Collapse of “Hanjin Shipping”: lessons and parallels (remember BLASCO) part 2

(from the issue №1, 2017) Continuation. Find the beginning in №5(149) 2016.

Winners and losers

Within three months after the “Hanjin Shipping” bankruptcy proceedings commencement, the 2M Alliance members, the world’s largest container operators “Maersk Line” and “Mediterranean Shipping Company” (MSC) were the unambiguous beneficiaries. The market share of the 2M Alliance in the line of Asia – North America rose to 17.5%, an increased by 3.5%, and in the opposite direction – up to 24.2%, or by 7.8%. It may be added that the German bank “HSH Nordbank” in late October last year, gave nine “Hanjin Shipping” container vessels with a capacity of 13,100 TEU (three – “MSC” and six – “Maersk Line”) to the 2M Alliance partners.

The “associates” of the company in the SKYHE alliance (“COSCO,” “K Line,” “Yang Ming Marine Transport,” “Evergreen Line”) essentially increased their market share at the expense of “Hanjin” as well. Thus, the South Korean government hopes that the business of the bankrupt company will go to the national carrier №2, the “Hyundai Merchant Marine” (HMM), did not live up. The predictions that “HMM” will acquire the US “Hanjin Shipping” businesses did not come true as well. Nevertheless, “HMM” did not come off the loser. Firstly, it itself narrowly escaped bankruptcy (the company’s debts amount to $ 6.2 billion, plus – over the past few years “HMM” has a negative financial result, only at the end of the 3rd quarter of the last year, amounting to 195,8 $ million). But now the government is unlikely to sacrifice the new flagship. It should also be noticed that in many ways to stay afloat “HMM” was helped by the signed in July memorandum of understanding with the “Maersk Line” and “MSC” about the possible accession to the 2M Alliance (although it is clear that “HMM” will not become a full-fledged member of the alliance). Secondly, 11 “Hanjin Shipping” ships (two container vessels and 9 bulk carriers) the construction of which was financed by “KDB”, have already been moved to the “Hyundai Merchant Marine.” Thanks to this, the “HMM” fleet has grown to 130 vessels, consisting of equal numbers of container ships and bulk carriers. Thirdly, “Hyundai” managed to win the tender for the acquisition of 100% stock of the container terminal in Algeciras, a large part of which belonged to “Hanjin Shipping.” And finally, “HMM” and “MSC” submitted a joint bid for the purchase of 50% part of “Hanjin” in the “Total Terminals International” (TTI). In turn, in the purchase of “TTI” in partnership with “HMM” South Korean “SM Group” is interested, which includes “Korea Line,” which should also be placed among the winning parties. “Korea Line” won the tender for the purchase of trans-Pacific “Hanjin Shipping” operations for $ 31.4 million. It also includes an option to purchase of the five containers with a capacity of 6,500 TEU, belonging to the “Hanjin”, and its share in the terminal in the Port of Long Beach. However, the experts doubt that the “Korea Line”, being the bulk mediocre operator, will be able to find the means, necessary for the purchase of a modern terminal and containers.

Another South Korean feeder operator “Dongjin Shipping” replaced “Hanjin” on intra-services, served with “Sinokor Merchant Marine.”

In economic terms, the other container carriers had their benefited as well, since the collapse of the Korean company has provoked a surge in freight rates, which allowed earning an additional US $ 1 billion during less than a month. At the same time the bankruptcy of “Hanjin Shipping,” according to some analysts, was the lowest point of the fall of container traffic market, after which it will start its recovery.

Some experts believe that it is the bankruptcy of “Hanjin” which led to a sharp increase in the number of unemployed containers in November 2016. Their total capacity was about 1.7 million TEU, or 9% of the fleet, while a year earlier the figure was only 2.5%. At the same time 36% of the standing container vessels are the ships operated by “Hanjin Shipping.”

Among the definite losers, there should be considered the numerous shippers (especially of perishable and high-value goods) using the “Hanjin Shipping” services in bad time. The logistic chaos led to the disruption of the supplies with all the consequences in the form of penalties, not to mention the enormous necrosis of the commodity values.

The terminals, serving the traffic flows of “Hanjin” lost as well, especially at the ports of Busan and Long Beach. The loss of container turnover in connection with the collapse of the Korean carrier in Rotterdam is estimated at 30,000 TEU. In a difficult situation appeared the leasing companies, providing “Hanjin” with  containers and other specialized equipment. Only “CAI International” leasing company leased about 15,000 containers with a total value of $ 40 million – and has already estimated the losses at $ 4.6 million.

According to the October evaluation of “Korea Maritime Institute,” in case of “Hanjin Shipping” liquidation, about 1.18 million from 1.88 million TEU (62.8%) of the park would go to foreign shipping companies, and only the remaining part – to the South Korean ones. In this scenario, the losses could reach 8.25 trillion won (about $ 7.0 billion) and, in total, the loss of 11,000 workers in the sea and on the shore.

***

The container park of the former Soviet, that Ukrainian large shipping company BLASCO at the beginning of 1996 totaled 50.7 thousand large containers, 5,600 of which were to be repaired or write-off, and 16,800 were wanted as unpaid by the railway (due to the collapse of the give-and-take containers system). Thus, more than 60 million USD were extracted from the economic turnover of the steam navigation.

A large part of the BLASCO container park, as well as trailers and chassis, remained abroad. Just like the whole lighter fleet, once the most powerful in the world LASH system together with joint venture Vietsovlihter, sunk into oblivion.

 

On land and sea

The reorganization process has already forced “Hanjin Shipping” to lay off 350 of the 650 people working in the offices in South Korea. The employees of the closing foreign offices of the company are collectively dismissed. However, “Korea Line,” which bought the “Hanjin” transpacific business, pledged to preserve jobs for 293 coastal workers in the South Korea itself – and 281 employees of the overseas offices, serving the way Asia – United States. However, the marine crews will lose their jobs in connection with the withdrawal of all the containers vessels from the routes.

Following the reduction of the first 560 workers in November, “Hanjin Shipping” said that in December, another 492 people will be laid off. Overall, on the company’s ships at the start of the bankruptcy proceedings there were about 2500 seafarers. The company itself is busy with the employment assistance for them, who lost their jobs due to the bankruptcy, referring to other South Korean shipowners. The Korean Federation of Trade Unions of seafarers, Korean Association of Shipping, Korea Shipowners’ Association and the Commission established under the government contributed as well. The Commission also undertook to ensure the arrested or detained ships’crews with food and other supplies, if they remain less than for 15 days.

The trade union of “Hanjin Shipping” promised to take care of the fired members of the crews, until they find a new job. The employees, who are affected by the dismissal, will receive a severance pay and wages for two months, and their unused annual vacation will be paid.

In the meantime, “Hanjin Shipping” has a vague future – and we won’t know anything for sure before February 2017. According to “SamilPriceWaterhouseCoopers,” in case of liquidation of the company 1.9 trillion won (about US $ 1.6 billion) can be gained, while the continuation of its operation, taking into account the debts and claims will bring only 800 billion won. That is the liquidation of the company is economically preferable. Especially since as of mid-December 2016, more than 90% of the company’s fleet was sold by creditors. Therefore, at best, the company will continue as a medium or even small regional carrier, losing a huge number of jobs. In this context, there was an interesting statement of the shore workers’ union, to give the staff the opportunity to redeem the company.

***

Numerous BLASCO addresses to the higher authorities to help the seafarers on the arrested ships remained the voice of one crying in the desert. Neither the Finance Ministry nor the Ministry of Emergency Situations did not want to approve the decision on the allocation of $ 400,000 from the reserve fund of the Cabinet of Ministers to assist the sailors on the arrested vessels (daily benefits and repatriation home).

The future of the Hanjin Shipping crews is dicey, but long suffering BLASCO seafarers, losing jobs at the shipping company, entered the international labor market – and a completely different level of salaries. These extremely high (for domestic miserable standards) salaries still support plenty of Ukrainian families.

 

State – is?..

A number of commentators and analysts called the policy taken by the South Korean government as for “Hanjin Shipping,” shorn of common sense, incorrect, irresponsible, ill-conceived, short-sighted, etc. And it was noted that the state had no right to make ill-considered statements of cessation of support (thereby dooming a company to bankruptcy) without having considered the effects and not having a Plan of Action in case of unexpected circumstances. Not to mention the fact that most of the “Hanjin” vessels after the declaration of insolvency have been blocked or arrested, the South Korean carrier’s bankruptcy has caused real chaos in the global supply chain of goods in containers.

In response to out-of-control processes in the Korean Ministry of Maritime Affairs and Fisheries, in September this year the Working Group, which was charged with the responsibility to accelerate the discharge of the blocked “Hanjin Shipping” vessels and to ensure the social protection of the crews (providing good conditions on board; employment of the reduced sailors) was created. In addition, the working group was to assist the shippers and forwarders, in the first place – to enforce the “Hanjin” contracts. According to expert estimates, the company had contracts for the carriage of goods in the amount of 39.9 million TEU. Purely organizational matters were greatly complicated by the penalties, claims, legal costs, etc. Not without the help of this group at the end of November, the completion of unloading of containers from the last detained “Hanjin Shipping” vessel was announced.

In late October, the South Korean government announced that to support the shipping industry, the state finance company with a capital of 1 trillion won (US $ 845 million.) will be created. It is also planned to make greater use of “Tonnage Bank” and “Korea Asset Management Corporation,” increasing their capitals to US $ 1.2 billion – to facilitate the acquisition of the fleet by the national companies.

“The situation with Hanjin Shipping has shown that the government should support the industry before the damage becomes uncontrollable,” – was the conclusion made by the government of Taiwan, decided to open a credit line in the amount of $ 1.9 billion with preferential interest rates for the national shipping companies “Evergreen Line” and “Yang Ming Marine Transport.” For a long period, these companies are in dire financial straits. Suffice to say that in the first three quarters of 2016 their total loss amounted to $ 580 million. Only “Yang Ming,” since 2009, accumulated losses of $ 1.06 billion. And in order not to repeat the fate of “Hanjin Shipping,” they need the state aid.

On October 18 at the National Assembly hearings, the parliamentarians demanded that the government of South Korea has to provide more aid to ailing “Hanjin Shipping,” which fully meets the national interests of the country.

“Hanjin” itself believes that they could avoid the avalanche stop of the company’s fleet, if in “Korea Development Bank” they adopted the financial recovery plan, plus – would have helped. The proposed plan envisaged the infusion into “Hanjin Shipping” of 500 billion won (US $ 451 million) during two years. But the company management failed to persuade the largest creditor of the advisability of such a move – and there you are. At that, the “Hanjin Shipping” management not so much blames the country’s government for what happened, as fierce competition and dumping by the larger lines that have managed to mobilize the necessary resources, including by means of the state support. Although there is a fact that the South Korean government “position of principle” do not waste taxpayers’ money to support the problem (including the large ones) companies (meaning “the Hanjin”) was very costly to the national shipping and cargo. And the pulses of this collapse will not die soon within the country.

In relations “Hanjin” – South Korea we cannot fail to recall the Asian crisis of 1997, which led to a sharp depreciation of the national currency, as well as the imposed in 1999 on the group for alleged tax evasion (as a result of the active use of the translation tactics funds to offshore accounts) huge fine of 541.6 billion won (US $ 445 million). The “Hanjin Shipping” bankruptcy prompted the “Financial Supervisory Service” to start checking all loans to “Hanjin Group” by the South Korean banks – for their intended use and collateral. According to preliminary data, of the 8 trillion won (US $ 7.14 billion), received from “Korea Development Bank”, “Nonghyup Bank” and “KEB Hana Bank,” “Hanjin Shipping” got 3.5 billion won, and the part of a group “Korean Air Lines” company received 4.0 billion won. If the financial controller doubt the adequacy and liquidity of the guarantee provided to banks, it threatens the group further problems. That is the duo “the Hanjin” – South Korea has not yet sung all its “arias”.  But the last word, of course, will remain with the state.

***

BLASCO regularly sent to all authorities (from Ministry of Transport to the President!) SOS signals – and the plans to get out of the crisis… But it seems that no one even read them. Instead of any aid, there were sent all sorts of commissions, organized for the verification test, required certificates, summaries, reports, programs, i.e. in the best bureaucratic tradition, the issue was simply being covered … The management staff most of the time was getting ready to answer the questions of the General, regional, urban and transport prosecutor’s offices, the Investigative Committee of the VR, State Security Service of Ukraine, State Audit Office, State department of the sea and river transport, Ministry of Transport, etc.

As a state-owned company, BLASCO had to beg from the parent bodies (Ministry of Transport, State department of the sea and river transport and the State Property Fund) for the permission for every step in terms of the alienation of any, including inefficient and bringing huge losses, property. But absolutely none of the officials wanted to take responsibility and were strongly delaying the solutions of these issues.

As a result of the work of the State Commission, at the end of 1992 the shipping company was fined by 3.6 billion of karbovanetz (krb) and US $ 19 million, which was the first financial blow of the young state on the shipping company. Further escalation of penalties, all kinds of interest, blocking of the accounts and files, – caused a vicious circle from which the BLASCO did not manage to get out. By July 1995, wage arrears to the company workers were 1.15 trillion of krb, plus – 2.15 trillion krb to the budget and 1.83 trillion of krb to the extra-budgetary funds. On 01.03.96 the current account of the shipping company had a card file of more than 5 trillion of krb, and payments of $ 3.1 million of krb were simply stopped. The BLASCO debt to the budget and trust funds as at 04.01.97 amounted to UAH 78,350,595 (new national currency, hryvnia – UAH – was implemented in 1996). That is, there has been an avalanche debts’ winding. And this despite the fact that the state has never paid off for the funding for the production of the national currency amounted to $ 5 million invested by the shipping company in 1992. The state did not compensate for these funds to BLASCO, at least on account of penalties and fines cancellation.

In accordance with the Decree of the Cabinet of Ministers of Ukraine dated 03.07.1999 № 1181, from the BLASCO balance without any payment there were taken the pre-schools in the elite districts of Odessa, educational and sports base Chernomorets, 86 ships, the company’s contribute to the Tamworth project etc. The total sum, seized from company only from 1995 to 2000 amounted to $ 108.8 million. As a result, the BLASCO was left without sufficient working capital and sources of its replenishment, with the debt to domestic and foreign creditors. In late 2004, it had only two vessels. In addition, all the company’s property was in tax lien. At the same time, as in irony, additional 111 million UAH of taxes and penalties were assessed.

At the time, one Verkhovna Rada representative, close to the maritime industry, in his letter to the Prime Minister of Ukraine Yevgen Marchuk noted state’s guilt in the critical situation of the shipping company. But the state did not correct the situation, and also, very likely, did not even aware the guilt.

 

Lessons for the future

The rapid collapse of the “Hanjin Shipping” raises a number of issues, chief among them: is it a purely random imposition of unfavorable factors, an isolated case – or the event, having its structured roots? Some analysts, for example, from “Hana Financial Investment Co.,” consider that it is quite an ordinary event, because across the industry, “Hanjin” is a little player to seriously affect the global processes. This opinion is shared by “OCBC Investment Research,” which believe that this collapse will have a minimal impacton the global container industry.

For others, what happened with “Hanjin Shipping,” on the contrary, is just the visible tip of the iceberg of the problems, which the global container industry is to face in the coming years. And this failure is only the “first fruit.” There is even a comparison of the “Hanjin” collapse with the bankruptcy of “Lehman Brothers Holdings Inc.” in 2008, laid the foundation for the global financial crisis.

  • Neither size, nor ownership or leading position in the national traffic or the ranking of world shipping companies is not the guarantees for collapse nonsusceptibility.
  • In the acute crisis even large companies are unable to avoid bankruptcy. However, only the state has the possibility to save or “drown” the largest national shipping company, which has been demonstrated with both the BLASCO, and with the “Hanjin Shipping.”
  • “Rings in the water” from the collapse of the “monsters” like “Hanjin” affect many “players” of the market and take billions of dollars, making the selection of counterparties be careful in terms of their financial solvency.
  • In the context of fierce competition in the global shipping industry, elimination of strong players is only encouraged by “colleagues,” and their market share is immediately absorbed.
  • The accepted by shipping companies investment programs and strategic directions of development must be carefully verified. (According to “Drewry,” one of the causes of the “Hanjin Shipping” collapse was making wrong business solutions not only by its management but also by the industry as a whole).
  • “Hanjin” bankruptcy showed a very high degree of financial risks, which go with container transportation and which must be observed by cargo owners.
  • The reasons that led to the collapse of both the BLASCO and “Hanjin Shipping,” have not disappeared – and not been eliminated. Therefore, none of the shipping companies can feel completely safe.
  • The bankruptcy of Korean company that is a member of the CKYHE alliance, on the one hand, gave rise to doubts about the benefits of the system of shipping associations, but on the other – has given an additional impetus in this direction. (This is evidenced by the decision, taken straight after the “Hanjin Shipping” collapse, of the three Japanese leading operators “MOL,” “NYK” and “K-Line” to combine their container business by creating an appropriate joint venture in July of the following year).
  • In the context of the rapidly changing “rules of the game” and market realities, the ability to quickly and flexibly respond to changes came out on top for shipping companies. And it is this possibility that BLASCO didn’t have at all, taken under “tutorship” and forced to beg permission from the higher authorities for each “sneeze”.
  • In the world in general, and in South Korea in particular, everybody is well aware that the marine industry, playing a major role in transport logistics, new technologies development, the independence of the freight and international relations ensuring, is one of the key sectors of the economy. Therefore, such a great attention is paid to what has happened with the largest national shipping company. Unfortunately, we have not made any conclusions from the BLASCO collapse, after which “Azov Shipping Company,” and “Commercial Fleet of Donbass” and almost all cargo fleet of once a maritime state Ukraine fell into oblivion as well. Ukrainian Danube Shipping Company (having long ago corporatized UDSC, the state cannot decide on the next logical step – privatization) is literally fighting for life. Instead of proclaimed decentralization, a strict administration and ignoring the interests of the industry’s development is continued. Today, it is practically impossible to talk about the independence of the freight and the revival of Ukraine as a naval power!.. But perhaps, after all, it’s already time to recall the Ukrainian maritime fleet?

 

Valery Voynichenko, Ph.D., BLASCO specialist in 1992-1998

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