South Korean behemoth Hanjin Shipping is in trouble, and that could set off a scramble at the ports of Los Angeles and Long Beach.
The company said last week that it is partnering with creditors in an attempt to restructure $4.9 billion in debt and avoid a government takeover. While negotiations over the company’s future take place across the Pacific Ocean, the company’s turmoil – and the broader impact of a global shipping slowdown – could soon be felt in Los Angeles as Hanjin and competitors also experiencing losses look for ways to increase revenue by limiting the amount of space on ships.
The most tangible impact is likely to occur at the Port of Long Beach, where Hanjin Shipping operates one of the port’s six cargo terminals. Hanjin’s terminal operations, run by a subsidiary called Total Terminals International, could reportedly be sold as part of the reorganization plan.
While exact numbers for Hanjin are proprietary, the shipping line is one of Long Beach’s largest operators and handles about 1 million of the roughly 6 million 20-foot equivalent units (TEUs) that pass through the port each year.
Hanjin has been particularly hard hit by its ship costs. The company operates 95 freight ships, 58 of which are chartered and 37 owned. The leases are proving particularly problematic and the company is seeking to lower the rates it pays to ship owners by 30 percent, in addition to restructuring its bank debt.
Noel Hacegaba, chief commercial officer for the Port of Long Beach, acknowledged the Hanjin situation is in flux but said the company has a long-term lease at the port until 2027. Port officials, he said, are monitoring the situation closely.
“We meet regularly with our terminal operators to review business,” he said. “Operationally, things are moving smoothly through the port,” he said regarding Hanjin’s situation.
The impact of Hanjin Shipping’s restructuring could stretch much farther. The company is part of Hanjin Group, a type of huge, multifaceted conglomerate known in South Korea as a “chaebol.” The Hanjin chaebol includes Korean Air, which has a huge footprint at Los Angeles World Airport and is financing the $1.2 billion, 73-story Wilshire Grand Tower downtown. It also owns a 33 percent stake in Hanjin Shipping. Whether the debt restructuring of Hanjin Shipping bleeds into Korean Air’s bottom line was not addressed in a recent statement by a company spokeswoman regarding its financial situation.
“The Hanjin Group will fully cooperate with creditors to alleviate the issues at Hanjin Shipping, and Korean Air has no plans for future investment,” the statement reads.
For its part, Hanjin said in a statement that its discussions with creditor banks regarding a voluntary restructuring plan are progressing.
“We will put our utmost effort and work closely with the creditors to achieve business normalization within nearest future,” the statement reads.
Asked if Hanjin’s financial woes would affect either the construction of the downtown tower or Korean Air operations at Los Angeles Interna tional Airport, a spokeswoman issued only a brief comment: “The answer to both of these is no.”
Global downturn
Hanjin’s precarious financial position is not an isolated one. Hyundai Merchant Marine, another South Korean shipping giant that’s part of the Hyundai chaebol, is also involved in a debt restructuring led by its creditors. Additionally, Danish shipping conglomerate Maersk Group, the world’s leading cargo shipper by volume, reported a 2015 fourth-quarter net loss of $2.5 billion. China’s two leading shipping companies, Cosco Group and China Shipping, received approval to merge in December.
South Korean conglomerates, known as chaebols, are unique to that country and play by a set of rules more complex than do most U.S. multinationals.
The primary distinction is that these companies operate, essentially, as family dynasties. While companies such as Samsung, Hyundai and LG all have dozens of subsidiaries, they are controlled by a single chairman who handpicks chief executives and makes sweeping decisions that can make or break the fortunes of multiple businesses. Loans can be made between companies controlled by a chaebol, which sometimes blur traditional corporate lines.
Most of the chaebols were formed in the 1960s and ’70s as a means to spur economic recovery in the wake of World War II and the Korean War, which left the country impoverished. The state orchestrated transactions and awarded contracts to both established companies such as Samsung and upstarts including Hyundai.
The chaebol model has been criticized in recent years, however, for not operating as some Western investors would like. Samsung weathered a challenge from activist investor Elliot Associates in 2015, which attempted to block an heir from being installed as a company leader.
Hanjin Group’s travails also have elements of family drama: Cho Yang-ho, chairman of Hanjin Group and Korean Air, was forced to apologize in 2014 for his eldest daughter, a former executive at the airline, after she ordered a flight to return to its gate at New York’s JFK International Airport because she was unhappy with how her macadamia nuts were served; his sister-in-law is now under investigation for dumping a huge number of shares before a massive stock-price drop. – Henry Meier
The volatility in the shipping industry is a product of several factors, according to Paul Bingham, vice president of Boston’s Economic Development Research Group and head of the firm’s logistics and trade division. He said shipping companies became obsessed in the last decade with lowering the cost to ship each TEU, and to do that commissioned bigger and bigger vessels. These super ships – typically more than three times larger than previous max-capacity freighters – have come online at the wrong time, he said.
The economic slowdowns in China and Europe have significantly reduced shipping demands and driven freight rates well below the $1,000-per-container rate generally accepted to be the price shippers need to break even.
In the eight years following the Great Recession, Bingham said shipping companies have only turned a profit once: in 2010.
“Every other year they’ve lost money,” he said.
Bingham and other shipping insiders said mergers and acquisitions are likely on the horizon. Miguel Reyes, a manager at the Port of San Diego trade development office, said everyone in the industry was bracing for change.
“There’s going to be a lot of consolidation,” he said. “Across the board the container business is in rough shape.”
Bingham also explained that as the industry reshuffles, a battle could emerge between the two local ports for business. That’s because even if no formal mergers take place, shipping firms are forming inter-company agreements known as alliances in order to better control the supply of freight space on their vessels and drive up the cost per container. That reduced shipping volume could have a knock-on effect at the ports.
“With freight rates going down, mergers and alliances are definitely possible,” said the Port of Long Beach’s Hacegaba.
Hanjin’s much-rumored potential alliance with Hyundai Merchant Marine could set off a scramble between the Los Angeles and Long Beach ports should Hanjin and Hyundai decide to decrease shipping volume in the region.
“It’s somewhat of a competition between the Port of Los Angeles and the Port of Long Beach,” Bingham said. “It’s unlikely that you’ll see terminals with no customers, but in the long run there could be some consolidation of terminal operators.”
