Stratfor: Hanjin’s bankruptcy reveals much about the world economy

Summary: This cycle’s combination of slow growth and widespread overcapacity have taken another victim – global shipping giant Hanjin. Those who like exciting news turn to Zero Hedge and read “Global Supply Chains Paralyzed” and “Supply-Chain Contagion Arrives – ‘Global Trade’ Roiled, Cargo-Owners Panic“. Those who like accurate news turn to this report from Stratfor.

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Shipping Giant Hanjin Has Hit a Rocky Shoal
Stratfor, 3 September 2016

Buffeted by overcapacity in the global shipping market, South Korean giant Hanjin Shipping Co. appears to be sailing toward oblivion. In the past week, creditors pulled the plug after 1 trillion won ($900 million) in support failed to keep the company afloat, forcing Hanjin to file for bankruptcy protection. Seoul Central District Court, which will decide the eventual fate of the company, has set a Nov. 25 deadline for Hanjin to develop another restructuring plan, but many experts think liquidation will be the most likely outcome.

In the short term, the company’s demise has temporarily raised some shipping rates, which have remained persistently low industrywide thanks to the sluggish global economy. It likely will also cause some supply disruptions during the peak season for orders of holiday goods.

But even if the company, the eighth largest by capacity in the world, finds an unlikely way out of its predicament, the underlying problems of overcapacity and sluggish global demand growth will continue to hamper the industry. In addition, the collapse of Hanjin deals another blow to the South Korean economy, which faces stiff competition in the high-tech market from rivals Japan and China.

Hanjin shipping
Roslan Rahman/AFP/Getty Images.

Hanjin’s Decline

Hanjin, which accounts for roughly 7 percent of Far East-North American trade, operates about 600,000 20-foot equivalent units (TEUs), 3 percent of existing global shipping capacity. But its size was not enough to save it. There have been numerous mergers, alliances and failures in the shipping industry made to deal with the fallout of the global economic crisis and a shifting world economy. For instance, Neptune Orient Lines and United Arab Shipping Co. both recently have been absorbed by much larger operations. Shipping rates continue to remain at low levels and in the first half of 2016, Hanjin saw a net loss of 473 billion won. Hanjin had also amassed a debt of over 6.1 trillion won, nearly 20 percent of which was due before the end of 2017.

Hanjin was further hampered by the way its fleet ownership was structured. It owns less than half of its ships and leases the rest. Because the charterers who own the ships have been reluctant to decrease leasing rates, even in light of market overcapacity, it has been difficult for operators like Hanjin to recover operating costs when shipping rates remain low.

World's top container shipping lines

The Short-Term Fallout

Once Hanjin filed for receivership, it set off a cascade of effects for its ships already at sea. Nearly a dozen of the ships operated by the company have been seized or detained at international ports in both Singapore and China. Additionally, because each entity along its logistics chain — from tugboats to truckers moving containers — is worried about getting paid, the company’s ships that are already loaded and crossing the ocean will face difficulties as they reach their destinations. Not only have ports denied the vessels access, but they can be seized if they are allowed to dock. Those idle ships would then clog up these ports, which could lead to additional delays. Furthermore, other firms are also refusing to work with Hanjin, in fear that there would be no payment for services. Numerous ships are sitting at anchor, waiting to see how the bankruptcy process plays out.

The disruption has already caused a surge in freight rates over the routes where Hanjin operates. The cost for the journey from Busan, South Korea, to Los Angeles, for example, jumped 55%, and rates for East Coast destinations have risen by 50%. However, the hike is likely temporary, and container shipping rates are expected to remain low.

More than 500,000 TEUs of Hanjin’s capacity are stranded at some point along the route on ships that have either been refused entry at ports, seized or were ordered to slow steam or stop altogether to avoid writs being served during port stays. This comes during the August through October peak holiday shipping season, which could result in temporary shortages of consumer products from South Korean companies like LG and Samsung (as well as other Hanjin customers).

Korea’s financial regulator has asked Hyundai Merchant Marine, reported by some to be interested in buying Hanjin’s ships and port management rights, to deploy additional ships along Hanjin’s routes. However, even if Hyundai and other competitors deploy these extra ships, delays and disruptions caused by Hanjin’s bankruptcy could still stretch for two to three months. Capacity-sharing arrangements and other nuances within the shipping industry itself will further complicate the companies and locations affected.

Should Hyundai, which is undergoing its own debt restructuring, go ahead with the purchase of Hanjin assets or another early liquidation take place, or if Hanjin’s rehabilitation plan is accepted before the November deadline, the snarls that are unsettling the supply chains it services may be smoothed sooner. However, many of the forces causing the delays rippling through the shipping system have already been unleashed.

The failure of Hanjin acts as a signpost for two ongoing intersecting trends: the struggles of the shipping industry during a global economic transition and the sluggishness of the South Korean shipbuilding industry and the country’s economy as a whole.

The collapse of Hanjin does not alter the long-term trajectory of global trade or even global shipping. Despite consolidation, overcapacity continues to be a problem, and unless there is a marked increase in the scrapping of existing ships, shipping rates are likely to remain depressed. And even with global economic recovery, it is unlikely that the rapid growth rates in global trade that were seen before the financial crisis will return. The era of rampant international trade is over. The global economy’s economic structure is shifting, and global trade deals are being replaced by regional ones.

Moreover, China, a main driver of international trade, is undergoing an ongoing economic transition toward an economy driven more by consumption than exports. In short, the factors necessary for the shipping industry to recover in the near term are not lining up.

The South Korean economy is struggling. In particular, its shipping sector, one of its staple industries, has been suffocating under the pressure of both global economic factors and competition from China, whose shippers enjoy government support and have undergone rounds of consolidation. In the short term, the rise in shipping rates on some South Korean routes as a result of the Hanjin failure is likely to put a premium on shipments of products coming out of the country. Where there is easy interchangeability of products, this could result in a temporary decline in Korean competitiveness.

Shipping Giant Hanjin Has Hit a Rocky Shoal
is republished with permission of Stratfor.

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8 thoughts on “Stratfor: Hanjin’s bankruptcy reveals much about the world economy

  1. South Korea is a top contender for a debt deflationary crisis according to Steve Keen. Total private debt to GDP is among the highest in the G20. Moreover their run up in debt is recent and rapid, a harbinger of incipient debt crises. Saw your tweet on this. Kudos to you for awareness of private debt as an issue.

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    1. Peter,

      S. Korea’s private debt/gdp is 8th highest in the OECD (as of 2015). Saying who is most at risk is difficult, as many factors spark a crisis. Other strong candidates are Portugal (#2), Canada (#7), UK (#9), Australia (#10), and Spain (#11). IMO Korea is in the low end of the top five, but that’s nothing to say with confidence except after large-scale analysis.

      Also note that S. Korea is #8 in the OECD in household debt/disposable personal income, far behind Denmark and Holland (#1 & 2), behind Ireland (#4), Canada, (#5), and Australia (#7) — and a bit more than UK, Portugal, Japan, and Spain (#9-12). Don’t forget Greece at #14! Again, Korea doesn’t look the most likely on this list.

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  2. I had not realized Korea has already been through a Richard Vague type private debt run up. Both the magnitude and recent slope of private debt must be considered. Here:
    http://privatedebtproject.org/view-articles.php?Richard-Vague-on-why-Large-Rapid-Build-Ups-of-Private-Debt-Cause-Financial-Crisis.-8
    Is a review of the predictive power and importance of private debt in explaining how private debt behaves before a financial crisis.

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    1. Peter,

      Dealing with your comments is an endless series of unheeded corrections. No, S. Korea’s private sector debt load is not catastrophic (see my previous comment). Its debt/gdp is not rising at a horrific rate. It was 247% of GDP in 2009; it was 255% in 2015. That’s a 0.5% growth rate of its debt/GDP over the past six years.

      As I have told you countless times, stick to the reliable business media.

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    2. Peter,

      I’m finishing up this thread, and that’s it. Your misinformation is a waste of my time.

      “S Korean private debt has grown over ten percent per year according to the chart he presents.”

      His chart cites this table at the BIS database. Which shows non-financial debt/gdp for Korea at 228.2 in 2014 and 234.8 in Q4 2015. A growth rate of 2.9% YoY. Not the 15% he shows in his graph.

      “There is a large variance between his data and yours.”

      It’s not “my” data. It’s the OECD’s data. Which agrees with the BIS data. As you should expect.

      Like

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