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Why Hanjin’s Zombie Collapse Won’t Be the Last One

by Wolf Richter, Wolf Street:

China Containerized Freight Index remains near record low.

Hanjin Shipping Co. filed for the equivalent of bankruptcy protection in South Korea on August 31 and over the past two weeks in the US and dozens of other countries. Some of its ships are still idling at sea, trying to out-wait the uncertainty, and being seized by creditors. Some have made it to port and are being unloaded. Others have already been sold at fire-sale prices.

When US Bankruptcy Judge John Sherwood asked Hanjin lawyer Ilana Volkov if the carrier was liquidating, she said: “There is no clear visibility yet on what will happen with this business.”

The seventh largest container carrier in the world is not the only carrier in financial trouble. Another huge Korean carrier, HMM, was restructured and bailed out earlier this year, with creditors, including the Korean taxpayer, taking a big hit. The state-owned Korean Development Bank is now its largest shareholder.

Whatever the company-specific reasons, the entire industry has been caught up in a collapse of the rates they charge to transport containers across the seas. This started in early 2015, as a result of a shipbuilding boom of historic proportions, fueled by cheap money, endless liquidity, yield-desperate investors, and over-optimistic projections of demand. It created a vast oversupply of container ships that will continue to get worse through 2017 as a slew of new ships, ordered years ago, are being delivered.

It coincided with lackluster demand for shipping goods, particularly a decline of exports from China (-1.8% in 2015) and South Korea (-5.1% in 2015).

Having acquired these ships with borrowed money, carriers are now weighed down by enormous amounts of debt, and when cash flow curdled, the math, which had been iffy before, no longer worked at all, turning some of these carriers into zombies.

But since Hanjin’s collapse, the meme has started to circulate that container shipping rates would soar, that Hanjin’s ships would be sidelined during peak shipping season and that shippers would have to scramble to find other carriers to transport their containers, and those carriers would jack up rates and get away with it.

That optimism may have been largely based on wishful thinking.

The Shanghai Containerized Freight Index (SCFI), which tracks only spot-market rates (not contractual rates) of shipping containers from Shanghai to 15 destinations around the world, had started plunging in February 2015. Carriers, desperate to get loads together, were accepting rates far below cost. Last March, there finally were rumors that some carriers quoted rates of “zero.”

At the time, we warned of Hanjin’s impending bailout or bankruptcy and, as I wrote, “the awkward side effect of stranded cargo.” The SCFI, which is very volatile, hit 415, down 62% from February 2015! But the “zero” rate rumors marked the low point of the rates.

In April, the SCFI began to zigzag higher, reaching a still unsustainably low 750 at the end of June, up 80% from the March low, before it plunged, jumped, dropped, and jumped again in its volatile spot-prices manner.

The chart of the SCFI shows this volatility. But during the first two complete reporting weeks since the Hanjin collapse, circled in black, the index has barely budged and is now at 794. It remains 28% lower than it had been in February 2015:

During the week, spot rates from Shanghai to the US West Coast dropped by $7 to $1,749 per TEU (20-foot equivalent unit container). Spot rates remained flat to the US East Coast and dropped to several other destinations, including an 8% plunge to South America. Rates increased significantly to the Mediterranean and South Africa. Rates to Europe edged up $23 to $966/TEU. This is where the action has been. After bottoming out in March at a catastrophically low $211/TEU, rates to Europe have since soared 357%, most of it over the spring and summer, before the Hanjin collapse.

Read More @ WolfStreet.com

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