Saturday, September 3, 2016

Hanjin's bankruptcy may affect all of us very severely . . .


. . . because it might significantly impact the entire world economy over the next few months - perhaps continuing right through the Christmas shopping season.

For those who haven't been following the news, Hanjin Shipping Co. of South Korea filed for bankruptcy protection in that country last Wednesday.  It's one of the top ten container shipping companies in the world in terms of volume, and owns dozens of the large container ships covering the trade between China and its markets in the USA and Europe.  To make matters more complicated, the company is part of an alliance with five other shipping companies.  Containers aboard its ships might come from or be handled through any of the six enterprises, making control of them (and sorting out the current mess) very complex indeed.

The company had been in financial trouble for years, worsened recently by the crisis in the container shipping industry.  Now, creditors for Hanjin are scrambling to ensure that they get paid, as are companies with which it does business.  The Wall Street Journal reports:

... terminal operators, ports, cargo handlers, truckers and others have refused to handle [Hanjin's] cargo, for fear they won’t get paid. That is causing turmoil at U.S. ports and beyond, said shippers, importers and freight forwarders.

U.S.-bound cargo has been delayed at the point of origin, and cargo-laden Hanjin ships are unable to get into U.S. ports. Already delivered cargo is sitting unhandled, clogging ports and occupying containers needed elsewhere.

Several Hanjin ships have been seized by creditors or barred from shipping cargo from Busan, South Korea’s main port, and vessels have been turned away from ports in the U.S., China, Canada, Spain and elsewhere.

An official at the Korea International Trade Association said about 10 Hanjin vessels were either seized or denied access at Chinese terminals in Shanghai and Tianjin over the past 48 hours.

The ships were seized after legal action by shipowners who leased them to Hanjin and didn’t get charter fees, workers who didn’t get paid, terminals which weren’t paid docking fees and bunker fuel suppliers.

Earlier in the week another Hanjin vessel was seized in Singapore.

There's more at the link.

Many other companies, from giants like Walmart and Target to trucking companies, may face very serious consequences over this.  US News reports:

South Korea's maritime ministry said in a statement that Hanjin's troubles would affect cargo exports for two to three months, given that August-October is a high-demand season for deep-sea routes. It said 540,000 TEU of cargo already loaded on Hanjin vessels would face delays.

Hanjin, the world's seventh-largest container shipper, represents nearly 8 percent of the trans-Pacific trade volume for the U.S. market.

The National Retail Federation, the world's largest retail trade association, wrote to U.S. Secretary of Commerce Penny Pritzker and Federal Maritime Commission Chairman Mario Cordero on Thursday, urging them to work with the South Korean government, ports and others to prevent disruptions.

The bankruptcy is having "a ripple effect throughout the global supply chain" that could cause significant harm to both consumers and the U.S. economy, the association wrote.

"Retailers' main concern is that there (are) millions of dollars' worth of merchandise that needs to be on store shelves that could be impacted by this," said Jonathan Gold, the group's vice president for supply chain and customs policy. "Some of it is sitting in Asia waiting to be loaded on ships, some is already aboard ships out on the ocean and some is sitting on U.S. docks waiting to be picked up. It is understandable that port terminal operators, railroads, trucking companies and others don't want to do work for Hanjin if they are concerned they won't get paid."

The confusion might sink some trucking firms that contract with Hanjin to deliver cargo containers carrying everything from electronics to car parts from ports to company loading bays.

"They've got bills to pay — they could literally close their doors over this," said Peter Schneider, Fresno-based vice president of T.G.S. Transportation Inc.

There's more at the link.

Bear in mind that we're approaching the Christmas shopping season, the biggest of the year, in which many stores make 40% to 50% of their annual income.  They depend on Christmas turnover to turn a profit on their entire year's trading.  Suddenly, many of the goods they've pre-ordered may not get to them in time for the shopping season.  If they're already on Hanjin ships, or in Hanjin containers, the chances of transferring them to other means of transportation are very slim right now.  Even if that could be arranged, shipping rates on major routes are already trending much higher as a result of the crisis.  If it becomes two to three times more expensive to get them here (the BBC has a good breakdown of the costs involved), that might make the difference between their purchaser making a profit this year, or making a loss.  Some businesses might not survive the latter.

The problem may stretch into the longer term for those with cargoes in Hanjin's hands.  As the Wall Street Journal reported:

“In 2001, Cho Yang, a much smaller Korean carrier, went bust and it took six months before a mere 200 containers, handled by a single freight forwarder, could be taken off to ports,” said Lars Jensen of Copenhagen-based SeaIntelligence Consulting. “This is at a much bigger scale so I would not be surprised if scores of boxes on stranded Hanjin vessels [n]ever actually make it to their destination.”

More at the link.

In the short term, if you intend to buy goods made in the Far East as Christmas gifts, particularly high-end items like TV's, game consoles, etc., it might not be a bad idea to buy them now, because the quantities and models available nearer Christmas might be limited (and their prices might be higher).  Furthermore, if you rely on Far Eastern goods for your business - if you couldn't keep your doors open without them, or won't make a profit this year if you can't get enough of them - then you need to buy everything you can right now, while you still can.  Prices are already rising to reflect the limitations on supply.

I suspect Christmas this year may be more expensive for all of us, possibly by as much as 25% to 50%, when it comes to the Far Eastern-sourced gifts we'd normally buy.  A lot of consumers may not be able to afford that.  The same goes for a lot of companies, who probably can't afford the loss of sales revenue that will result.

Furthermore, remember that we've already discussed the crisis in container shipping in these pages.  Hanjin's the first major casualty.  There are likely to be more.  This crisis may be a long way from over, and may get worse before it gets better.

Peter

10 comments:

drjim said...

Oh, boy.....that's gonna clobber the Port of Los Angeles and The Port of Long Beach!

Hanjin has HUGE container terminals here. Maybe they'll lease them to other container carriers....

Phil said...

It's going to sting all the way up the West Coast. Portland has a pretty busy harbor even being 100 miles inland and there are several ports across the Columbia River from Portland over in Vancouver WA also. Hanjin ships moored on both sides of the river up here loading and unloading.
The only bright spot at all I can see out of this is that there may soon be a glut of used cargo containers on the market cheap.

Paul, Dammit! said...

Peter, I'm going to disagree partially, based on a couple of things, knowing that I might be being an optimist here, going in.

First off, Hanjin going under will mean a normalization of freight rates, which are vastly artificially low compared to when the economy was still healthy(ish). The big liner companies still have national interests to support their ridiculously bad managerial decisions, too. The 4 largest container firms all are all more-or-less nationalized AND enjoy massive tax subsidies from their home nations. They'll be fine.
Following up on that, there's a big problem with overcapacity already. Even with Hanjin's smaller fleet going TU, there's more than enough capacity to absorb the loss of Hanjin's fleet. To me, this then makes this a logistics problem more than anything else. These companies are decent at logistics, but there's no incentive, I suspect, to fix other people's containers already in transit, which is an issue.

I don't know enough to say who owns the containers after Hanjin's ships get sold off, which is the best thing to do with them- it's a good opportunity for smaller companies to get larger ships. 2005-built megaships are already small by today's standards, but can fill an efficiency void for hub service to backwater ports and 3rd world dumps currently serviced by overpressed boats built for river service.

I see that disruption will be an issue, and increased freight rates to more reasonable standard will be an issue, too, but I'm hopeful that the reduction in capacity will result in more efficiency in transit, and with the existing partnerships, including a massive new one between United Arab and Hapag-Lloyd proposed, I see Hanjin's going under as an opportunity to increase stability. With close to 20 weeks to Christmas and the utter shit show that is container shipping for late November- Mid December, there is time to get the Christmas containers planned out.

I bunker Hanjin ships regularly- just in New York, my company moves about 40,000 tons of black oil to fuel their ships each month. They are professional and efficient and I'll miss working with their crews. It's going to hurt us for sure. Hopefully this mess will be straightened out soon. I've already fueled up a MOL post-panamax ship that was suddenly put on a new US/EU/China liner route 2 weeks ago, which suggests that the midsize players are already positioning themselves to absorb some of the liner traffic.

deborah harvey said...

paul,dammit
thanks!

Bob said...

And so it begins...

TGreen said...

Peter?

Back in March, there were 350 idle container ships with 1.5 million TEU looking for cargo.

Sidelining Hanjin's 98 ships and 0.4 million TEU will delay the goods currently afloat on Hanjin bottoms for a weekend or two, but not harm Christmas deliveries.

Nor, likely, will the next weakest shipping company.

TheOtherSean said...

As far as I understand it, both ocean shipping and rail freight are operating significantly under available capacity. Trucking is far closer capacity, but unless the Hanjin bankruptcy were to actually shudder trucking firms like speculated in the US News article, I suspect little long term impact. I believe the biggest problems are likely to be, as others here in the comments have speculated, disruptions in just-in-time supply chains.

bobbookworm said...

I suspect that we will start seeing how it really is going to shake out in 2 to 4 weeks...given so many industries rely on Asian goods for "just in time" systems and since 500 thousand containers seemingly aren't going to be delivered anytime soon, and I suspect it will be more than "a weekend or two", there should be a bunch of companies effected by a lack of parts/products. And there are Christmas deliveries in those containers...I worked "big box" retail for a long time and Christmas started hitting the stores in September...sometimes earlier.

Inconsiderate Bastard said...

I suspect whatever turmoil this causes will be sort-lived, although intense. It's long been said that "amateurs think tactics, professionals think logistics" and shipping companies - whose business is logistics - aren't amateurs.

The biggest challenge will be moving money around to get containers off loaded and moving on the ground; I'd be surprised if things weren't well on the way to shaking out within a month, undoubtedly with a number of outfits throughout the supply chain scrambling like mad. Longer term, some of the less efficient ships will get replaced by larger, more efficient ones, shipping rates will go up (higher in the immediate future, declining as capacity is redistributed and absorbed and routines get restored).

It does highlight, however, the value of maintaining one's own supplies, as Peter points out. If you are dependent upon Asian components - think, for example, coolant hoses, water pumps, fuel pumps, etc. for your Japanese-made Bug Out Vehicle, or other non-US manufactured supplies - there is value in procurement in advance of any supply chain distruptions to avoid unexpected interruptions. If you're a US firm, once the panic subsides would be a very good time to review your logistics positions: Hanjin won't be the only ripple in this pond.

And, as far as US-made goes, there is a LOT of U.S. assembled stuff that depends on component shipments from across various waters. Forewarned is forearmed, as they say.

Anonymous said...

You can sometimes work around issues like this by ordering your chinese/pacrim sourced parts from online sources in country and having them shipped by standard post or FedEx or whatever. We do this a lot. Instead of getting the part from the US "manufacturer" who gets them in bulk in containers, marks them up and sells them as replacement parts, you order direct from Shenzhen Charlie who is the actual manufacturer or an employee who brings home a pallet of product to sell online. You order online, he slaps it in a box and it shows up in a week via airplane. If it's a Chinese part or product on US shelves chances are you can buy it direct from China for a fraction of the price you're paying off the shelf here. Little tappity tap tap on Google and ebay etc and you're cutting out 1 or more middle men.