The bankruptcy of Korea’s largest shipping company could make it a difficult festive season for the country’s export giants, writes Ed Wiltshire.

 

For retailers in the US, UK, Europe and elsewhere, this is a critical time of year when they build up inventories in readiness for the end of year holiday season. But numerous toys, trainers, televisions and smart-phones that should be heading for the shelves of shops or the warehouses of internet retailers are currently marooned on the high seas due to the bankruptcy of Korea’s Hanjin Shipping.

The company is Korea’s largest container carrier and, with a global market share of nearly three per cent, is also one of the world’s top ten. Operating over 100 container ships, it moves more than 100 million tons of cargo annually. South Korea is the third largest exporter of containerised cargo globally after China and the US, and Hanjin Shipping, together with its smaller domestic rival Hyundai Merchant Marine (HMM), carries the vast majority of the country’s exports, including goods from household names such as Hyundai, LG, Kia and Samsung.

Such carriers are a vital part of the physical reality that underpins global trade. However, at the end of August, Hanjin Shipping went into receivership; the most obvious victim of a global shipping industry suffering from oversupply issues whilst going through its most significant downturn in six decades.

Hanjin’s application for court protection was an attempt to buy time before the creditors moved in, but it led to some unfortunate consequences. While three of Hanjin’s vessels had already been seized, more than seventy remained stranded at sea. Port authorities in the US, Asia and Europe turned these ships away; unwilling to let them dock when the payment of port fees could not be guaranteed. They were also concerned that attempts by creditors to seize the contents of the containers might disrupt port operations.

As well as posing logistical challenges for global retailers, it also has significant implications for Asian exporters. Korea’s Samsung Electronics and LG Electronics, giants in the consumer electronics market, depend on Hanjin Shipping to get their goods to major markets. LG Electronics is the world’s second biggest manufacturer of televisions; Samsung is the global leading mobile phone manufacturer with smartphone sales exceeding those of Apple. LG sends 20 per cent of its overseas shipments via Hanjin; for Samsung the figure is double that.

The hold-up illustrates how dependent global companies are on an effective transport and logistics infrastructure. In a court filing of its own, Samsung provided information on the impact of Hanjin’s troubles on its business. The company detailed $24 million worth of visual display parts and goods stranded on route to its factory in Mexico, together with $13 million worth of white goods such as washing machines, refrigerators, microwave ovens and dishwashers packed away in various sea-bound containers. 

Samsung filed in support of Hanjin’s Chapter 15 US Bankruptcy Court petition, arguing that without protection against its creditors the shipping line wouldn’t be able to dock and unload its containers. Without immediate unloading, Samsung would be obliged to fly in alternative parts to meet its own contractual obligations. The company claimed it would cost nearly $9 million to charter sixteen planes for that purpose.

Given the stakes involved, all parties are keen to clear this logjam and get these ships moving again. Hanjin Group chairman, Cho Yang-ho, said the company would provide over $90 million of emergency funding to its shipping unit, with 40 per cent coming from his own personal wealth and the remainder borrowed from banks using the group’s stakes in port terminals as collateral. The South Korean government offered a similar amount in low-interest long-term loans to the company.   

These numbers, however, represent only a small proportion of Hanjin Shipping’s $5.5 billion debts and are not intended to secure the company’s survival. That seems an unlikely event now that the South Korean government apparently no longer views Hanjin as ‘too big to fail’. The chairman of the state-run Korea Development Bank (KDB), one of the company’s creditors, presumably reflected the view of the authorities when he refused further financing, saying that lending more would be like “pouring water into a broken jar”.

These are challenging times, and not just for Hanjin. Korea’s exporters are left to struggle with the immediate implications of their goods being marooned at sea while also having the problem of finding new shippers as quickly as possible. For one thing, it can’t be assumed that HMM will fill the void. Korea’s next biggest shipper faces a similar predicament to its rival as it works with KDB, its main creditor, on a restructuring designed to ward off bankruptcy. If the Korean government ultimately decided Hanjin was not too big to fail, the smaller HMM must be feeling all the more vulnerable.

Emergency funding from Hanjin’s parent company may be enough to reassure port authorities that fees can be met while those ships currently marooned at sea are unloaded.  And they may help Korea’s major exporters minimise further delays in supply lines to retailers as they gear up for the holiday season. Whatever the outcome, Hanjin’s difficulties are making life for Korea’s struggling exporters a little more awkward at just the wrong time. Christmas waits for no man: if Korean-made smartphones, trainers, toys and televisions aren’t available to be gratefully received then those of their international rivals will be.

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