Hanjin shipping bankruptcy creates logistics turmoil

Nov. 18, 2016
Automakers, parts distributors, retailers and other companies experienced logistics and supply chain disruptions as one of the world’s largest shipping operators filed for bankruptcy.

Automakers, parts distributors, retailers and other companies experienced logistics and supply chain disruptions as one of the world’s largest shipping operators filed for bankruptcy.

On Aug. 31, the South Korean container line Hanjin Shipping Company filed for bankruptcy protection, leaving $14 billion in cargo stranded at sea or locked up at ports. Some ships were seized, while others were denied access to ports because it was uncertain who would pay their docking fees, container storage, and other unloading bills.

Hanjin is the largest shipping company in Korea, and the seventh largest in the world. Within five days of the announcement, more than half a million 20-foot equivalent units (TEUs) with cargo for 8,300 shippers were either arrested, stuck at ports waiting for entry, or en route to other ports to (hopefully) unload their cargo and re-route it.

The bankruptcy exposed how sensitive the global supply chain is to these types of disruptions, particularly in industries like automotive where just-in-time supply chain management is the norm, and where a number of parts and components are manufactured in Asia. Shipping rates have also increased dramatically, and freight volumes are expected to rise as companies struggle to replace their stranded freight before the holiday season.

As the news broke, shippers in Asia scrambled to free their containers by paying the terminals, but the process soon became chaotic as the terminal operators tried to charge shippers for handling processes (like ship mooring) that Hanjin normally would have covered.

“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, vice president for supply chain and customs policy at the National Retail Federation (NRF). “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. However, we need all parties to work together to find solutions to move this cargo so it does not have a broader impact on the economy.”

Hanjin’s collapse is the result of a number of factors that currently plague the shipping industry, and could lead to more problems down the road. The bankruptcy was precipitated by falling ocean freight rates and an excess of capacity that resulted in nearly $16 billion in losses at Hanjin.

Both automotive OEMs and aftermarket suppliers are affected by the disruption. The Auto Care Association signed a joint coalition letter to Department of Commerce Secretary Penny Pritzker urging the agency to work with the South Korean government to resolve the issue, and outlining their concerns.

“The current situation has a tremendous impact on both importers and exporters of the auto care industry, as shippers are uncertain if Hanjin ships will be allowed to unload and if their goods will be seized by Hanjin’s creditors once they are docked,” said Bill Hanvey, president and CEO of the Auto Care Association.

The letter was signed by 120 different organizations – including the Alliance of Automobile Manufacturers and the Motor & Equipment Manufacturers Association – and led by the National Retail Federation and the Hardwood Federation.

According to the letter: “Since this is ongoing, the level of anxiety remains high as shippers wonder when Hanjin ships will be allowed to enter ports and if their goods will be seized by Hanjin’s creditors once they are docked. There are also concerns about critical cargo that remains at overseas ports. For some, there is added confusion about the location of cargo, where cargo will be unloaded and how the cargo will be transported. The trade community is also facing steadily increasing freight charges as they look for new transportation options as well as concerns about fees assessed on cargo. The impact on small and medium sized companies could be particularly devastating if this situation is not resolved in a timely manner.”

In addition to the delays for shippers and receivers, trucking companies are taking heavy losses because of monies owed them by Hanjin. IMC, RoadOne Intermodal Logistics, Evans Network, and others are expected to lose six- seven-figure sums because of the bankruptcy.

The Federal Maritime Commission has advised affected shippers and receivers to contact their attorneys about their remedies available to them, and to be vigilant in watching for improper behavior by other carriers that would constitute violations of the Shipping Act.

“There are more questions than answers at this point, but retailers are working to get all issues addressed,” the NRF’s Gold said. “Retailers are working with all of their service providers to find ways to get their cargo moving to ensure that there is no or limited interruption in the supply of merchandise.”

Meanwhile, empty cargo containers are piling up at the Port of Long Beach, where container volume declined by 16.6 percent after the bankruptcy announcement. Hanjin owns a large stake in Total Terminals International, which operates one of the busiest piers at Long Beach.

Some of the cargo is getting unloaded.

In early October, the South Korean bankruptcy court handling the Hanjin case put  the company’s sales and marketing network for its Asia-U.S. route up for sale to raise funds. Korea Line Corp., the second-largest bulk carrier in South Korea, outbid Hyundai Merchant Marine Co. for many of those assets.

In early November Korea’s Maritime Ministry said 94 freighters from Hanjin’s container fleet of 97 ships had finally finished unloading at various global wharves after 15 cargo-filled vessels had spent several weeks either aimlessly adrift or anchored off-port. Of the remaining three ships, one was preparing to discharge its cargo at an undisclosed foreign destination while the other two had been seized by creditors in China and Canada.

According to Drewry Shipping Consultants, there could be even more turmoil ahead for international shipping companies. An analysis by the firm found that the container industry is over-leveraged, and most carriers have seen a deterioration in their balance sheets. Ballooning debt and negative cash flow have put a strain on their business viability, and the effects are likely to ripple across customers and vendors.

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