Worldwide: Hanjin Ships Facing Globalisation Storm

Last Updated: 29 September 2016
Article by Giorgio Bianco

In 1972 the mathematician Edward Norton Lorenz asked "Does the flap of a butterfly's wings in Brazil set off a tornado in Texas?"; then, a very similar concept is found in the movie The Butterfly Effect "It has been said that something as small as the flutter of a butterfly's wing can ultimately cause a tornado halfway around the world".  Both these quotes refer to the so called butterfly effect also known as chaos theory.  As far as Hanjin Shipping Co. Ltd is concerned it could be said that globalization has played a role in speeding up the effects of the initial event and all the subsequent consequences leading to this particular "tornado", even if, in this case, the "tornado" is a financial and economical one and it did not start in Brazil, but in South Korea.  

We have recently heard the news about the financial crisis of the colossus Hanjin Shipping Co. Ltd., one of the biggest shipping companies in the world.  Until 31 August 2016, it was the first company for container transport in Korea and the seventh at a global level.  Its 141 ships are now scattered worldwide and more than 60 ships are out of harbours waiting for the permission to dock and unload many of tons of merchandise, worth about 14 billion dollars.

The request for declaration of bankruptcy filed by Hanjin Shipping did not really come out of the blue: the company has been experiencing losses since 2011 and it was only a matter of time before sponsor banks decided to abandon ship (literally).  Nonetheless, Hanjin is not the only company in this field to face crisis, most shipping companies are dealing with financial problems: for example, MAERSK, the first shipping company in the world, loses 11 dollars for each shipped container (Hanjing was losing 100 dollars per container), due to an increase in the number of ships that have disrupted market demands.  Modern ships can transport 18 thousand containers, thus overloading the global market and destroying small competitors.

The unstable economic position of Hanjin has affected many other companies, in effect creating a butterfly effect, often reaching States that were a considerable distance from the place where the crisis was born, e.g. Italy.  The Hanjin bankruptcy has halted many ships just out of harbour, making it impossible for them to dock as there is no certainty they will be able to pay the fees, workmen, captains and fuel necessary to cover disembarkation procedures.  In Italy, Hanjin was the first company for La Spezia port, where it shipped about 90 thousand containers annually, and where ships remained blocked until 9 September waiting for the permission to unload (which was then given thanks to the cooperation among several port operators, willing to help owners); in Genoa, the company has closed its offices, leaving 80 people without their jobs.  

A procedure has been started by the Korean company, known as Rehabilitation Procedure, which according to South Korean law is regulated by the Debitor Rehabilitation and Bankruptcy Act. It includes the appointment of a curator by the tribunal, in this case the same president and CEO of Hanjin (Mr Tae-Su Seok), who must manage the company and propose a debt restructuring plan in order to save the company, if it is possible. It is similar to the Italian "amministrazione controllata", or the British re-structuring, albeit with some variations.

The curator is now receiving the requests from creditors for the proof of debt. The requests have to be filed through spontaneous registration of the entitled creditors at the bankruptcy department of Seoul Tribunal. The time limit for filing the requests, together with evidence of credit and probative documents, is from 20 September to 4 October 2016, at the address of Central District Court of Seoul Bankruptcy Department. The curator then examines the requests and proposes a debt restructuring plan before 23 December 2016.

Beyond these time limits, there is the risk of losing credit rights towards Hanjin, and it has to been said that the settlement amount is likely to be lower than the one requested.

For those companies who own the merchandise are now in the paradoxical situation of not having access to their own goods because the Hanjin ships are being denied permission to dock; it has to been remembered that the reference authority here is the port and not the shipping company (as happened in La Spezia).  The Seoul Court has requested the major creditor of the company to cover the costs for docking and unloading the container ships, while it is possible that Hanjin parent company will give 90 million dollars to cover expenses, to reduce losses and avoid the company collapse.

Despite all these vicissitudes there have been some positive outcomes for the global market: after 31 August, a very positive period for rentals commenced. In fact, after the news about the bankruptcy, rentals grew to 50% in a few days, following the principle mors tua vita mea.

Some have compared Hanjin crisis to that of the Lehman Brothers bankruptcy which eventually led to world economic crisis in 2008, due to the fact that this crisis could also spread like wildfire and impact on many other industry sectors that are completely separate from those involved with the shipping market. The Wall Street Journal published an article on 13 September which linked Hanjin "tornado" with the financial sector, which has recently invested huge resources in building new ships. The newspaper focused on German finance as approximately 17.5 billion dollars has been invested just in 2015; there is a risk that an evolving financial crisis may drag down the sponsor banks.  

Despite all the above mentioned news, the overall situation concerning maritime transport is not so negative. First of all, in Europe there is a project called Short Sea Shipping (SSS) that can be defined as the maritime movement between ports in the Union at one side (in Italy, Trieste, Gioia Tauro and Genova benefit most from this program)  and those of other European regions and of  the Black Sea at the other side. In 2014, 582 million tons of goods were shipped under the SSS. This system is thought to be safer, more economic and eco-friendly for the shipping of goods and people.

Secondly, at least ten percent of these companies are dealing well with the crisis, including the Italian fleet whose modern innovative ships place it third in the European market, thanks most of all to its traffic in the Mediterranean area. Italian stopovers deal most of all with International merchandise, covering 65% of total traffic. The leading company, Electrosteel, has recently chosen Cagliari port as the base for traffic in all the Mediterranean.

This is proof of the efficiency of a new approach, demonstrating that it is not necessary to be the biggest and travel the farthest to win the day.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Giorgio Bianco
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