Hanjin Shipping bankruptcy a wake up call for the container shipping industry

While there have been a number of bankruptcies in the sector in none of them have been remotely on the scale of Hanjin which ranked number seven in the world in terms of capacity with over 600,000 teu on the water.

The bankruptcy of Hanjin comes during the latest and particularly deep slump in the container sector. Now while lines can point to the state of the global economy and limited to negative volume growth as a result the reality is that much of the sectors woes are also self-inflicted.

Companies have made vast investments in ultra-large containerships only to promptly give all the gains in efficiency and cost back to their customers. As soon as the market hints at a turn to the negative they engage in vicious price wars that often only come to an end when freight has hit effectively zero and lines are hemorrhaging red ink.

Vessels are only laid-up, a strategy proven to work on major scale in 2009/10 in terms of managing capacity and restoring rate levels, when the situation is already completely dire.

Shippers with containers stuck on Hanjin ships around the globe, which are rapidly becoming huge floating warehouses with nowhere to go, or scrambling to rebook their freight with another line might like to reflect that driving your service provider into the floor on price at every given opportunity can have its downsides.

The case of Hanjin shows that a white knight will not always come to the rescue, even if the largest creditor is a state-owned bank. It’s not Hanjin is alone in its woes having lost money year-on-year, and racked a massive $5bn in debt.

Almost no-one in container shipping is making money at present, even the mighty Maersk Line lost $114m in the first half of the year.

Fellow Korean line Hyundai Merchant Marine (HMM) only just managed to survive two months ago, perhaps underscoring the belief that Hanjin would not be allowed to fail.

Two recent merger participants Neptune Orient Lines (NOL) and United Arab Shipping Co (UASC) were in a poor state. NOL had been losing money for years before being bought over by CMA CGM, while UASC’s ambitious fleet expansion had left with $4bn in debt and hefty losses before a merger with Hapag-Lloyd was agreed.

Hopefully the bankruptcy of Hanjin will be a wake up call to all in the sector that it cannot continue doing business in the way that it has for the last two decades, or more major companies will fail leaving shippers high and dry.