Friday, September 16, 2016

Ripple effect from high seas shipping company failure inevitable

Effects of the Hanjin shipping line collapse continue to spread even as Korean electronics companies and U.S. retailers work desperately to untangle the mess before Christmas shopping season.

Like the fate of many small trucking companies, Hanjin failed because of shipping overcapacity. To keep up with boom-time growth in the early 2000s, major shipping lines ordered massive new container ships. Those orders could not be canceled when the world economy faltered in 2008. The new ships typically handle 19,000 containers compared with the 8,000-container ships regarded as huge just a decade ago.

Just like new trucks bought by optimistic fleets in the early 2000s, those big ships were put in service to generate revenue. All that capacity forced rates down.

Sound familiar?

When one or a hundred small truckers go out of business, few notice. But as we now know, when a major container ship line suddenly goes out of business, everybody notices.

Hanjin was the seventh-largest container ship line in the world when it suddenly declared bankruptcy on Aug. 31, leaving almost 100 ships and 500,000 loaded containers in a kind of limbo. Hanjin ships have been unable to leave port until someone pays for the port’s services. Hanjin ships at sea have been refused docking facilities until payment is assured for the services they will need. According to many reports those payments are emerging – very slowly.

So far, at least, the impact of Hanjin’s demise on the overall U.S. truckload industry has been minimal, but not for the drayage truckers who haul to and from container ports. At least some are truckload companies like Clark Freight of Pasadena, Texas. Clark operates 175 trucks.

“More than half of our revenue is from container freight, most from the Port of Houston,” said Danny Schnautz, vice president at Clark. “We handle hundreds of containers a day.”

Some of those containers take long truck rides. Clark operates in 49 states, Schnautz said.

“Many drayage carriers are owed money by Hanjin,” he noted, “Cash they’re not likely to see.”

Schnautz also pointed out it isn’t only ports holding Hanjin containers. Some railroads are also demanding money up front to release containers in transit.

“Often that money comes from someone like Samsung whose goods are in those containers,” Schnautz said.

Two weeks after the initial shock, some freight has moved as major shippers like Samsung have stepped in to arrange payment. Those payments do not involve carriers, Schnautz said. Usually the shipper will work though its import agent who handles the details and the money. Payment has been made before the driver picks up the container.

But much freight remains stuck and confusion prevails as lawyers wrangle over who is going to pay for what, and some logistics experts predict a glut of empty Hanjin containers. Because no one is obliged to pay for handling and storage, some say empties will be stuck in place for some time, perhaps causing shortages and supply chain disruptions.

Schnautz doesn’t believe the disruption will be too severe.

“Many containers aren’t actually owned by the shipping line. They’re owned by leasing companies,” he explained.

Those leasing companies will want their Hanjin-leased containers returned so they can lease them to other shipping lines. Obviously, other shipping lines will be absorbing Hanjin’s business.
Meanwhile, another challenge for truckers looms. As Hanjin containers are eventually unloaded and released, surges in freight could result.

Schnautz said the surges would be a particular challenge for the California companies called transhippers. They strip incoming containers and forward the contents to different locations around the country. At some point as containers are finally unloaded, transhippers could be swamped.

“It’s called the accordion effect. Things are slow for a while and rates may go down a little bit. But at some point they’re going to be jumped on,” Schnautz explained. “Hey, there are five loads out there and we need all of them moved right now!”

With the Christmas season pressing retailers and retailers pressing everyone else, there is bound to be a gush of freight at some point. Schnautz predicts what he described as, “a three to four week madhouse.”

That “madhouse” will involve carriers as well as transhippers.

It may not be that far off. On the West Coast, the Port of Oakland and the Port of Long Beach, ships are being unloaded. On the East Coast, however, Hanjin ships wait outside New York and Savannah.

Meanwhile, news on the crews isn’t easy to find. According to media reports, stranded Hanjin ships at sea and in ports have been receiving food and medicine, usually paid for with the cash Hanjin supplied to each ship captain. No word on what happens when that cash runs out.

People who watch the maritime industry say Hanjin won’t be the last ocean carrier bankruptcy.

Let’s hope the next one will be managed with more foresight than the Hanjin debacle.