September 8, 2016

"The financial failure of Hanjin Shipping is a shock to global commerce and logistics, but it isn't a complete surprise given mounting overcapacity in global shipping and subsequently depressed container rates. While the eventual removal of some or all of Hanjin from the equation might benefit other carriers, it has left retailers and other importers facing starkly higher costs and service impacts as they scramble to find various other methods to transport or replace their goods, such as airfreight." ‚Äč

– Joe Dunlap, CBRE Managing Director of Supply Chain Services

Key Takeaways
  • Overcapacity in the shipping industry, along with slowing global trade, has resulted in historically low shipping rates and has put extreme pressure on the shipping industry.
  • With seasonal inventory in limbo, retailers will be forced to re-evaluate their import strategy, including high-cost options such as airfreight, to mitigate against potential supply chain interruptions.
  • While this may affect the real estate needs of a small number of retailers and distributors that are highly dependent on Hanjin, the overall effect on industrial and retail real estate is likely to be negligible unless this issue spreads to more shipping companies.

South Korea's Hanjin Shipping Co., the eighth largest cargo container carrier in the world, filed for bankruptcy protection on Aug. 30. Almost immediately, this caused major upheaval in global freight shipments as ports around the world refused to handle cargo from Hanjin ships over concerns about the shipper’s ability to pay docking fees. At the time of the bankruptcy filing, Hanjin had approximately 80 ships at sea with at least 500,000 containers on board. In a scene reminiscent of the labor slowdown at U.S. West Coast ports in early 2015, dozens of ships with billions of dollars of cargo are anchored in international waters, sending retailers into a panic over how long their cargo will be delayed and their supply chains disrupted. Hanjin has been trying to steer its ships to Singapore, Hamburg and Busan—key transshipment hubs across the globe—in order to minimize disruptions to the supply chain.    

 

Overcapacity in the shipping industry has been a looming concern as shippers have been introducing larger post-Panamax ships1 to their fleets. In 2015, more than 200 ships were added, accounting for an expansion of 1.6 million TEUs (twenty-foot-equivalent unit container). This was the largest expansion since 2008 when more than 400 ships and 1.5 million TEUs were added. As container capacity has grown, global shipping demand has slowed. In the first half of 2016, global container throughput grew only 1.2% over the previous year, while in the U.S. loaded inbound container volume grew 3.6% year-over-year—well below the robust 7% growth rate in 2015. This slump in demand, coupled with rising capacity, has inevitably led to a decline in the cost that shippers can charge to move a container. The China Containerized Freight Index, a measure of the average cost to ship containers from China to ports around the world, fell to its all-time low in April. While it has rebounded slightly, the Sept. 2 index price of 694 is down 15% year-over-year and 40% over the past two years. In the immediate aftermath of the bankruptcy, the price to ship a TEU from China to the U.S. West Coast rose from $1,100 per container to $1,700. Given the excess capacity in the shipping industry, this rise in price is expected to taper off in the next 30 to 45 days as rival shippers absorb the Hanjin capacity.

 

While this will have a wide ripple effect over the global supply chain as importers look to diversify the way they import and export goods, the most immediate impact will be felt by retailers who are depending upon these shipments to replenish inventories now. The major near-term impacts are:

  • Supply chain interruption: The freezing of shipments means millions of dollars of merchandise destined for retail shelves is held back at ports or at sea until a resolution is reached. This will limit not only immediate store stock for affected retailers but also their holiday merchandise, which is often shipped months in advance. Because a resolution could take several months, many retailers will likely explore alternative shipping arrangements (other shipping companies, air, etc.) to ensure shelves are fully stocked for the busiest shopping period of the year.
  • Exacerbating profit margin pressures: The supply chain interruption and additional costs of re-ordering merchandise and expediting delivery will be another squeeze on retailer profit margins that already have been affected in recent years by e-commerce and omnichannel growth. Brick-and-mortar brands that have sought to compete with online players by offering quick, low- or no-cost shipping and returns have faced higher operational costs in recent years, and the additional outlay required to address the Hanjin bankruptcy will put further pressure on the balance sheet.
  • Macroeconomic effect: The Atlanta Federal Reserve forecasts Q3 2016 U.S. GDP annualized growth of 3.7%—an outlook highly dependent upon aggressive restocking of business inventories. Given the immediate concern of cargo unable to reach the docks and longer-term volatility in the shipping industry, the outlook for inventories and, by extension, such robust Q3 GDP growth may be in jeopardy.

1 The post-Panamax class of container ship can carry over 8,000 TEU’s. The new Panama Canal locks were designed and built to accommodate this class of ship.