Has shipping just had its Lehman Brothers moment? That's the question gripping insurance and international logistics markets this month, after South Korea's Hanjin Shipping Co (Kor:117930) filed for bankruptcy protection in Seoul. The scale of the collapse, sparked after a state-owned bank withdrew support for the loss-making business, is unprecedented in the industry. At last count, Hanjin was the seventh-largest container shipping company on the planet. But the company, which collapsed under debts of $5.5bn (£4.1bn), has also become a somewhat inevitable casualty of a shipping industry hammered by overcapacity and unsustainable cargo rates.
Tepid global demand, a glut of new supply and an inability to scrap vessels fast enough has led to a number of smaller failures in the industry this year, and consolidation among the major carriers. This month, France's CMA CGM completed its $2.4bn takeover of Singapore's Neptune Orient Lines, while the recently announced merger of Germany's Hapag-Lloyd (Ger: HLAG) with United Arab Shipping Company is set to create one of the world's five largest shipping companies. However, these moves have been engineered to bring down costs rather than take market share.
For Hanjin and its partners, the immediate headache has been a legal one; namely what to do with $14bn-worth of goods floating at sea. Reports suggest many of the company's vessels have been left stranded amid fears that international ports or ship owners would either seize cargo or block attempts to dock on the assumption that Hanjin could not pay port fees.
And although the company accounts for just 3 per cent of global shipping container capacity, the impact has already been felt elsewhere. The Baltic Dry index - the global benchmark for the cost of transporting raw materials by sea - pushed to an annual high in the days following Hanjin's collapse, while container rates for the major global shipping lines between China and the West surged by as much as 42 per cent (see graph below), as shippers rushed to book containers with alternative carriers.
"A major upheaval of supply like this is likely to cause extreme short-term price volatility," said Richard Heath of the World Container index in the wake of Hanjin's bankruptcy. "Shippers should expect increasing freight costs and tight allocation for several weeks at least."
That could provide some relief for Hanjin's peers, however brief, potentially leading to higher costs for companies that have come to rely on low shipping rates in the past two years. In the short term, the fallout is likely to be most keenly felt by companies using Hanjin's lines, such as electronics giant Samsung Electronics (Kor: 005930), which scrambled to recover around $38m in stranded cargo last week. But given that around 90 per cent of the world's goods are carried by sea, usually in containers, any uptick in rates is likely to weigh on operating profit margins of retailers everywhere.
It is already preoccupying the minds of UK plc. In a quarterly call with analysts last week, Dixons Carphone (DC.) implied that the collapse would have relatively little impact on the electronics retailer's inventory or product availability, but other companies will be watching to see if there is further fallout from Hanjin's demise.
