by Tyler Durden
The fallout from last week’s historic bankruptcy of one of the world’s biggest shipping lines, Hanjin Shipping, continued with little resolution with as much as $14 billion worth of cargo stranded at sea according to the WSJ, sending cargo owners scurrying to try to recover their goods and get them to customers. Since Hanjin’s bankruptcy protection filing, dozens of ships carrying more than half a million cargo containers have been denied access to ports around the world because of uncertainty about who would pay docking fees, container-storage and unloading bills. Some of those ships have been seized by the company’s creditors.
As Bloomberg adds, 85 Hanjin ships that have been effectively marooned offshore as ports in the U.S., Asia and Europe have turned the company’s ships away. The worry is that Hanjin ships won’t be able to pay port fees or their contents might be seized by creditors, which would disrupt port operations. The global shipping disruption comes just as companies are shipping merchandise to fill shelves and warehouses for the end-of-year holiday season.
Earlier this week, South Korean authorities rushed to piece together a capital injection. Hanjin Group will provide 100 billion won ($90 million), including 40 billion won from Chairman Cho Yang Ho, to help contain disruptions in the supply chain. At the same time, South Korea’s ruling Saenuri Party asked the government to offer about 100 billion won in low-interest loans to the shipping line if Hanjin Group provides collateral, in what is effectively a government funded DIP loan.
Some have calculated that the funding package won’t be enough: South Korea’s Ministry of Oceans and Fisheries estimates Hanjin Shipping needs more than 600 billion won to cover unpaid costs like fuel, including about 100 billion won immediately for payments such as to port operators to unload cargo from stranded ships.
Meanwhile, in addition to the stranded cargo, there are other more pressing problems: “Our ships can become ghost ships,” said Kim Ho Kyung, a manager at Hanjin Shipping’s labor union.
“Food and water are running down in those ships floating in international waters.” As a result, The company has started providing food, water and daily necessities to crews on six Hanjin ships anchored at ports including Rotterdam and Singapore. About 70 container movers and 15 bulk ships are stranded at 50 ports in 26 countries, according to Hanjin. One Hanjin captain operating a ship in international waters near Japan said his vessel has been given permission to enter a Japanese port Wednesday to unload cargo, but will be required to head back out soon after.
However the biggest threat is that being faced by Hanjin’s clients, who now find themselves with no products, and recourse.
About 95% of the world’s manufactured goods—from dresses to televisions—are transported in shipping containers. Though Hanjin accounts for only about 3.2% of global container capacity, the disruption, which comes as retailers prepare to stock their shelves for the holiday season, is expected to be costly, as companies scramble to book their goods on other carriers.
Analysts don’t expect the snarl to leave U.S. retailers with inventory shortfalls for the holidays, but the longer the logjam drags on, the greater the risk.
Some of those most reliant on Hanjin, such as Samsung Electronics, which has said it has cargo valued at about $38 million stranded on Hanjin ships in international waters, are taking alternative measures: the company said it is considering chartering 16 cargo planes to fulfill its shipment contracts, mostly to the U.S. “We’re passengers on a bus, and we’re being told we can’t get off,” Evan Jones, a lawyer for the company, said Tuesday.
For now US retailers aren’t feeling too much pain, as Nate Herman, a senior vice president for the American Apparel & Footwear Association, said: “This is not impacting store shelves now,” however he added that “It will impact store shelves if the situation isn’t resolved.” On Tuesday, the association, which represents manufacturers and retailers, held a conference call with 150 members. “People are still trying to figure out how to get their boxes off the boat and move them,” Mr. Herman said
The problem retailers face is that there is little precedent how to deal with the fallout. While Hanjin was granted protection by bankruptcy courts in Korea and the U.S., conditions are “bordering chaos,” said Lars Jensen, chief executive of SeaIntelligence Consulting in Copenhagen.
“With so many Hanjin ships barred from entering ports, shippers have no idea when their cargo will be unloaded.” Jensen added that 43 Hanjin ships are en route to scheduled destinations with no guarantees that they will be allowed to unload. An additional 39 are circling or anchored outside ports. Eight ships have been seized by creditors.
While the courts’ creditor protection permits Hanjin ships to move in and out of certain terminals in those countries without fear of asset seizures, shippers and brokers say the rulings don’t solve the shipping line’s problems in the U.S., as it is unclear whether Hanjin will be able to afford to have the ships unloaded once they dock. Moreover, the courts’ rulings don’t necessarily apply to ports in Asia and Europe.
But while manufactured cargo can survive indefinitely, crews on ships can not, and as Hanjin ships drift at sea, their crews face increasing uncertainties and diminishing supplies. “We usually have food and water for about two weeks,” said the captain of a Hanjin-operated ship speaking by satellite phone from the South China Sea. But, after 12 days at sea, “everything is getting tight—food, water and fuel,” he said.The captain added that he is rationing water and cutting back air conditioning to save energy.
“The heat is driving the crew crazy,” he said. His ship was carrying lubricants and home appliances from South Asia to a Chinese port, but last Thursday, he was told to stop, as the ship could be seized at its destination.
Adding to the confusion, the WSJ adds that shippers and brokers said the Korean government has designated only three so-called base ports—Los Angeles, Singapore and Hamburg—where Hanjin vessels can unload shipments without risk of being seized by creditors.
“Even in those ports, we don’t know who is going to be paying unloading and docking fees,” a broker in Singapore said. “Korea says it will be Hanjin, but Hanjin is telling us it has no money. It’s a total mess.”
It gets worse.
The Korean Shippers Council, which represents more than 60,000 trading companies, said Wednesday its members “have not been able to figure out the whereabouts of their freight.”
And even those who do know where their ships are, will soon find a dramatic surge in costs. Brokers said the problems extend to carriers with vessel-sharing deals with Hanjin. They include China’s Cosco Group, Japan’s Kawasaki Kisen Kaisha Ltd., and Taiwan’s Evergreen Marine Corp. and Yang Ming Marine Transport Corp., which typically move thousands of Hanjin containers daily. Sanne Manders, chief operating officer at California-based freight forwarder Flexport Inc., said rates on Asia-U.S. cargo have risen 40% to 50% since Monday on all sea lanes—not just those operated by Hanjin.
“That amounts to easily $600 to $700 per container,“ Mr. Manders said. ”We think this period of high prices will be 30 to 45 days,” through the initial peak for Thanksgiving-season shipping, he said. Freightos, an online marketplace for booking freight shipments, said the average price per container on Asia-U. S. routes rose 56% to $4,423 on Tuesday from $2,835 a week earlier.
The surging costs are a problem as the global shipping industry has been operating at a loss since the end of 2015, and it’s set to lose about $5 billion this year amid an oversupply of vessels, according Drewry Maritime Research.
The financial woes have made terminal operators and marine service suppliers wary of working with Hanjin’s vessels. Typically, port fees for a ship that can carry 8,000 boxes would be about $35,000 per call.
“Getting ships arrested or stranded would minimize debt exposure for vendors, but it will also get the court to quickly take steps to normalize the company and start making payments,” said Rahul Kapoor, a Singapore-based director at ship consultancy Drewry.
Meanwhile, executives with freight-booking platform Shippabo warned that companies should expect delays as many cargo containers have been rerouted on different vessels. “For the top 25 importers, this is a blip,” said Frank Layo, a retail strategist at consulting firm Kurt Salmon. “They’re diversified, they’re not shipping it all on one line.” But for smaller retailers with less sophistication, “this could be devastating,” he said.
Another word for devastating? A “justification” to miss earnings for yet one more quarter.