The Hanjin Shipping Bankruptcy

By the early 2010s, the shipping industry was facing overcapacity, which was depressing rates and impairing the profitability of shipping lines. Further, almost every major shipping line was ordering larger containerships, caught in a vicious circle of trying to boost profitability with economies of scale. Capacity was growing faster than demand., undermining the profitability of several shipping lines. In September 2016, the Korean company Hanjin Shipping filed for bankruptcy, which represented the largest bankruptcy in the shipping industry in recent years.

In September 2016, Alphaliner reported that Hanjin owned 37 containerships and chartered 62 others, making it the world’s seventh-largest container shipping line at that time, which represented about 3.2% of the global container shipping capacity. Even if this share is relatively small, this was still more than 623,000 TEU of disrupted shipping capacity. Further, a large share of this capacity was allocated on transpacific routes as well as routes from Asia to Europe. Although Hanjin was a global shipping line, it has a pronounced regionalism.

The 37 containerships directly owned by Hanjin were subject to the full asset seizure by creditors under bankruptcy protection, but the matter was more complex for the 62 chartered ships. In theory, chartered ships fully belong to the leasing company and are thus not subject to seizure, only to be declined services since a terminal operator may not get paid by the company under receivership. This is a risk that many are unwilling to assume. However, many chartering agreements are under “bareboat” conditions where the owner gives possession of a containership to the shipping line, who assumes all the operational costs, including crew, fuel, insurance, and terminal charges. Such chartering arrangements can be used as a form of ship financing, which could lead to legal complications in terms of if the ship was truly leased or if the chartering arrangement is a sale in disguise.

The orientation of Hanjin, both in terms of trade routes and terminal assets, implied a focused impact of its bankruptcy. The first stage of the bankruptcy (September-October 2016) created a “shock” for supply chains using Hanjin since services were interrupted without prior notice. Cargo became stuck in transit as shippers (ports, transport companies) refused to handle Hanjin ships since they would likely not get paid for that service. This was highly disruptive for supply chains because of the scale involved. Assuming a 70% level of ship utilization and a 20% share of empty cargo, this represented 350,000 TEU of cargo. Assuming a cargo value of $50,000 per TEU (average value reported by the insurance industry), the outcome was $17.5 billion worth of cargo that may have been impacted.

In the second stage, the increase in rates and the capacity demand on routes and ports that were serviced by Hanjin incited competitors to quickly offer additional services and capture the opportunity. Since the industry was in a situation of overcapacity, placed downward pressure on rates rather quickly as shipping lines aggressively compete to gain market share. Within three months, the shipping industry will likely have completely substituted services that were offered by Hanjin.

The last stage concerned the allocation of Hanjin’s assets. With liquidation, most of its assets were captured at discount prices. Although some ships were retired, most were brought back into service. The bankruptcy of Hanjin was a significant event in global container shipping. The situation of overcapacity ensured that the shock was short-lived and quickly absorbed.

Further to shipping, Hanjin had stakes in 20 container terminals, totaling an annual capacity of 22.4 million TEU. Korea had the most significant potential terminal capacity disruptions, including Busan, an important transshipment hub for the China trade. The main issue was that most of these terminals lost ship calls from Hanjin, impairing their revenue.