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  September 27th, 2016 | Written by

Bankruptcy Woes: Hanjin Makes Waves Across the World

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  • Hanjin's bankruptcy leaves with billions of dollars of cargo stuck at sea.
  • Hanjin has filed for bankruptcy protection in over a dozen countries.
  • Samsung is considering paying to charter planes and retrieve cargo on Hanjin vessels.

The world’s seventh-largest deep sea cargo transportation carrier, Hanjin Shipping, filed for court receivership—a form of bankruptcy protection—on August 31 and chaos has promptly ensued.

While the situation is still developing, the ripple effects and atmosphere of uncertainty have already affected a number of businesses and markets across the globe.

The company must wait for South Korean courts to decide whether it can restructure its debt or whether it must file for bankruptcy—which would make Hanjin the largest ocean cargo carrier in history to go under.

To prevent its assets from being seized by creditors, the South Korean shipping company has filed for bankruptcy protection in over a dozen countries. While a few countries, including the United States and South Korea, have temporarily granted this protection, Hanjin ships are still being turned away from ports worldwide. Without the financial backing to pay for port docking fees, cargo unloading services and fuel, more than 80 Hanjin ships, their respective crews and roughly $14 billion worth of cargo have been stranded at sea.

The inability to retrieve cargo from these stranded ships has sent retailers—and Hanjin’s partner—into a tailspin. While some shippers have been less affected by the development due to their diversified contracts with ocean cargo carries, other businesses are watching the situation carefully. Samsung alone estimates that it has $38.0 million worth of goods currently stranded on Hanjin’s ships, and the company is considering paying about $8.8 million to charter planes and retrieve their cargo. Meanwhile, South Korea’s other main ocean carrier, Hyundai Merchant Marine (HMM), is discussing ways to help rescue some of the cargo, and Hanjin’s parent company has also promised to spend about $90.0 million to ensure that the stranded cargo gets unloaded. This amount is likely to still fall short of the funds needed to dock and unload all 80 ships. As a result, most of the cargo remains stranded, leaving Hanjin’s buyers and backers holding their breath and waiting for the next move.

The full effects of Hanjin’s financial woes are only beginning to be felt. While uncertainty in the ocean cargo transportation market has already taken a toll on shipping prices and alliances, many markets further down the transportation supply chain will also be affected. Retail shippers are unsure if they will face long-term effects of a bankruptcy, especially given that June through October is considered the high season for ocean container shipping in preparation for holiday sales. Buyers should therefore be aware of the markets that will be most affected by the financial hardship of this carrier, and are encouraged to mitigate the risk of future service disruptions by diversifying their carrier base where possible.

Drayage services have lost business as a result of Hanjin’s current situation. Drayage and unloading suppliers are the primary reason that Hanjin ships have been turned away; service providers are worried that the carrier does not have enough money to pay them and, as such, have been refusing to accept the ships’ cargo. Additionally, many large shipping companies enter into contractual agreements with drayage service providers, so if South Korean courts order Hanjin to file for bankruptcy, these contracts will essentially be nullified and Hanjin may not be required to pay contract termination fees. However, because the drayage service market is highly fragmented and does not exclusively serve ports, it is not anticipated that prices in this market to change significantly.

Another link in the transportation supply chain, freight forwarding services, may also be adversely affected by Hanjin’s financial situation. Freight forwarders scrambled to reorganize and redirect the rail, airfreight, and trucking services that were supposed to follow the docking and unloading of Hanjin ships. Many Hanjin ships are now seeking to dock at different ports than were originally intended because some countries have not yet granted seizure protection to the company’s assets. Freight forwarders are subsequently trying to track their clients’ cargo and make arrangements wherever and whenever the containers are unloaded.

Freight forwarders have also been rushing to arrange alternative transport routes for cargo that was due to be carried on Hanjin ships. Most freight forwarders are seeking other ocean cargo carriers, in spite of the substantial spot price spikes that have occurred during the past few weeks and could potentially last for months. However, some freight forwarders are also looking to international air cargo transportation services as a substitute for ocean shipping in order to avoid further delays. Some buyers may benefit from low aviation fuel prices, which have kept air cargo transportation prices growing at a minimal average rate of 0.2 percent annually during the past three years. Although airfreight prices are measured by cargo weight rather than size, making heavy goods extremely expensive to ship, some manufacturers, distributors and retailers may benefit from this alternative until the ocean cargo transportation market stabilizes.

Ultimately, both carriers and shippers must wait for the next developments in Hanjin’s financial situation before determining how to permanently adjust. Hanjin Group will present a debt restructuring plan to South Korean courts, although it will likely be several months until the decision is made on whether to allow Hanjin Shipping to restructure and continue operating or condemn the company to bankruptcy. Lingering uncertainty regarding Hanjin’s potential bankruptcy will disproportionally affect retailers, especially those in the toys and electronics markets, which ramp up sales heavily for the holiday season, and import much of their stock from across the Pacific Ocean. Nonetheless, shippers of all types should be aware of the supply chain disruptions caused by Hanjin’s financial hardships, as well as the ripple effect that could take place in the event of the company’s bankruptcy. Ultimately, buyers cannot completely avoid the market’s risks, but can shield themselves to a certain extent by diversifying their carrier base, or seeking alternative methods of shipping goods.

Ashley Cruz is a procurement research analyst at IBISWorld.