Global Supply Chains Paralyzed After World's 7th Largest Container Shipper Files Bankruptcy, Assets Frozen

Tyler Durden's picture

After years of relentless decline in the Baltic Dry index...

 

... today the largest casualty finally emerged on Wednesday when South Korea's Hanjin Shipping, the country's largest shipping firm and the world's seventh-biggest container carrier, filed for court receivership after losing the support of its banks, leaving its assets frozen as ports from China to Spain denied access to its vessels.


For those unfamiliar with the company, here is a brief overview from its website:

Hanjin Shipping is Korea's largest and one of the world’s top ten container carriers that operates some 70 liner and tramper services around the globe transporting over 100 million tons of cargo annually. Its fleet consists of some 150 containerships and bulk carriers.

 

 

With 4 regional headquarters in the U.S., Europe, Asia and South East & West Asia, approximately 5,000 global staffs as well as container terminals in world’s major ports contribute to Hanjin Shipping’s world-class logistics network around the world.

As Reuters reports, banks led by state-run Korea Development Bank withdrew backing for the world's seventh-largest container carrier on Tuesday, saying a funding plan by its parent group was inadequate to tackle debt that stood at 5.6 trillion won ($5 billion) at the end of 2015.

Suk Tai-soo, president and chief executive officer of Hanjin Shipping Co, arrives
at a court in Seoul, South Korea, August 31, 2016.

South Korea's biggest shipping firm, announced the filing for receivership and a request to the court to freeze its assets, which the Seoul Central District Court planned to grant, a judge told Reuters.

As part of the company's insolvency process, the court will now decide whether Hanjin Shipping should remain as a going concern or be dissolved, a process that usually takes one or two months but is expected to be accelerated in Hanjin's case, the judge said. A bankruptcy for Hanjin Shipping would be the largest ever for a container shipper in terms of capacity, according to consultancy Alphaliner, exceeding the 1986 collapse of United States Lines.

Coming as no surprise to anyone who has followed the persistent decline in worldside trade, global shipping firms have been swamped by overcapacity and sluggish demand, with Hanjin booking a net loss of 473 billion won in the first half of the year. 

South Korea's ailing shipbuilders and shipping firms, which for decades were engines of its export-driven economy, are in the midst of a wrenching restructuring. According to Reuters, KDB's decision to stop backing Hanjin Shipping shows the government is taking a tougher stance with troubled corporate groups.

The fallout from the country's unprecedented bankruptcy invoked a statement from South Korea's Finance Minister Yoo Il-ho, who said that "the government will swiftly push forth corporate restructuring following the rule that companies must figure out how to survive and find competitiveness on their own while taking responsibility."

To be sure, this decision is a fresh breath of air in a world in which mega-corprations across the globe have become "too big to fail" by default, and in many cases anticipate a government bail-out.

According to South Korea's Financial Services Commission, Hyundai Merchant Marine, the country's second-largest shipping line, will look to acquire its rival's healthy assets, including profit-making vessels, overseas business networks and key personnel,  A Hyundai Merchant Marine spokesman told Reuters nothing had been decided about the potential acquisition of Hanjin assets and that the firm will hold talks with KDB. Hyundai Merchant Marine is also in the process of a voluntary debt restructuring.

The question now is whether as a result of the bankruptcy process there will be an unexpected failure in the global supply-chain: South Korea's oceans ministry estimates a two- to three-month delay in the shipping of some Korean goods that were to be transported by Hanjin Shipping, and plans to announce in September cargo-handling measures which could include Hyundai Merchant Marine taking over some routes, a ministry spokesman said on Wednesday.

Making matters worse, Reuters adds that KDB's move to pull the plug was already having an impact on Hanjin's operations, with the company's various shipping assets already frozen. Ports including those in Shanghai and Xiamen in China, Valencia, Spain, and Savannah in the U.S. state of Georgia had blocked access to Hanjin ships on concerns they would not be able to pay fees, a company spokeswoman told Reuters.

Another vessel, the Hanjin Rome, was seized in Singapore late on Monday by a creditor, according to court information. "Now Hanjin must do everything it can to protect its clients' cargoes and make sure they are not delayed to their destination, by filing injunctions to block seizures in all the countries where its ships are located," said Bongiee Joh, managing director of the Korea Shipowners' Association.

Finally, while jarring Hanjin's bankrtupcy was inevitable: shipping industry economics have deteriorated. Charter rates for medium-sized container ships have dropped from around $26,000 a day in 2010 to $13,000 per day now.  Container rates from Shanghai to the U.S west coast have more than halved since then, from around $2,000 per 40-foot container in January 2010 to $596 per 40-foot box last week, data from the Shanghai Shipping Exchange shows.

Shares in Hanjin Shipping have been suspended after plunging 24% on Tuesday.

The global implications from the bankruptcy are unknown: if, as expected, the company's ships remain "frozen" and inaccessible for weeks if not months, the impact on global supply chains will be devastating, potentially resulting in a cascading waterfall effect, whose impact on global economies could be severe as a result of the worldwide logistics chaos. The good news is that both economists and corporations around the globe, both those impacted and others, will now have yet another excuse on which to blame the "unexpected" slowdown in both profits and economic growth in the third quarter.

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robertocarlos's picture

Time to buy a Kia.

mary mary's picture

Is that a distributor cap, in the photograph?

Dg4884's picture

Uh oh, sum ting wong.  I follow the BDI as it is, IMO, the most accurate indicator of economies.  Did anyone catch (or know) what class ship they use?

Berspankme's picture

The liners have always been terrible asset managers. How do you think Maersk got so big? Swallowing up the stupid

Canoe in the Desert's picture

New World Order: Just clearing the seas to make way for "UBER Shipping" and self navigating ships. (kayakers and fishermen are just speed bumps to be ignored).

bluskyes's picture

refugee cruise ship line

Kagemusho's picture

Those old enough might recall a certain garbage barge that couldn't find a berth, anywhere. https://en.wikipedia.org/wiki/Mobro_4000

Considering the behavior of some of those refugees, any ship carrying them might meet the same kind of problems...

Robert Trip's picture

Floating whorehouses?

Maybe.

atthelake's picture

Bankers want EVERYTHING.

bluskyes's picture

Who insures the loads?

Or does it not matter any more, since everyone gets to leave assets on their books at any value they want?

Strelnikov's picture

Causing its stock prive to shoot up, how far?

U4 eee aaa's picture

a net loss of won. Those conference calls must be hilarious

Anopheles's picture

  The Baltic Dry Index has nothing to do with container shipping or tankers.  The BDI is only for dry, bulk goods like iron ore, coal, grains, cement,  wood chips...

 

SmedleyButlersGhost's picture

How do they move those dry bulk goods around?

Berspankme's picture

Well you are correct about BDI but the decimation in raw materials is a good indicator of output on the other end. Kind of like eating bad mexican food

Anopheles's picture

Not entirely.  The actual volumes of shipping are between slightly down to slightly up.  It's a false narrative to simply state the BDI has dropped a lot and ASSUME that means volume is down the same amount.  That's a lie, and the story writers do it just to try and sensationalize the story.  (clickbait)

The BDI is only a reference to cost, not volume.  The past five or so years there's been a huge number of ships enter the worldwide fleet.  And those ships are all chasing the same loads of cargo.  The problem is the ship owners expected volumes to increase much more.  They didn't.  The number of ships is inelastic, so costs will vary wildly with just tiny changes in demand.  This has been going on for decades and even centuries. 

Take a look in another post I made, that the majority of Hanjin ships are less than 10 years old, and most between 2 and 6 years.  They, along with other companies, have been adding ships, but the volume hasn't increased as much as expected.  Glut of ships, means everyone is cutting prices just to try and fill their ships.

dynomutt's picture

Wow! They're JUST IN TIME!

questionsthatgottabeasked's picture

Old news the dry baltic index has been forzen since 2009 and the market is at all time highs. Clearly this doesn't matter.

//
Anopheles's picture

Looking at their fleet of ships, they are almost all less than 10 years old, and most of them in the 2 to 6 year old category. 

It appears they overextended themselves and were prepared for a recovery, and increase in shipping that never materialized. 

Duc888's picture

 

 

 

Chalk another one up to Jim Willie.

 

 

ghengiskhan's picture

5 Billion is nothing.  Clearly they want to kill this company. Seriousy Obama loses that in a Wednesday night poker game.  That's tip money in DC now.  They print and lose Trillions and shrug like it's just one of those things.

lakecity55's picture

"Haha, Reggie, I sank your containership!"

rosiescenario's picture

Good Luck DB with that "asset" sale now:

7/6/16

Deutsche Bank (DBKGn.DE) is looking to sell at least $1 billion of shipping loans to reduce its exposure to a sector whose lenders face closer scrutiny from the European Central Bank, sources told Reuters.

While the oil tanker trade has picked up, the container and dry bulk shipping industries are struggling with their worst downturn due to a glut of ships, a faltering global economy and weaker consumer demand.

Banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.

"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping."

Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment.

Germany was one of the world's main centers of global ship finance before the 2008 financial crisis, and lenders there still have around 80 billion euros ($88.62 billion) on loan to the sector.

DjangoCat's picture

Thanks, that's what I was looking for.  DB stock up again, and they won't deliver the gold.  Strange business.

Yukon Cornholius's picture

If I had a billion or so dollars I'd buy a couple of old US navy battleships and a few of these container ships and have some fun out in the ocean somewhere.

withglee's picture

saying a funding plan by its parent group was inadequate to tackle debt that stood at 5.6 trillion won ($5 billion) at the end of 2015.

Man. Wouldn't it be neat if we could do the same thing with the USA government ... for the same reason (times a  thousand billion).

DjangoCat's picture

#cancelthedebt   Make it happen Capn,  Jubilee please.

withglee's picture

#cancelthegovernment  Make it happen Capn, Jubilee please.

Iterative secession.

monopoly's picture

Thank goodness everything else is awesome. I am sure it is company specific. lol

hoagy goldmikel's picture
hoagy goldmikel (not verified) Aug 31, 2016 4:42 PM

they're peddling fiction

Chipped ham's picture

Alfredo E. Neuman says, "What?  Me worry?"

DjangoCat's picture

I bought the baseball cap.

bentaxle's picture

Hanjin, a boating accident waiting to happen. Er...form an orderly queue first please fella's

Ajax_USB_Port_Repair_Service_'s picture

Oh, oh, there may be a shortage of inflatable plastic santas this year.

franzpick's picture

Hanjin would have been one of the latest and biggest in an ongoing and worsening series of worldwide shipping, trade, business and bank collapses, if it weren't for the historic, unsustainable, politically oriented, QE/state bank bailouts of the TBTFs undertaken after the 2008 great recession.  Terminal financial cancer - is hiding in plain sight, and ongoing world trade collapse, begun a year ago (Aug. '15 Korean exports down 17%, for one example) may soon, or later, be the Lehman moment that brings the impending, otherwise hidden, failed, world financial structure into clearer investor focus.

Steady as she sinks.

DjangoCat's picture

But surely the Fed can intervene and make it all good again.  In Fed We Trust?!....

Barnaby's picture

Looks like somebody forgot to top up the hydraulic fluid.

First rule of beetles, kids, the exoskeleton is only as good as the guts.

wizteknet's picture

hmm sht happens, blame it on us frogs, yeah right

Father ¢hristmas's picture

America needs to start developing Mainland China, India, and Africa if they wanna make some motherfucking money.

In fact, develop the whole Third World.  Ain't no demand cause fat ass First Worlders have their shit made already. Invest in infrastructure in these Third World nations and create demand for domestically produced goods.

Everybody's just sitting with their thumbs up their asses, piling on moar inventory atop a pile already at capacity domestically.  America needs to be leading the way into new markets, by creating new fucking markets!

Create some goddamn markets so your people can manufacture and ship goods to them!

blue51's picture

Hence , all the new Im-me-grants here in the US.

niemand's picture

long central banksters bodycount index..

atthelake's picture

Does this mean we cannot buy more pots and pans from Korea?

bullock's picture

This is a major event ! Especially for the deutsche bank

Could it be the first domino... ? get ready for a crazy ride !

DjangoCat's picture

How come Deutsche Bank?

Paracelsus's picture

Singapore offshore looks like a parking lot.Who authorized all the surplus construction?

Enquiring minds wanna know...

Berspankme's picture

Has Cramer put a buy signal on it yet?

booboo's picture

Yes, Three days ago. Buy Buy Buy