Hanjin Shipping bankruptcy

Hanjin Shipping bankruptcy

On February 17, 2017 Seoul Central District Court declared Hanjin Shipping Co. bankrupt. It was the 7th largest global container shipping firm with almost 3% global market share. It had been suffering continuous losses from 2011 and its debt had mounted to US$ 5.5B by the end of 2015.

What is the Shipping Industry’s Future?

On February 17, 2017 Seoul Central District Court declared Hanjin Shipping Co. bankrupt. It was the 7th largest global container shipping firm with almost 3% global market share. It had been suffering continuous losses from 2011 and its debt had mounted to US$ 5.5B by the end of 2015. Hanjin filed for receivership bankruptcy with the court on August 31, 2016 in an  attempt of salvaging operations, after creditors withdrew support. The announcement left two-thirds of its ships stranded at sea with US$ 14B worth of cargo and crew onboard. Within two weeks, the market value plummeted by a third to US$ 293M.

Remaining assets such as terminal operations and  97 container and 44 bulk ships are to be now liquidated. Some have already been sold or auctioned.

What is the prevailing health of the shipping industry?

Since 2008, the Baltic Dry Index, a measure of freight rates for bulk carriers has plunged by 95%. Moody’s Investor Service has predicted the negative outlook for the industry will persist for at least another year. Market leader Maersk, with over 15% market share, too lost US$ 151M in Q2 2016 and US$ 116M in Q3 2016,.

Maersk is acquiring Hamburg Süd Group in 2017, increasing its share by almost 3%. In 2015 it entered into the 2M Alliance, with Mediterranean Shipping Co. (MSC) with almost 14% market share. Two other alliances are also being floated on April 1, 2017, which involve seven other companies. These three alliances will make each at par with the other.

Why did Hanjin Fall and What Threatens the Shipping Industry?

Hanjin was unsuccessful in negotiating a restructuring agreement with its creditors led by Korea Development Bank, and Korea Airlines, its primary investor. It was thus forced to file bankruptcy in court with an absence of funds, resulting in the chaos.

 Lower freight prices emerged from lower global demand post 2008. New and larger ships have been built and supplied at the rate of 6-8%. Whereas, the industry growth rate has been 0-1%. Over supply has thus driven industry freight prices down. In some markets, it has been lower than fuel and crew costs. Government backed foreign firms were able to maintain lower prices, which Hanjin found hard to match.

 Hanjin’s creditors and shareholders may not wholly recover their losses. This may transpire as all of Hanjin’s assets may not sell due to the industrial overcapacity.  

 Cuts in OPEC oil production, as decided in December 2016, could further impact the industry’s operating costs due to higher oil prices. This will undermine sustainability further.

Alliances could streamline efficiencies and dispense competitive services. The result could be maintained freight prices. This may spell loss in market share for smaller firms. Potentially it may push them into further losses and result in another Hanjin.

Assessment

The weak economic climate is expected to persist which will continue to affect the shipping industry. Long-term global trade may also be impaired by Governments proposing protectionist measures. Sustained overcapacity of the shipping industry, compounded by new ships scheduled for 2017, could further negatively affect it. 

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