The shipping industry, being the mainstay of international trade, is not left unaffected by economic highs and lows, which can lead to the downfall of the largest shipping companies. The bankruptcies impact the global chain while showcasing the vulnerabilities and pressures faced by maritime companies to remain competitive.
One of the most notable cases of bankruptcy recently is that of Hanjin Shipping, a South Korean conglomerate which was once the 7th biggest container shipping line in the world.
It was declared bankrupt in February 2017, which shocked the entire sector and led to the stranding of around $14 billion worth of cargo at sea and disrupting supply chains.
However, why did Hanjin Shipping go bankrupt, and why do shipping companies suffer from bankruptcies?
Hanjin Shipping faced this fate due to internal mismanagement and market pressures.
Shipping experienced a prolonged period of overcapacity in which many shipping lines, including Hanjin, invested a lot in mega-ships, but growth slowed after the 2008 financial crisis, which led to a glut of available ship capacity.
Overcapacity meant intense competition, and companies were once charging rates that could hardly cover their operating costs or sometimes even less, making it impossible to make a profit.
Hanjin also acquired considerable debt, and Hanjin’s debt-to-equity ratio was high, over 850% in 2016, which made it unable to handle large losses.
It also entered into many chartering contracts at high rates just before the market downturn in 2008, which became a burden when freight rates collapsed.
The company also suffered from cash flow issues as the period for collecting freight payments exceeded the period for paying suppliers.
Once the company’s financial health began to deteriorate, its main creditors, led by the Korea Development Bank, asked for a rescue plan, which the company submitted, but the creditors rejected, which was the final straw leading to the bankruptcy filing.
The South Korean Government insisted that the parent Hanjin Group should provide more funding to rescue the company, which marked a major shift from the past instances where large ‘chaebols’ or family-controlled conglomerates often got financial help from the government in such cases.
Lastly, Hanjin was also unable to adapt to changing market conditions, and some analysts also pointed to a lack of significant shipping industry experience within its top management after its founder’s death and a generational shift in the company’s leadership. There were internal problems within the Hanjin Group and a focus on personal gain over the company’s health.
These issues were not unique to Hanjin, but many companies that faced bankruptcies.
Other reasons are fluctuations in oil prices, which affect profitability, especially for companies that operate on thin margins. Events like sanctions and geopolitical conflicts like the one affecting the Red Sea and the Mediterranean can also disrupt shipping, increase operational costs and decrease cargo volumes, which can contribute to financial distress.
Apart from Hanjin, there are other cases as well.
U.S Lines, 1986: Before Hanjin, the bankruptcy of U.S Lines was said to be the biggest in container shipping for decades. The company was once a key player in transatlantic trade and round-the-world services, but it faced severe difficulties due to a disastrous investment in 12 econoships.
These vessels were large and uneconomical. Though designed to reduce fuel costs, they proved too big for many ports and too slow to meet customer demands, leading to heavy losses.
OW Bunker, 2014: This was one of the largest bunkering companies in the world. However, its collapse in 2014 due to alleged fraud at a Singapore subsidiary and massive trading losses sent shockwaves throughout the sector. Ships were arrested due to unpaid fuel bills, causing legal disputes and highlighting credit risks inherent in the supply chain. This shows how even supporting companies can lead to widespread disruption, even when they fail.
The dry bulk sector, which ships iron ore, coal, grain, etc, has been susceptible to overcapacity and low freight rates. Numerous dry bulk companies faced financial distress and have gone bankrupt, especially after the 2008 financial crisis and during subsequent market downturns.
An example is Paragon Shipping, a dry bulk company that filed for Chapter 11 Bankruptcy because it struggled with massive debt loads, which were accumulated during boom times and the prolonged slump in dry bulk rates.
Genco Shipping & Trading, a major U.S.-listed dry bulk owner, filed for Chapter 11 bankruptcy due to massive debt and a severe downturn in dry bulk rates in 2014. However, they restructured and emerged from bankruptcy.
The offshore sector also suffered after the 2014 oil price crash. Several companies which owned and operated offshore equipment, like drilling rigs, etc, faced a reduction in demand and day rates, leading to restructuring, bankruptcies and vessel lay-ups.
Drilling companies like Seadrill filed for Chapter 11 bankruptcy in 2017 and again in 2021, while Ocean Rig also filed for Chapter 15 bankruptcy in 2017 to implement financial restructuring.
Many OSV companies, often small and more regionally focused, also faced insolvency as oil companies cut back on exploration and production.
While land-based, the largest U.S trucking company, Yellow Corp, filed for bankruptcy in 2023, which impacted freight movements across North America, including cargo moving to and from the ports. This was a result of massive debt, labour disputes and an economic slowdown.
Another company called Convoy met a similar fate in 2023. This tech-driven freight brokerage shut down operations and highlighted the difficulties innovative companies can face during a freight recession and tighter markets. It impacted shippers who depended on their digital platform for freight matching.
Impact of Bankruptcies
The most immediate impact is stranded cargo. When ships are prevented from entering ports or arrested by creditors, billions of dollars worth of cargo remains stuck at sea or in terminals, causing delays and financial losses for shippers, retailers and consumers.
The removal of shipping capacity from the market leads to a short-term capacity crunch, which leads to a spike in freight rates by 50% or more on the routes affected.
The presence of alliances, vessel-sharing agreements and other issues makes this situation a nightmare for the bankrupt shipping company, leading to legal battles for the parties involved.
What Can Be Done?
The international shipping industry must try to find a sustainable solution between fleet expansion and actual demand to avoid crippling capacity. This is a perpetual challenge due to long lead times for new ship builds.
Shipping Companies should prioritise managing their debt, maintaining a healthy cash flow, and building financial resilience to withstand market downturns.
Management should keep plans ready to mitigate risks from volatile fuel prices, in case of geopolitical events or unforeseen disruptions. Diversifying the services or expansion could help.
Transparency in financial reporting and collaboration among the stakeholders could prevent future crises and help manage the situation. The Hanjin crisis highlighted the need for better measures for handling stranded cargo.
Additionally, a company’s ability to adopt new technologies, optimise its routes, or adapt to changing patterns of trade is important for long-term survival.
As the global shipping industry is navigating complex challenges, the lessons learnt from the largest bankruptcies are a strong reminder of the balance required to keep the global maritime trade running smoothly.
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