Hanjin Shipping, a large South Korean logistics and transportation company, filed for bankruptcy protection on August 31st, bringing the seventh largest international shipper to its knees. The reasons for such a large bankruptcy (also known as receivership filing) are complicated and many, ranging from $5.1 billion in total unpaid debt to a general decline in the demand for shipping and shipping vessels, coupled with an increase in the supply of such vessels. The point is that Hanjin Shipping’s receivership filing is a dangerous issue for both current stakeholders and the future of the industry in general.
Even for a logistics company that makes up only 2.9% of the entire market for container shipping, Hanjin still caries billions of dollars in goods every single day, which is what makes the current situation dire for consumers and businesses. There are currently 73 ships in Hanjin’s fleet which have been seized or barred access from their point of destination due to fear of not receiving port duties for docking rights. The scope of this detainment represents nearly $1.5 billion in goods from 8,300 companies. Many lawsuits have been filed and court orders brought down because retail companies can’t get to the goods they need to sell in order to actually generate revenue. This is essentially lost product to these retail and manufacturing companies. In addition, consumers are hurt because these are goods that, for the time being, cannot be sold. Retail giants like Walmart or Apple may have to increase future prices to make up for this deficit. Moreover, there is little that can be done in terms of getting the ships to port because of the massive amount of debt and other obligations Hanjin has. Funds are desperately being raised by the parent company of Hanjin Shipping, The Hanjin Group ($55 million), the South Korean government ($90 million) and even personal funds from the chairman of The Hanjin Group himself ($36 million). These funds can at least get the current goods of the detained ships to their destinations, but the larger issue will be how this interferes with global commerce for years to come.
Because let’s think about the nature of the container and the shipping industry; these are big, expensive assets that carry huge liabilities for the ships themselves and also the cargo onboard. These ships are engineered to order, oftentimes years in advance due to the need to forecast future demand (i.e. there is a long lead time from order to final product and the shippers have to guess how much capacity they will need for the future). Even though the short term implications for the remaining shippers is generally positive (more demand for the fixed capacity available), the long term ramifications are far worse.
Currently, there is a general downward trend in the demand and a current over-capacity for shipping and cargo containers. The global shipping industry is already set to lose around $10 billion this year as global trade stagnates or sinks. Ship building companies are going to see decreased demand for their products and therefore decreased profitability. Retailers and the producers of the stranded goods may lose billions in lost revenue from product that can’t make it to the shelf on top of the other problems (cost of switching shippers, lawsuits against Hanjin and others, lost consumer trust and demand, etc.) Finally, consumers lose the value of the products they will never be able to buy or through the increase in the price of products that companies will have to impose in order to sell them profitably. Compound all this with a global recession that the world still hasn’t recovered from and what you have is a recipe for disaster.
No one wins in a permanent Hanjin Shipping bankruptcy because the problem doesn’t end there; it is a crisis in global trade that affects us all.