Will This Bankruptcy Grinch Ruin Christmas?

Last week, I went to the BJ's Wholesale Club near my house. Unsurprisingly, Halloween decorations, candy, and costumes greeted me as I entered. But the next two aisles, to my amazement, were filled with Christmas stuff. At the time, it was still September!  

While there are surely children eagerly writing up their lists for St. Nicholas, isn’t it a bit early for parents to ponder whether their children deserve shiny toys or lumps of coal? Whatever they decide, when it comes to actually purchasing the presents, there are few doubts about availability. This is a testament to the spectacular sourcing abilities of companies like Amazon, Target, and Walmart.

But there have been times when shortages of “hot toys” sent parents scurrying in search of the season’s must-have gifts. Just think of Cabbage Patch Kids, Tickle Me Elmo, Beanie Babies, or Furby. 

Demand-driven shocks are one possible source of potential disappointment; another is a supply disruption. In this regard, it’s worth noting the world’s 7th largest shipping company just collapsed. Two months ago, banks withdrew support for Hanjin Shipping, South Korea’s largest shipping firm, forcing it to file for bankruptcy and temporarily disrupting global supply chains.

Worried that they wouldn’t be paid, ports all over the world refused Hanjin’s ships, leaving them—and their half-million containers carrying $14 billion worth of cargo—floating at sea. Further complicating the situation were fears that ships, serving as security for the debt, might be seized upon docking at ports. Crews, cargo, and collateral were left in limbo.

It’s worth noting the world’s 7th largest shipping company just collapsed.

One ship, the Hanjin Louisiana, was stranded for a month before it docked in Singapore. According to the BBC, “the crew had worried about running out of food.” In another case, the Wall Street Journal reported Seattle dockworkers “staged a brief work stoppage in solidarity with the crew of the Hanjin Marine, after crew members dropped a banner off the side of that ship that read, ‘We deserve shore leave.’”  

The Hanjin Louisiana was stranded for a month before it docked in Singapore.

Hanjin received new funding in September, and ships have started unloading; the South Korean government expects most of the process to be completed by the end of October. Despite this progress, the future of the company, and the extent of the economic damage caused by its collapse, are unclear.

Domestically, the disruptions have effectively frozen the South Korean port of Busan, raising the specter of 11,000 job losses. (Proportionally, this would be similar to having 66,000 jobs at risk in the United States.) Locals worry that the city may lose its place on the routes of major shippers as traffic shifts to hubs like Singapore. Other impacts might include higher shipping rates for exporters, thereby decreasing South Korean competitiveness and potentially snowballing into larger implications for the economy. 

What drove the bankruptcy filing? In short, a perfect storm of rising supply accompanied by falling demand. On the supply side, capacity of the world’s container ships grew 240% over the last decade, averaging increases of 9% per year. Why did supply grow so rapidly even after the global financial crisis? The short answer is that it takes a long time to build a ship and shipbuilders had large backlogs of orders to fill. At the dawn of crisis, “orders for new vessels were as much as 50 percent of the existing fleet,” according to Reuters. And when you consider the Chinese economic slowdown wasn’t globally acknowledged until 2013 or so, the picture begins to make more sense.

Capacity of the world’s container ships grew 240% over the last decade

This increasing supply coincided with falling demand. The World Trade Organization is predicting that 2016 will be the worst year for global trade since the financial crisis, with growth estimated to be around 1.7 percent. And it’s not likely to rebound quickly: analysts are not expecting demand for container shipping to grow more than 2 percent per year over the next two years.

With supply rising and demand slowing, shipping rates have plunged. According to Reuters, “Container rates from Shanghai to the U.S west coast have more than halved” since 2010. Despite expectations that ten percent of capacity will either be idled or scrapped next year, supply is still expected to grow 5 percent, exacerbating the industry’s difficulties.

It was in this environment of dire overcapacity that Hanjin Shipping found itself drowning in debt; in 2015, it owed $5 billion while earning just $6 million in net profit, following years of losses. Between January 2011 and February 2012, the company’s stock price fell 58% in won terms. Through April 2015, it lost another 53%. And since then, it’s plummeted another 86%. Overall, the stock has fallen 97% from its peak.

Why should we care? Well, to begin, Hanjin is a global shipping behemoth, and disruptions to its operations can ripple through our tightly coupled system of global trade. The company holds 3.2% of the world’s shipping container capacity, moving 10% of containers between Europe and Asia. Companies affected by the disruption include Samsung, LG, Nike, Ralph Lauren, and Hugo Boss. According to the CEO of Seaspan, “The fallout of Hanjin Shipping is like Lehman Brothers to the financial markets...It’s a huge, huge nuclear bomb. It shakes up the supply chain, the cornerstone of globalization.”

Hanjin’s difficulties will produce both winners and losers. Other shipping lines are clear winners as they benefit from a sharp increase in rates. These higher rates will hit shipping customers, but not all will be affected evenly: according to one analyst, large customers are facing little disruption to services since their shipping is diversified across multiple lines, but for smaller ones, “this could be devastating.”

And as the shipping world acknowledges overcapacity and consolidates, large customers could soon find themselves as vulnerable as small companies. Might this trend be motivating Amazon to vertically integrate its global supply chain? Jeff Bezos’s company recently leased forty Boeing 767-300s to build out “Prime Air,” effectively firing a shot across the bow of FedEx and UPS. 

Meanwhile, according to the Wall Street Journal, Amazon is also “buying long-haul truck trailers to ship by ground, building delivery drones to conquer the sky and looking to manage shipping by sea.” Might Amazon be in the market for an ailing shipper? Courts are exploring a sale of Hanjin, and while most would point to rivals like Maersk Group as a potential buyer, it might make sense to think more broadly.

So what do these dynamics mean for holiday shoppers? It’s still too early to say, but prices could be higher if retailers pass along higher shipping costs. If they don’t, retail margins might fall.

But even if Christmas stockings are not affected, the potential ripples of this far-off event are a useful reminder of how interconnected our daily lives are with global developments. The bankruptcy of a Korean shipping company doesn’t grab the attention of Western consumers. It should, because it’s paying attention to seemingly irrelevant developments like this that can let us navigate today’s uncertain and choppy waters.

Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst(Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit his website. He can also be followed on Twitter @mansharamani or by liking his Facebook page.