When an individual or small business files for bankruptcy, chances are it won’t make national headlines; the effects, while they may prove disastrous for those involved, typically won’t be felt on a large scale. However, when one of the largest shipping companies in the world, who accounts for seven percent of the Far East-North American container trade, announces their decision to file – commotion ensues.
The international shipping industry is now in a state of turmoil, as South Korean based shipping company Hanjin, the world’s seventh largest shipping container operator by volume, has filed for bankruptcy. The shipping giant now emerges as a symbol of the slump that has plagued the industry since the global financial crisis. Members of The Alliance are now scrambling to cancel bookings with the Korean liner, while simultaneously trying to divert freight to other container lines.
A Pattern of Loss
Headed for another year of losses (it has reported losses in four out of the past five years), Hanjin has been fervently struggling to reschedule debt under a voluntary program led by creditors since May. Meanwhile, rival Hyundai Merchant Marine Co. has been taken over by creditors as a result of meeting certain conditions. However, as you know, not every story has a happy ending. Unfortunately for Hanjin, according to the Wall Street Journal the company’s creditors have decided to discontinue their assistance as their financial support of more than 1 trillion won ($896 million) has failed to keep it afloat. If it goes under, Hanjin will become the largest organization in the industry to fold.
Despite the immense impact this could have on global shipping, it may not necessarily come as a surprise, as this unfolds at a time when shipping companies worldwide have been affected by years of decreasing demands (most notably from China) as overall global trade has decelerated. If you have followed the developments in the shipping industry over the past few years, you are perhaps aware that global shipping rates are currently at an all time low (the shipping industry has been operating at a loss since the end of 2015). In fact, it’s actually more inexpensive to put your personal belongings in a shipping container for a year than it is to keep them at a local storage facility. Shipping companies simply cannot gross returns that are higher than their cost of capital.
A Miscalculation of Demand
So what on earth has caused this severe collapse in shipping prices? Has it been the overall slowdown in demand? Yes, but it is not the sole contributing factor; this has without a doubt contributed to the problem however; it is not the root cause. The severe decrease in shipping prices can be attributed primarily to the sheer overinvestment in shipping capacity by ocean carriers. The latest models of shipping freighters are bigger, better and have additional capacity compared their older counterparts. When carriers upgraded their ships, they seemed fairly confident the demand for shipping services would increase and the rate of global trade would continue to progress. However, unfortunately for them, this is not exactly how things transpired; now shipping companies are dealing with increased capacity and stagnant demand. The expected profits from the larger, more efficient ships have yet to materialize, and as almost every other shipping line made shipping investments, the baseline market price decreased as they competed their profits away.
What Does it All Mean?
So what does all this chaos mean for the shipping industry? The potential impact of this bankruptcy may be felt around the world as cargo owners now scramble to find space with other shipping lines, not to mention this collapse comes at time of high seasonal demand for the shipping industry ahead of the year-end holidays. However, while this is may be dire news for cargo holders, Hanjn and Alliance members, this debacle might be welcomed by Hanjin’s competitors, as they are part of an industry previously plagued by low freight rates as a result of overcapacity. But now, as demand for reliable shipping companies is on the rise, prices as a result, will also increase. Sound familiar? Basic principles of supply and demand. As reliable shipping lines have become scarcer, the demand will rise and prices will follow.
As stated in a recent article posted by CNBC , state-run think tank Korea Maritime Institute estimates that shipping rates on Busan (South Korea’s second largest city) to U.S. routes will rise 27 percent and Busan to Europe routes will rise 47% in the near term. We have already seen a few developments befall as Hanjin’s filing follows announcements by a handful of shipping companies last week of general rate increases scheduled to take effect this week, in an attempt to prop up long-deflated prices.
Hanjin is the most notable casualty yet in South Korea’s sprawling but clearly troubled shipping industry. The shipping business plays a key role in the countries export heavy economy, and has been hit hard by the downturn in international trade. It will be interesting to see how this continues to unfold as news of Hanjin’s downfall spreads across the globe.
Max Lock - Fleet's CEO