Collapse of “Hanjin Shipping”: lessons and parallels (remember BLASCO) part 1

(from the issue №5, 149, December) The bankruptcy of “Hanjin Shipping” container operator, the seventh number in the world ranking, was the largest in the field of the industry. The number of publications on the subject, collected only in my files and only in September-November 2016, is more than a hundred. These are not only South Korean publication “Business Korea”, “The Korea Herald”, “Korea Times”, “Korea Joongang Daily”, “The Telegraph”, “Pulse”, “Yonhap”, but “Fairplay”, “Wall Street Journal”, “Journal of Transportation”, “Economic Intelligence”, “OECD Insights”, “Market Watch”, “ABC”, “BBC”, “CNA”, “CNBC”, “The Investor”, “Nikkei”, “Asia Times”, “Straits Times”, “The New Paper”, “Reuters” and others. Well-known rating and analytical agencies, such as the Fitch ratings, Platts, Alphaliner, Drewry, Xeneta and Bloomberg did not escape the topic as well. Some commentators even called the collapse of “Hanjin Shipping” the first collapse of a major shipping company in the last 30 years, apparently forgetting about ЧМП, or how the world used to call it – BLASCO. But in the CIS, in Ukraine and particularly in Odessa the events of mid-late 90s are still fresh, when one of the largest shipping companies in the world went to the bottom. Therefore the history of the “Hanjin Shipping” fall involuntarily aroused associations and made parallels by combining the history of these two failures. At the dawn of independence, pondering over which country is the right thing to be compared with Ukraine, it seemed more appropriate to use South Korea. First of all with regard to shipbuilding and the navy. But in the last two decades, these industries in Ukraine and South Korea have been developing in opposite directions – and the reason of the comparison disappeared. And only the current collapse of “Hanjin Shipping” allowed carrying out certain parallels.

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Only a lazy did not write on the collapse of the BLASCO… Look to the articles names! From Black captains to Suppose the whole Ukraine is put up somewhere in Bremen?”. In public opinion clearly developed a version that BLASCO was lost due to a cluster of villains who looted the property of the company. And, in keeping with the best traditions of the genre, the main villain, guilty of everything, was found (another thing is that the fleet disappeared and the company collapsed without his contribution. And even more, if his suggestions, the corporate model and the strategic investor, German concern Shtines, had not been rejected maybe we would not have what we have…). Just because it was more familiar and easier to answer the question who is to blame. But no one answered what to do, considering that almost annual change of the first heads will save the situation. In late 1992, a short article entitled Controversial BLASCO was published in the Fairplay magazine. It ended with the following prophetic words: BLASCO is a big, proud company that has survived all the previous revolutions. But it was easier to do when the policy was in Moscow, and the company in Odessa. Kiev is much closer and much more incompetent. Here there is little to add, when it comes to the Navy. Incidentally, after the collapse of the Union, the Baltic Shipping Company, being too close to Moscow, suffered the same fate as the BLASCO. And only the third largest – Far Eastern Shipping Company (FESCO) being detached – managed to survive.

 

Historical reference

“Hanjin Shipping” began its history is not so long ago – in May 1977 as “Hanjin Container Lines”. A year later, the company began to carry container traffic to the Middle East, and since 1979 – on the US West Coast. In 1988, “Hanjin Container Lines”, united with “KSC”, got its present name “Hanjin Shipping”. Already in 1991 the company opened its container terminal at the Port of Long Beach (USA), and in the mid-90s the services relating Europe and China began to work. And in 10 years the service, linking the Far East and Latin America was launched. Since 2010, the company began to operate with the container vessels with a capacity of 10,000 TEU, and since 2012 – of 13,100 TEU. Thus on the Trade Asia – US West Coast the company operated with 27 container ships, controlling about 7% of the market.

“Hanjin Shipping” together with the “COSCO”, “K Line”, “Yang Ming Marine Transport”, “Evergreen Line” companies is a member of the SKYHE alliance, and from April 2017 was to join the newly formed association “The Alliance”. At the time of the bankruptcy, “Hanjin Shipping” had four regional offices (in Europe, Asia, Southeast Asia and the United States) and 230 offices in 60 countries. At the end of June, the coastal cast of “Hanjin Shipping” consisted of 1428 workers.

The problems started in 2007, when the leadership was changed and the debts began rapidly accumulating. In 2014, in order to somehow improve the situation, under pressure from South Korea, Cho Yang-ho, the eldest son of “Hanjin Group” founder, headed the company. But neither his personal capital and grants nor the loans of the main shareholder – “Korean Air Lines Co.”, as well as the state “Korea Development Bank”, were not able to save the situation.

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May 16, 1833 is considered to be the birthday of the BLASCO, when the Black Sea Shipping United was founded. That is, this year the shipping company – or rather, what’s left of it – turned 183 years old. But 30 years ago it was one of the most powerful enterprises, uniting transport and auxiliary fleet, ports, shipyards and other infrastructure, which in total employed about 80 thousand people.

At the end of 1994, the BLASCO had the offices in Egypt, Bangladesh, Bulgaria, Vietnam, Guinea, United Arab Emirates, Romania, Sri Lanka, Croatia, Germany, Greece, China and Syria. The keeping of these representations cost $ 2 million per year. In early 1996, the number of the BLASCO management unit totaled 4,250 employees, 1,385 of whom worked directly in the shipping company, and the rest – in the separate structural divisions.

 

Assets and liabilities

At the end of August 2016 under the supervision of “Hanjin Shipping” there were 141 ship, including 97 container vessels with the total capacity of near 600,000 TEU, 40 bulk carriers and 4 tankers. The fleet of the company consisted of 63 ship of all sizes, with the market value, according to the “Vessels Value” of $ 1.71 billion. The container fleet of “Hanjin” consisted of 37 vessels; the rest 60 were in the charter.

In the coastal part, the company operated by 12 specialized terminals in South Korea, Japan, USA, Belgium, Spain and two logistics centers – a total capacity of around 10,000000 TEU. The cost of the onshore assets of “Hanjin Shipping” was not mentioned, but it can be judged on the basis of the fact that 54 per cent share of the company in the terminal at the Port of Long Beach is estimated at 342.5 million dollars.

At the end of June this year, the payables of “Hanjin Shipping” was about 5.33 – US $ 5.41 billion. As of mid-October 2016, there were about 4,000 creditors of the company. Quarterly operating losses exceeded 250 million dollars. Daily losses only by chartered vessels were estimated at US $ 2 million. But the claims for the early termination of the contracts of chartering can be about US $ 1.7 billion dollars.

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As of the end of February 1994, the market value of 225 ships of the transport fleet of the BLASCO according to the Unione Mediterranea di Ticurta, was more than US $ 1.3 billion. In contrast, Hanjin Shipping operating only container ships, bulk carriers and tankers, the fleet of the BLASCO had also 21 ro-ro ships, 5 refrigerators, 3 lighter carrier, as well as 14 passenger liners, 7 hydrofoils (HF) and 2 Research vessel (RV). If HF and RV just brought considerable losses, the passenger liners’ arrests with passengers on board literally drowned the company. As for March 1995, the current debts of the passenger fleet of the BLASCO was $ 27.2 million – plus 126 million DM debt to Lloyd Shipyards for reconstruction and repair of the motorship Belarus (Kazakhstan-2).

The BLASCO had less, compared to Hanjin, accounts payable, which amounted, as for October, 1994, 263.8 million dollars. It is obvious why the agony of the company lasted for such a long period.

By mid-July 1995 in Singapore, Italy, Greece, Turkey, Panama, Bangladesh, UAE, Egypt, South Africa, the Netherlands and China there were 27 vessels of the BLASCO under arrest. Monthly, the arrested ships brought the company up to $ 1 million of net loss, not to mention the $ 2.5 million loss of profit. Since they could not repay, only in 1997 from the auctions in various countries, against the will of the shipping company and the state of Ukraine, 13 the most modern and young vessels were sold.

 

The chronology of the events

8.31.16. “Hanjin Shipping” refers to the Central District of Seoul court with the declaration of insolvency and the request to protect the assets from the arrest (and that was the beginning of the preparations for bankruptcy and the external management was put).

9.1.16. Blocking starts (port entry denial) or even ships’ arrest. As a result, almost 400,000 TEU of loaded containers belonging to almost 8,300 various companies “stuck” on the ships of “Hanjin” all over the world. The cost of the goods was about US $ 14.0 – 14.5 billion.

9.6.16. Bankruptcy proceedings, which protected the ships of “Hanjin Shipping” from arrests, were opened in the United States. Later the same decision was made by the courts of Japan, the UK, Singapore, Germany, Italy, Spain, and others (15 countries totally).

9.15.16. 81 of the company’s ship arrested, detained or blocked all over the world. The Administrations of the Suez and Panama canals locked “Hanjin Shipping” ships.

9.20.16. The Court directs the company to return all chartered vessels to the owners and to sell its own vessels, as many as possible.

9.25.16. “Hanjin Shipping” notifies more than half of the workers of the onshore staff about the upcoming layoffs.

9.10.16. “Hanjin” moves from 7th to 17th place in the world ranking.

10.14.16. The Court directs to sell the container business of the carrier, serving the direction Asia – US West Coast.

10.24.16. A decision to close all 10 European offices, including the regional office in Germany.

8.11.16. The debates in the National Assembly of South Korea were held, dedicated to support of the national shipping and shipbuilding.

10.11.16. 560 of the 2,500 seafarers being on the “Hanjin” ships got laid off.

11.14.16. There was a tender for the purchase of the “Hanjin Shipping” transpacific operations.

11.24.16. South Korean bank “Woori” sells 4 tankers “Hanjin Shipping” tankers. It is also reported that the lenders are willing to sell 40 more company vessels.

11.25.16. The term of financial recovery plan of “Hanjin” presenting was moved from December 23 to February 3, 2017 and the auditor’s report of “PriceWaterhouse Coopers” – from November 25 to December 12, 2016.

11.27.16. Containers’ unloading from all the vessels of “Hanjin Shipping” is fully completed.

11.29.16. There was a tender for the purchase of a container terminal in the Spanish port of Algeciras, partly owned by “Hanjin Shipping”.

13.12.16. The audit company «Samil PriceWaterhouseCoopers» recommended to eliminate “Hanjin Shipping”.

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The issue of the BLASCO bankruptcy was raised for the first time at the end of 1994, when one of the formerly part of the shipping company changed into the Court of Arbitration on this matter. Then, the problem was resolved – and the bankruptcy of enterprises was launched in July 11, 2003 – and is not closed until now.

Both Hanjin Shipping, and the BLASCO were in financial difficulties for quite a long period. But in the South Korean carrier, as we see, a very active sale of assets is in process, while in Ukraine, not without the help of the state, the BLASCO fleet was hidden and its onshore assets taken away, ensuring the prolonged sluggish process. The result – not only the entire fleet has been lost, and also 34 highly profitable objects of the coastal shipping company property were transferred to the balance of other companies (or communal ownership), or sold in public trading.

 

Collapse reasons

One of the root causes of the “Hanjin Shipping” collapse was the global financial crisis of 2008, which stopped the rapid growth of the container traffic. On the other hand, the insatiable appetites of the leading carriers to replenish the fleet, and, mainly, due to the mega-container ships, led to the fact that over the past 7 years, the capacity of the container fleet has doubled, reaching more than 20 million TEU. As a result, the excess of supply over demand for transportation has reached 30%, which, of course, could not fail to exert strong pressure on the market conditions. Adding unprecedented freight wars for market share, by leading carriers, and we get those purely money-losing bets which multiplied the problems of “Hanjin Shipping”, and many other container operators. For example, the losses of the leading container carrier “Maersk Line” according to the results of the 3rd quarter of 2016 amounted 116 million, and of the combined “COSCO” for the three quarters – $ 1.1 billion. According to “Ferrier Hodgson”, “Hanjin” has been unprofitable for the past four or five years. And according to the “IHS Global Insight”, in the crisis year of 2009 the “Hanjin Shipping” losses reached $ 1.1 billion.

The financial problems of the company were compounded by the fact that the container vessels taken at relatively high rates in 2010 – 2011 years on the “low” market that took place in recent years, began to bring the company the net loss, estimated at the time of the bankruptcy at $ 2 million per day. In addition, in the “Hanjin” fleet there were 25 container ships of the “Panamax” class completely unclaimed after the expansion of the Panama Canal and they were bringing only financial losses. An unfocused expansion of the fleet in the hopes of the market recovery in the years 2009-2013 (from 69 to 104 vessels) is considered to be the main mistake of the management. The loans under this expansion led to the fact that if in 2009 the debt ratio stood at 155%, it rose to 1445% (!) in 2013. High ambitions and harsh reality brought “Hanjin Shipping” to the tragic events that we have seen in the recent months. The rise to the leadership of the head of “Hanjin Group” company Cho Yang-ho (who bought the carrier for 1.8 bln) in 2014 and the infusion of $ 1.3 billion from the main shareholder (“Korea Air Lines”) allowed only to reduce the debt ratio to 800%, but did not remove the problems dictated by the crisis state of the container industry. And one of them was a sharp depreciation of shipping assets. Until the very last moment in the “Hanjin Shipping” they were trying to restructure the debt to obtain a review of the charters, to sell non-core assets, but the creditors headed by the State Development Bank of Korea (KDB), did not approve these measures as they seemed to be inadequate and unconvincing. And after that, there was a collapse.

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The roots of the BLASCO collapse lie in the complete loss of the most powerful state support, which took place before the collapse of the USSR. On the BLASCO balance and other shipping companies there were transferred dozens of new ships built at the expense of the state budget. Today, few remember that in those days for every so-called convertible ruble they used to add a half ruble of centralized surcharges. (In 1989, on my Ph.D. defense in Soyuzmorniiproekt on the Container and Ro-Ro tariffs of the BLASCO, there was a question: What will happen to the BLASCO, if you cancel the coefficient of the centralized co-payments?. The answer was purely Odessan, with the use of unscientific language, which caused a storm of criticism, but, in fact, it was true). A crushing blow on the shipping company was caused by the loss of foreign trade cargo traffic of the former USSR, in the first place – with Cuba, Vietnam, Bulgaria and other countries of the Soviet bloc. These traffic flows amounted about 70-80% of the volume of traffic.

The payment of the bunker, lubricants, supplies, etc. were made according to the global (market) rather than the domestic prices. For the same reason the costs for fleet repairs soared astronomically.

The debt to the shipping company on the part of the enterprises of the former Soviet foreign trade and the USSR Vnesheconombank in the amount of 103.6 million dollars for the carriage of goods in 1990-1991was not repaid, while in 1993 these funds would be enough to put the BLASCO on an even keel.

The non-productive sphere pressed on the Company quite noticeably as well. These are meat and dairy plants, the tomato paste plant, Agillas resort (the Canary Islands), and the sports base Chernomorets, the full reconstruction of the building of the BLASCO, the construction of the representation in Kiev, the arrangement of the overseas offices, the plane Dornier, etc. Only in 1994 for the reconstruction of the BLASCO building 7.1 million was spent, for the construction of the base Chernomorets – 1.4 million, for the purchase of the vehicles, and office equipment for the BLASCO and other organizations – 1.5 million, the arrangement of the BLASCO Shipmanagement office (Cyprus) – 0.74 million dollars.

Already being on its knees, in financial terms, the BLASCO under the pressure from the top in 1994 ordered at the Ocean plant the construction of two (with an option for two more) Panamax carriers at the cost of $ 26 million each. But these vessels were never seen and the money for their construction was paid with “the last effort” by getting into more and more debt …

(To be continued)

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

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