Local economic fallout from Hanjin Shipping Co.’s multibillion-dollar voyage into receivership has yet to be tabulated, but the bill could be considerable.
Even though that voyage for the world’s seventh-largest container freight line is far from done, analysts see little chance of a happy ending. They also see challenges on the horizon for other highly leveraged ocean carriers navigating a sector encumbered with too much capacity and too little demand.
In the words of shipping and transportation analyst Kevin Sterling, the former managing director of Virginia’s BB&T Capital Markets, “it’s a big-time mess.”
The mess at last count includes an estimated US$14 billion in cargo on more than 80 ships adrift in financial uncertainty as terminals refuse to load or unload Hanjin vessels without assurance of payment for services, or those ships remain at sea fearing seizure by creditors.
Two of the company’s ships were arrested recently in B.C. waters after unloading: the Hanjin Scarlet in Prince Rupert and the Hanjin Vienna in Vancouver.
IBISWorld research analyst Ashley Cruz has estimated that Samsung (KRX:005930) alone has US$38 million worth of goods aboard Hanjin (KRX:117930) freighters.
While Hanjin Shipping’s Hanjin Group corporate parent has promised to allocate US$90 million to ensure cargo aboard Hanjin ships can be unloaded, Cruz noted that amount would likely be insufficient.
Korean Air Lines, Hanjin’s largest shareholder, has also agreed to lend the company US$54 million.
Among B.C. businesses with significant skin in the Hanjin game are the world’s largest container ship leasing company – Hanjin is among Seaspan Corp.’s (NYSE:SSW) clients – and one of North America’s fastest-growing container ports.
On September 19, a South Korean bankruptcy court ordered Hanjin to return the 83 ships it charters to the vessels’ owners.
But that move, seen as part of the wholesale liquidation of the company, raises the question of where Seaspan and other major container fleet lessors will find new charter contracts for their ships in an oversupplied sector.
Sterling pointed out that there might be some takers for the leased Hanjin vessels, “but there is no way they are going to get the rates that Hanjin was paying. So maybe they can get some type of lease rate, but it will be at market bottom.”
Seaspan has three container vessels chartered to Hanjin. Estimated future revenue under the three charter contracts as of August was US$364 million. As of May, Seaspan had approximately US$18.6 million in past due accounts receivable from Hanjin.
Seaspan, which is registered in the Marshall Islands but has major offices in Hong Kong, Shanghai, Mumbai and Vancouver, went public in 2005 with a fleet of 10 container ships. It now has more than 100.
Co-chairman of Seaspan Corp.’s board is Kyle Washington, the eldest son of Dennis Washington, founder of the Washington family business empire, which has ownership interests in Seaspan Corp. and North Vancouver-based shipbuilder Seaspan Marine Corp.
Like others in the sector, Seaspan Corp. has been feeling the effects of the slowdown in the global shipping industry.
As reported in “Opportunities on Seaspan radar in global marketplace volatility” (BIV issue 1386; May 24-30), Seaspan Corp.’s first-quarter 2016 financials showed company revenue up 14.3% to US$215.5 million compared with the same quarter in 2015, but net earnings were down 67% to US$7.1 million. Earnings for the six months ended June 30 were down 57% from the same period in 2015.
As of December 31, it was also carrying corporate debt of around US$3.5 billion.
In an interview with BIV, Washington called the rapidly evolving Hanjin saga “an unfortunate situation … a mega deal for sure; it shocked the world.” But he said repercussions for Seaspan from Hanjin’s collapse will be minimal because it represented less than 5% of Seaspan’s charter fleet. Seaspan, according to Washington, remains in a “great position.”
He added that while shipping in general is in a challenging market and container shipping companies in particular “are getting beat up pretty good,” Seaspan will have little trouble finding new customers for the vessels leased to Hanjin.
He said most of the container shipping sector’s financial distress involves smaller vessels of around 5,000 TEU (20-foot equivalent containers) capacity.
The 10,000 TEU Seaspan Saver-design ships leased to Hanjin, he said, are 30% more fuel-efficient than standard ships in that class and are hard to come by.
“So we will be able to find employment [for the ships], if not at the Hanjin rate then very close to it.”
Meanwhile, Ocean Shipping Consultants’ (OSC) 2016 West Coast container shipping outlook notes that Hanjin has been a major customer of Prince Rupert since the northern B.C. port began handling container cargo in 2007.
The loss of that customer for one of North America’s fastest-growing container ports could stall that growth.
But Brian Friesen, the Port of Prince Rupert’s manager of marketing and trade development, said the cargo owners who route products through the port because of its relative proximity to Asia and its direct rail links to the North American heartland “are not going away. … They will continue to look for Prince Rupert routings.”
Friesen declined to say what percentage of the port’s container cargo was shipped via Hanjin, which has accounted for about 8% of all trans-Pacific trade. But he conceded that it has been a major customer.
Dean Davison, co-author of the OSC container outlook, said the loss of Hanjin would have some effect on Prince Rupert, “but not as much as if there was a loss of, say, COSCO [China Ocean Shipping (Group) Co.]”
However, Sterling also pointed out that Hanjin is not the only major carrier facing financial trouble.
“Pretty much all of them are vulnerable,” he said. “If you look at the industry – the [container shipping] rate pressure, the excess supply in the industry; look at companies with leveraged balance sheets – that describes a big chunk of the industry.”
Data from other shipping analysts confirm the continuing depressed nature of the sector worldwide.
Earlier this year, Drewry, a U.K.-based shipping consultancy, noted that container industry revenue is down 18% worldwide in the first half of 2016 compared with the same time a year ago. If the trend continues to the end of the year, it projected carrier losses could reach more than $US25 billion.
But Washington said Seaspan is not worried about other major charter customers running into the same financial complications as Hanjin.
“We monitor all that closely. We try to work with the top credit customers. A majority of our customers are state-owned or state-backed entities. We’re not worried about that at all. [Hanjin] was a unique situation that had a lot of different dynamics.”
With Hanjin likely too far down the road to mount a corporate recovery, the best outcome now would be for South Korea to launch a state shipping line, Washington added.
“South Korea’s economy is really dependent on major exports. They need a strong shipping carrier. So we will see what comes out of it; the game is not over. Seaspan is in good dialogue with the government there, and we’ll see what shakes out.”