Executive Briefings

Hanjin Woes: Cargo Transportation Prices & the Interrupted Supply Chain

The world's seventh-largest deep sea cargo transportation carrier, Hanjin Shipping, filed for court receivership - a form of bankruptcy protection - on Aug. 31. Chaos has promptly ensued in a number of markets, and it won't end any time soon, according to Ashley Cruz, IBIS World Procurement Research Analyst.

The company must wait for South Korean courts to decide whether it can restructure its debt or whether it must file for bankruptcy - which would make Hanjin the largest ocean cargo carrier in history to go under. To prevent its assets from being seized by creditors, the South Korean shipping company has filed for bankruptcy protection in over a dozen countries. While a few countries, including the United States and South Korea, have temporarily granted this protection, Hanjin ships are still being turned away from ports worldwide. Without the financial backing to pay for port docking fees, cargo unloading services and fuel, more than 80 Hanjin ships, their respective crews and roughly $14bn worth of cargo have been stranded at sea.

The inability to retrieve cargo from these stranded ships has sent retailers — and Hanjin’s partners — into a tailspin. While some buyers that utilize cargo transportation services have been less affected by the development due to their diversified contracts with ocean cargo carries, other businesses are watching the situation carefully. Samsung alone estimates that it has $38m worth of goods stranded on Hanjin’s ships, and the company is considering paying about $8.8m to charter planes and retrieve their cargo. Meanwhile, South Korea’s other main ocean carrier, Hyundai Merchant Marine (HMM), is discussing ways to help rescue some of the cargo, and Hanjin’s parent company has also promised to spend about $90m to ensure that the stranded cargo gets unloaded. This amount is likely to still fall short of the funds needed to dock and unload all 80 ships.

Deep-sea cargo transportation services is the primary market that will suffer from Hanjin’s potential demise. In the U.S., Hanjin accounts for about 7.8 percent of all trans-Pacific trade, therefore, the loss of the carrier would constitute a considerable decrease in supply for ocean shipping services and cause market prices to rise. In the days immediately following the company’s court filing, spot prices for trans-Pacific shipping rose as much as 50 percent, forcing many buyers to absorb the additional costs of the temporary price spikes. Still, many shippers fear that these higher prices will not be temporary as other suppliers work to fill Hanjin’s shipping capacity. IBISWorld estimates that despite price declines in recent years due to low oil costs, deep-sea cargo transportation prices will rise at an average rate of 3.1 percent per year from 2016 to 2019, driving buyers’ shipping costs up substantially. Furthermore, if South Korean courts reject Hanjin’s request to restructure, deep-sea cargo transportation costs will likely rise even faster.

Another negative effect of the company’s uncertain future is the turmoil that has been created within shipping alliances. Hanjin is part of the CKYHE alliance, which allows for vessel sharing among Cosco Container Lines, “K” Line, Yang Ming Line, Hanjin Shipping and Evergreen Shipping. Container shipping alliances are common in the deep-sea cargo transportation market due to the immense capacity of cargo ships, combined with lackluster demand for ocean shipping over many routes. As such, vessel sharing agreements allow carriers like Hanjin to limit unused capacity on regularly traveled routes in order to achieve greater cost savings. This means a buyer that books deep-sea cargo transportation services through Hanjin will potentially have their cargo carried by another company’s vessel, and vice versa. As such, some of the cargo stranded on Hanjin ships may be under the protection of another shipping company altogether. Although the other four carriers in the CKYHE alliance have halted their sharing with Hanjin until the courts make a decision about the company’s future, the alliance is set to extend through March 2017, potentially disrupting the operations and pricing of the other member carriers until then.

Supply Chain, Interrupted

Many of the effects of the Hanjin crisis occur further down the transportation supply chain. For example, drayage services, which move cargo across short distances, such as from a port to a nearby truck or rail terminal, have lost business as a result of Hanjin’s current situation. Drayage and unloading suppliers are the primary reason that Hanjin ships have been turned away; service providers are worried that the carrier does not have enough money to pay them and, as such, have been refusing to accept the ships’ cargo. Additionally, many large shipping companies enter into contractual agreements with drayage service providers, so if South Korean courts order Hanjin to file for bankruptcy, these contracts will essentially be nullified and Hanjin may not be required to pay contract termination fees. However, because the drayage service market is highly fragmented and does not exclusively serve ports, IBISWorld does not anticipate prices in this market to change significantly.

Another link in the transportation supply chain, freight forwarding services, may also be adversely affected by Hanjin’s financial situation. Freight forwarders arrange the transportation of cargo, usually across multiple transport modes, and handle the complex logistics of moving cargo on behalf of shippers. Freight forwarding service providers were affected immediately by Hanjin’s receivership filing, which left as many as 500,000 containers of cargo stranded offshore. In the aftermath, freight forwarders scrambled to reorganize and redirect the rail, airfreight and trucking services that were supposed to follow the docking and unloading of Hanjin ships. Many Hanjin ships are now seeking to dock at different ports than were originally intended because some countries have not yet granted seizure protection to the company’s assets. Freight forwarders are subsequently trying to track their clients’ cargo and make arrangements wherever and whenever the containers are unloaded.

In addition, freight forwarders have been rushing to arrange alternative transport routes for cargo that was due to be carried on Hanjin ships. Most freight forwarders are seeking other deep-sea cargo carriers, in spite of the substantial spot price spikes that have occurred during the past few weeks and could potentially last for months. However, some freight forwarders are also looking to international air cargo transportation services as a substitute for ocean shipping in order to avoid further delays. Some buyers may benefit from low aviation fuel prices, which have kept air cargo transportation prices growing at a minimal average rate of 0.2 percent annually during the past three years. Although airfreight prices are measured by cargo weight rather than size, making heavy goods extremely expensive to ship, some manufacturers, distributors and retailers may benefit from this alternative until the deep sea cargo transportation market stabilizes.

Ultimately, both carriers and shippers must wait for the next developments in Hanjin’s financial situation before determining how to permanently adjust. Hanjin Group will present a debt restructuring plan to South Korean courts, although it will likely be several months until the decision is made on whether to allow Hanjin Shipping to restructure and continue operating or condemn the company to bankruptcy.

Source: IBISWorld

The company must wait for South Korean courts to decide whether it can restructure its debt or whether it must file for bankruptcy - which would make Hanjin the largest ocean cargo carrier in history to go under. To prevent its assets from being seized by creditors, the South Korean shipping company has filed for bankruptcy protection in over a dozen countries. While a few countries, including the United States and South Korea, have temporarily granted this protection, Hanjin ships are still being turned away from ports worldwide. Without the financial backing to pay for port docking fees, cargo unloading services and fuel, more than 80 Hanjin ships, their respective crews and roughly $14bn worth of cargo have been stranded at sea.

The inability to retrieve cargo from these stranded ships has sent retailers — and Hanjin’s partners — into a tailspin. While some buyers that utilize cargo transportation services have been less affected by the development due to their diversified contracts with ocean cargo carries, other businesses are watching the situation carefully. Samsung alone estimates that it has $38m worth of goods stranded on Hanjin’s ships, and the company is considering paying about $8.8m to charter planes and retrieve their cargo. Meanwhile, South Korea’s other main ocean carrier, Hyundai Merchant Marine (HMM), is discussing ways to help rescue some of the cargo, and Hanjin’s parent company has also promised to spend about $90m to ensure that the stranded cargo gets unloaded. This amount is likely to still fall short of the funds needed to dock and unload all 80 ships.

Deep-sea cargo transportation services is the primary market that will suffer from Hanjin’s potential demise. In the U.S., Hanjin accounts for about 7.8 percent of all trans-Pacific trade, therefore, the loss of the carrier would constitute a considerable decrease in supply for ocean shipping services and cause market prices to rise. In the days immediately following the company’s court filing, spot prices for trans-Pacific shipping rose as much as 50 percent, forcing many buyers to absorb the additional costs of the temporary price spikes. Still, many shippers fear that these higher prices will not be temporary as other suppliers work to fill Hanjin’s shipping capacity. IBISWorld estimates that despite price declines in recent years due to low oil costs, deep-sea cargo transportation prices will rise at an average rate of 3.1 percent per year from 2016 to 2019, driving buyers’ shipping costs up substantially. Furthermore, if South Korean courts reject Hanjin’s request to restructure, deep-sea cargo transportation costs will likely rise even faster.

Another negative effect of the company’s uncertain future is the turmoil that has been created within shipping alliances. Hanjin is part of the CKYHE alliance, which allows for vessel sharing among Cosco Container Lines, “K” Line, Yang Ming Line, Hanjin Shipping and Evergreen Shipping. Container shipping alliances are common in the deep-sea cargo transportation market due to the immense capacity of cargo ships, combined with lackluster demand for ocean shipping over many routes. As such, vessel sharing agreements allow carriers like Hanjin to limit unused capacity on regularly traveled routes in order to achieve greater cost savings. This means a buyer that books deep-sea cargo transportation services through Hanjin will potentially have their cargo carried by another company’s vessel, and vice versa. As such, some of the cargo stranded on Hanjin ships may be under the protection of another shipping company altogether. Although the other four carriers in the CKYHE alliance have halted their sharing with Hanjin until the courts make a decision about the company’s future, the alliance is set to extend through March 2017, potentially disrupting the operations and pricing of the other member carriers until then.

Supply Chain, Interrupted

Many of the effects of the Hanjin crisis occur further down the transportation supply chain. For example, drayage services, which move cargo across short distances, such as from a port to a nearby truck or rail terminal, have lost business as a result of Hanjin’s current situation. Drayage and unloading suppliers are the primary reason that Hanjin ships have been turned away; service providers are worried that the carrier does not have enough money to pay them and, as such, have been refusing to accept the ships’ cargo. Additionally, many large shipping companies enter into contractual agreements with drayage service providers, so if South Korean courts order Hanjin to file for bankruptcy, these contracts will essentially be nullified and Hanjin may not be required to pay contract termination fees. However, because the drayage service market is highly fragmented and does not exclusively serve ports, IBISWorld does not anticipate prices in this market to change significantly.

Another link in the transportation supply chain, freight forwarding services, may also be adversely affected by Hanjin’s financial situation. Freight forwarders arrange the transportation of cargo, usually across multiple transport modes, and handle the complex logistics of moving cargo on behalf of shippers. Freight forwarding service providers were affected immediately by Hanjin’s receivership filing, which left as many as 500,000 containers of cargo stranded offshore. In the aftermath, freight forwarders scrambled to reorganize and redirect the rail, airfreight and trucking services that were supposed to follow the docking and unloading of Hanjin ships. Many Hanjin ships are now seeking to dock at different ports than were originally intended because some countries have not yet granted seizure protection to the company’s assets. Freight forwarders are subsequently trying to track their clients’ cargo and make arrangements wherever and whenever the containers are unloaded.

In addition, freight forwarders have been rushing to arrange alternative transport routes for cargo that was due to be carried on Hanjin ships. Most freight forwarders are seeking other deep-sea cargo carriers, in spite of the substantial spot price spikes that have occurred during the past few weeks and could potentially last for months. However, some freight forwarders are also looking to international air cargo transportation services as a substitute for ocean shipping in order to avoid further delays. Some buyers may benefit from low aviation fuel prices, which have kept air cargo transportation prices growing at a minimal average rate of 0.2 percent annually during the past three years. Although airfreight prices are measured by cargo weight rather than size, making heavy goods extremely expensive to ship, some manufacturers, distributors and retailers may benefit from this alternative until the deep sea cargo transportation market stabilizes.

Ultimately, both carriers and shippers must wait for the next developments in Hanjin’s financial situation before determining how to permanently adjust. Hanjin Group will present a debt restructuring plan to South Korean courts, although it will likely be several months until the decision is made on whether to allow Hanjin Shipping to restructure and continue operating or condemn the company to bankruptcy.

Source: IBISWorld