House of Cards

house of cards

By Erik Kravets 2017-01-05 14:58:45

Does the Hanjin bankruptcy signal the end of an era?

At long last the market correction has arrived! Thanks to the insolvency of Hanjin Shipping, one of the global players in the container market will be struck from the record, allowing rates to rise, excess capacity to be scrapped and survivors to flourish.

Not really.

In shipping, appearances sometimes do not match reality. And the reality of the Hanjin insolvency is that the Korean giant was not so much a shipping company as an amalgamation of diverse contracts with shipowners, cargo interests, terminal operators and crewing agencies. It did not so much have assets as it allocated assets for others. It chartered ships owned by others, carried freight owned by others, used terminals owned by others, and navigated and operated its ships with employees hired by others. All the while, Hanjin earned and spent money hoping that somehow it could keep a decent operating profit after paying all of the third parties it depended on.

According to Hanjin’s own website, as of the end of October its fleet of 88 container vessels included 51 that were chartered-in. In other words, Hanjin does not own the majority of Hanjin’s fleet.

Reshuffling the Deck

As largely a non-owner operator of ships other people own, Hanjin’s insolvency is more the elimination of a capacity-buying customer than the elimination of the underlying capacity. Affected parties include several Japanese owners but also German owners Claus-Peter Offen, Conti Holding and Peter Döhle, who are, much like Hanjin’s other suppliers and banks, transitioning into the role of creditor vis-à-vis Hanjin when it comes to loss of hire under their respective charter parties. These owners will move their ships elsewhere, pressure new markets and make contracts with new charterers.

What’s more, whatever ships Hanjin did own will now be shuffled around as the financing banks seek to recover their investments and protect against the prospect of a total loss. That is to say, even those vessels directly implicated in the insolvency of their owner will not disappear.

For example, Kiel, Germany-based HSH Nordbank has arranged for Maersk to long-term charter six state-of-the-art, 13,100-TEU container ships built in 2012 and 2013. These six vessels were financed by a German consortium of which HSH Nordbank was the lead lender and were used in Hanjin’s European network. The technical management of these ships will be assumed by a familiar name: Peter Döhle. Three other sister ships, also financed by HSH Nordbank, have gone to Mediterranean Shipping Company and are thus also expected to remain active in European trading.

Hanjin’s insolvency is, therefore, the opposite of the market correction we needed. What is needed are fewer owners and fewer ships or, alternatively, much more cargo. What instead happened is that a customer was lost.

To illustrate the point, the Hamburg-based German P&I Club (Schutzverein Deutscher Rheder) recently issued a circular addressing the risks of the Hanjin insolvency, warning that its members could suffer “massive lost income” due to loss of hire and noting that its members’ vessels could be arrested as unpaid Hanjin suppliers and service providers seek to enforce against the owners of the vessels for the charterers’ debts. The German P&I Club noted that its members would have to deal with the significant costs of Hanjin’s insolvency “for a considerable time to come.”

Collapse of Globalization

Now what about cargo? Surely cargo interests are rejoicing at the prospect of even lower rates?

For decades it was axiomatic that global trade would continue to increase at a brisk, even geometric rate. As such, shipowners continued to build new ships in anticipation of growing cargo volumes. Shipping lines like Hanjin continued to demand more new ships, which got bigger and bigger as they grew into new markets or increased frequencies in markets they were already serving.

As Lothar Jolmes pointed out way back in 1966 in his article, “Technical Structural Change in Shipping”: “The reallocations occurring in world trade and thus with respect to the corresponding demand for ship tonnage … have to do with the fact that global maritime shipping had fallen behind global commerce.” And what if today we have a situation in which shipping, fueled in large part by speculative capital, is so far ahead of global commerce in terms of tonnage that supply and demand have inverted?

In what may be the Gettysburg (or Pearl Harbor) of globalization, 2016 marks the political defeat of the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Public enthusiasm for trade has, in general, withered away both in the E.U. and the U.S. Brexit-advocate Boris Johnson and Donald Trump have in common an ethos of withdrawal from the world, which they regard primarily as a threat to national values and prosperity. Some people like the new direction while others don’t, but the political wind is shifting.

Compared to political moods, ships are built at a glacial pace – with years-long waits for the completion of large vessels. As such and in anticipation of increased trade, the supply of containers (a proxy, to some extent, for ship tonnage) mushroomed from 12.1 million in 2009 to 19.9 million in 2015.

If price is a function of supply and demand, this would mean that freight rates ought to be a steal. Indeed, in March 2016 a 40-foot container could move from Shenzhen to Rotterdam for $400, probably a lot less than one economy class seat on a commercial airline. This, one assumes, ought to be making cargo interests quite happy indeed.

But the reality is something very different from the imagined shipper’s paradise, as Hanjin has shown: News reports claiming Hanjin was allowing crew to starve; cargo laid up in vessels not allowed to dock or discharge, clogging the arteries of global commerce; and insecurity on the part of consignors and consignees about creditors’ ability to enforce in cargo. And, of course, misguided and desperate efforts to cut costs will cause avoidable accidents that jeopardize seafarers’ health and well-being and lead to frustrating cargo losses. When the shipping industry is traumatized, we all lose, because a functioning shipping industry is essential even in a brave new world in which it has been disowned by a new isolationist political wave.

So what does it mean if, at this point, it is no longer possible for owners to recapitalize their investments? If there is a rock bottom in shipping, then it has now been reached and the alternative cannot be even lower freight rates. Last year, Rolf Habben Jansen, CEO of Hapag-Lloyd, confirmed that “Rates must go up. We have too many trades where we are moving cargo below operating cost.”

So if freight rates do not go up, then the only way to “win” this game – ever-larger ships going to ever-more places for ever-less money – is to refuse to play or to change the rules.

Building a Sustainable System

Maybe the merger of Japan’s Mitsui O.S.K. Lines (MOL), Nippon Yusen Kabushiki Kaisha (NYK Line) and Kawasaki Kisen Kaisha (“K” Line) points the way forward – bundling market power under one geographic and cultural roof to make better strategic decisions, limit competition and control fleet growth. But this can only work if the mergers are approved by antitrust regulators.

If we imagine a sustainable system, we might postulate a few ground rules for it: Freight rates should never drop below the recapitalization level; new capacity should only be brought into the market when cargo volumes have risen enough to trigger an increase in freight rates; if banks want to make money in shipping, they should lend money to owners, not manage ships directly. If my genie in a bottle were especially generous and granted a fourth wish, it might be that consignors and consignees build long-term relationships with reliable carriers rather than chase price.

A world subject to constraints such as these would probably share more with the gentlemanly era of liner conferences than the carnival in which we all participate today. At this late stage, it must be clear even to price-conscious cargo interests that the instability caused by the current capacity glut outweighs any benefit derived from cheap rates. The tumult of threats against ships at anchorages and cargoes at terminals means that global trade itself ends up being discredited and looking foolish, which adds fuel to the fires set by isolationist politicians.

Regular, high-quality service with fair and honest working conditions for seafarers and self-regulated tonnage will raise freight rates. But given the consequences of the hyper-low freight rates resulting from the repeal of the E.U.’s block exemption for shipping conferences (E.U. Regulation 4056/86) in October 2008, we might wonder whether we should keep on riding this tiger until Europe suffers its own Hanjin – with all the collateral damage that would entail.

Right now there is little doubt that such an arrangement would run afoul of E.U. regulators because we no longer have the aforementioned block exemption. But next time carriers come together to discuss limiting capacity on certain routes, using rebates on freight to lock in longer-term customers, or negotiating rates in accordance with the capital and operating expenditures generated on certain routes, we should pause a moment – especially if “we” are antitrust bitter-enders – and understand that this broken game needs new rules. – MarEx

subscribe