CBRE offers up take on Hanjin bankruptcy situation

In light of the recent news regarding the bankruptcy filing of Korea-based Hanjin Shipping, the seventh largest ocean liner in the world that handles roughly 7% of U.S.-Asia cargo, there has been numerous questions what happens next in regards to cargo on Hanjin vesels, the ocean shipping market general, carrier alliances, supply chain operations and inventory management and rates, among other concerns.

Logistics Management Group News Editor Jeff Berman recently spoke with Joe Dunlap, Managing Director of Supply Chain Services for industrial real estate firm CBRE and Melina Cordero, Head of Retail Research in the Americas, for CBRE. A transcript of the conversation follows below.

Logistics Management (LM): What factors in global shipping contributed to Hanjin’s troubles?

Joe Dunlap: I think I would bring it back to fundamentals over a longer period of time and longer-term impact of how steamships have shifted from slow steaming to extra slow steaming and combine that with that impact that in some cases became a long-term process resulting from a short-term trend back when we were all talking about green logistics and supply chain sustainability, with slow steaming and extra slow steaming creating better margins and efficiency for the ocean carriers. And it also created a need for more ships in certain shipping lanes, where you may run one port of call from Shanghai to Los Angeles per week, and you may have seen the impact of extra slow steaming and need to add a ship or a second ship, going from six ships in that lane to eight ships, so that increases overhead and assets. And the impact of post Panamax plus larger ships that hold more than 10,000 containers brings the need for these larger assets. The long-term effect of that was magnified with the last 12 months of declining container rates and the recent slowing of volumes. You might also argue there has been some impact of some of the West Coast importers that have shifted ports, which creates more capacity issues of ships coming into the West Coast and then there is the broader impact of idling vessels, where some carriers are idling vessels intentionally to better utilize those that are in circulation. The more recent trends compounded the longer-term effect of other activities. My suspicion is that those carriers that were susceptible to thin margins became very asset-heavy. Without knowing the specifics of Hanjin’s financials, when I look at their revenue, you can kind of see the trend line occurring over the last four years that their revenue has been on a very steep decline.

LM: In what ways does the carrier alliance factor come into play in the name of rates sticking and capacity commitments, as well as Hanjin’s role in alliances?

Dunlap: I have always viewed alliances as a way in which smaller vessel companies were better able to share space and for smaller and medium-sized firms to better compete against and leverage the bigger ones. Hanjin is a relatively large carrier and perhaps did not benefit as much by an alliance. I looked at a recently published vessel sharing agreement report and it did not have Hanjin listed, which meant to me that maybe this news was coming for a while, as well as other carriers also jumping ship from alliances they were previously in. I think this has been a slow process that many did not really recognize until it happened.

LM: As far as alternatives available for importers that relied heavily on Hanjin, what are those alternatives at this point, given the reports about certain ships being arrested and cargo stuck out at sea?

Dunlap: It comes down to shippers’ transportation departments understanding and figuring out if they had any containers on Hanjin assets or at ports as a first step and then figuring out the subsequent impact. I think there is a very challenging process to go through, if you will, because they are kind of handcuffed. But for those who are less impacted, I think what it is creating is a situation in which they are having to reassess freight alternatives as well, because capacity in that segment of the industry is going to tighten up and they are looking at how to make sure they are not impacted through the holiday importing season and make sure they are booking space with other carriers. If a shipper already has a contract and is “handcuffed” with Hanjin now, it needs to be getting a new agreement set up with another carrier or alliance and start booking space. I was talking to a fashion retailer that does about 5-10 percent of air freight, and some of their slower merchandise now needs to be airfreighted so they hit their numbers in the coming months and quarters. Longer-term, one needs to recognize that for companies that were not impacted, with the long-term effects not only of a potential rate increase from capacity tightening, like what happened to Hanjin, it is a reminder to diversity or have backup plans to redirect when needed so this does not happen to them. But it also deleverages their position of power in negotiating rates. There are a few negatives that are going to impact a lot of people on the rate increase side due to capacity and diversifying their freight carriers.    

LM: There is always a lot being discussed with excess ocean capacity. Will there be a situation in which we see more capacity come online as a result of what is happening with Hanjin, given how much global ocean cargo they handle and move? Also, what does this mean on the rate side?

Dunlap: Without definitively knowing what is going to happen, creditors could refund Hanjin and it could sort of emerge relatively intact and capacity could be in play. Another option might be that other firms decide to buy up those assets and those ships could be divvied up among other players in the market and that capacity stays in play. Or there may some other longer-term impact where that capacity goes away and a portion of those ships are decommissioned or there are other more radical activities. There are options in which that capacity stays in play, and we are already over capacity so that option would likely keep rates relatively low, as demand has been soft. But as capacity goes away the concern I have is the effect on capacity and potential rates. It is going to create a type of behavior which focuses on how companies source and tender those moves and may require them taking a few more conservative steps in the future to protect themselves from being impacted. What ends up happening to the physical assets on Hanjin’s ships will be indicative of what happens in terms of rates and capacity. We will have to see what the creditors do.

LM: How do you view the retail inventory disruptions as they relate to this situation with Hanjin?

Melina Cordero: This issue is impacting billions of dollars in retail merchandise, and I think a lot of it is mostly apparel and some electronics this is supposed to be going on shelves but is stranded at ports or at sea at this point. And these types of bankruptcy situations can take months to resolve a lot of times.  The challenge for retailers and their suppliers is that this merchandise represents a lot of money that is not going to make it onto shelves. And a lot of this merchandise is not for just now but also for the holidays, because retailers will usually stock up on these things months in advance in preparation. Retailers are now having to scramble to figure out how to place new orders and to logistically look at different suppliers, and transportation options. It is obviously a huge logistical nightmare. But it is also really high in costs, as having to re-order merchandise they probably already paid for in addition to shipping costs, with demand surging due to this situation, means that the costs are higher, especially because they will now have to expedite a lot of these things. The logistical nightmare plus the cost implications are obviously going to affect the seasonal profit margins for many retailers. That is the immediate conundrum.

LM: How will inventory disruptions caused by Hanjin’s troubles affect holiday merchandise levels and shelf stocking and how are retailers responding?

Cordero: Retailers do have a little bit of wiggle room before the holidays to make alternative arrangements, so it will cost them more money than they had planned. The other thing is, and it is hard to know for sure, is a lot of these retailers are tight-lipped in that they don’t want to publicly disclose how much inventory was impacted by the Hanjin situation. Retailers, especially the larger ones, are waiting to see what happens in case this situation gets resolved more quickly than anticipated. So we are not getting much direct feedback from the retailers right now, but retailers have kind of learned their lesson over the years about relying too heavily on one player in the supply chain. It is highly unlikely we will see a retailer whose entire shelves are just not stocked, because of this disruption. Things won’t be that dire, but retailers want to cover their bases and really the most important thing is making sure they made alternative arrangements for their holiday merchandise as it is the most important time of the year for retailers, especially the brick and mortar ones.

LM: Is it fair to say this would not be as pressing of a situation had it happened earlier in the year, while it is not ideal any time of the year?

Cordero: It is not just things shipping now. All of the retailers that had contracts or pre-scheduled things with providers throughout the next six months are having to look ahead at all of those orders and come up with alternatives. It is not just things for now, it is also things that were scheduled to arrive via Hanjin over the next critical three months, so it is just a lot of logistics and cost implications for retailers.

LM: How does this situation impact other parts of the supply chain? 

Cordero: There is absolutely a ripple effect throughout, especially with trucking companies that had contracts with Hanjin and are responsible for taking merchandise from ports to large DCs. For smaller players there are more issues in that maybe they don’t have the profit margin to support this kind of temporary blow.

LM: In regards to whatever type of long-term impact this brings, is it more of a wait and see approach at this point, given the unknowns?

Cordero: It depends. Certain players can afford to wait and see, notably those with a smaller portion of their business moving on Hanjin assets. Smaller players cannot afford to do so because if they wait even a month to make alternative arrangements to get things on shelves they risk being stuck in holiday season with less merchandise to sell and they cannot really wait on that, given that there are likely several retailers affected by this.