off when the news of the Court filing came through.

At the root of all this is the parlous situation which ocean shipping currently finds itself in, a situation which must in some part be attributed to the very carriers which control it. Starting with the dramatic introduction of Maersk’s E Class vessels the race for the production of the largest possible box carriers has continued apace whilst trade has stagnated. With 18,000 TEU vessels becoming almost commonplace the trick is to make them economic by ensuring they are always running at near capacity.

Having tried every possible cost saving measure available, principally slow steaming to save fuel and stretch out voyages thus reducing overall capacity, the container lines turned to the VSA’s in a bid to cut overheads and share traffic without encroaching into illegal antitrust territory. Now the box of economic tricks is empty and simply taking on another rival company fleet when it meets its demise may well not be enough. Cutting capacity is probably the only available effective weapon left in the carriers’ armoury but it remains to be seen whether any of the carriers is prepared to do it and whether even that can work before seeing more companies go the way which Hanjin appears to be headed.

Photo: Hanjin’s future hangs by a thread.