Hanjin shipping collapse

28 November 2016

The collapse of Hanjin Shipping in August sent shockwaves through the industry. The Korean shipping line collapsed owing USD 5.5 billion to creditors and leaving billions of dollars of cargo stranded on its ships.

Andrew Green, Senior Claims Adjuster at XL Catlin and David Clark, Director at Pequod joined Garry Cordess, Senior Partner and Jared Prince, Partner in JLT Specialty’s Cargo team to discuss the impact on the shipping and insurance industries.

What caused the collapse of Hanjin?

Andrew Green: “In my opinion we could look back to 2012/13 with a slew of vessels being built, many with far larger capacities than before. These vessels began entering service at the same time as a major downturn in the global economy, especially the Chinese and Korean. 

“With less demand for goods and new higher TEU capacity vessels, many lines were forced to slash freights rates to compete. In February 2016 Shanghai Containerized Freight Index (SCFI) was down a huge 62% evidencing the low demand high supply matrix. Hanjin accounted for about 3% of the world’s fleet, 5% of the global world’s fleet is currently laid up.”

David Clark: “I’d agree with Andy that market overcapacity is one of the key factors behind the collapse. Perhaps some of the causes behind this market overcapacity can be traced as far back as the early 2000s when shipowners started slowing down ships to save on bunker fuel on ‘environmental’ grounds. If you slow ships down from 25 knots to 15 knots, the effect of this is that you end up with more cargo ships on the water and as a result, you need to create more capacity to ship the cargoes waiting in port. So owners ordered more ships to be built. That all worked well pre-2008 when the Chinese and Indian economies were growing at astonishing rates. Then the global economy crashed in 2008 and demand spiralled downwards but by that time arrangements to increase capacity had already been put in place as the new build order, books were full.

“Also, as Andy mentioned, the carriers had started building larger and larger ships chasing economies of scale. That’s all very good if they can fill those larger ships but if you can’t fill those ships you’ve got a problem.”

Jared Prince: “They can build these large container ships in three years and the capacity is phenomenal. That’s part of the problem that the industry needs to look at as well. The carriers are trying to get more value out of their ships by using them for longer, low scrap value isn’t helping, so we have an ageing fleet as well as plenty of new ships, contributing to this over capacity.” 

Garry Cordess: “You’ve now also got recent news that three major Japanese shipping lines merging. Mistui, Nippon Yusen and Kawasaki Kisen Kaisha. Is this just the crest of the wave?” 

David Clark: “I wonder if these mergers are a good thing? Again, the mergers seem to be driven partly by a search for economies of scale but possibly another driver may be the desire to kill off some of the smaller container lines. The bigger container lines with their economies of scale are theoretically able to drive freight rates down to levels that become unsustainable for the smaller container lines. 

“One of the problems with this is that even these large mega container lines are then forced to run on very tight profit margins which needs to be balanced against a large debt/mortgage exposure. Maybe as well their business models are also not diversified enough – perhaps, they’ve got all their eggs in one basket; i.e. their income stream is pretty much solely reliant on container freight.”

Could the collapse of Hanjin been foreseen and will it result in clients being more careful in their selection process given that the situation could be repeated?

Garry Cordess: “The insurance press and the shipping press have been relatively vocal on the decline of freight rates. Much depends on the type of cargo being shipped. We are talking about containers on vessels and often the cargo owner has no direct control over which vessel or shipping line it is shipped on.” 

Andrew Green: “We’ve seen some evidence of key accounts doing just this. This was an unpredictable event and those with the foresight to manage down were few I’d suggest. The industry has seen some smaller lines failing over the past 18 months but the lesson to be learnt here is ‘you’re never too big to fail’.

“What can or will shippers do now? Deal only with who they deem to be the most stable companies out there”

David Clark: “In an ideal world shippers should have a risk manager assessing the risks that the company is exposed to throughout their whole supply chain. Thus, not only risk relating to the selected carrier but also risks such as those relating to suppliers, storage etc.

“In terms of assessing the quality of the carrier, their role might be quite restricted in as much as shipments made with the container lines are not made directly but rather via a freight forwarder, also known as a non-vessel operating common carrier (NVOCC). Thus perhaps their risk management in terms of the carrier vetting should be focused on assessing their NVOCC?

“The advantage of having a risk manager assessing the risks throughout the supply chain process is that you then have someone who should be able to rapidly react if a problem occurs. That response time is surely going to be slower if you haven’t got a team monitoring the risks?”

Garry Cordess: “Historically it has been the age of the vessel that has attracted market attention not necessarily the financial viability of that particular shipping company.”

Andrew Green: “Some large organisations with dedicated risk managers in place may possibly consider adding the financial stability of their chosen shipping line much like their regular selection criteria when assessing third party contractors/storage providers.”

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For further information, please contact Garry Cordess, Senior Partner on +44 (0)20 7558 3012 or email garry_cordess@jltgroup.com.

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