March 1, 2017    5 minute read

South Korea’s Dying Shipping Industry: A Boon for Beijing?

Some Win, Some Lose    March 1, 2017    5 minute read

South Korea’s Dying Shipping Industry: A Boon for Beijing?

 

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The global shipping industry just can’t seem to catch a break. Last week, heavyweight Hanjin Shipping was declared bankrupt following a decision by the Seoul Central District Court. The company had gone into receivership last August and applied for court protection under the staggering weight of its $5.4 billion debt. While Hanjin’s implosion might seem at first glance to be an isolated incident, it is, in fact, a symptom of the poor health of global maritime trade – and of China’s likely plans to turn this state of affairs to its own advantage.

Hanjin used to be South Korea’s number-one shipping company and the seventh largest in the world, but now it barely reflects its former glory. The company’s fleet size has dropped from nearly 100 in 2014 to 37 this February. Throughout the same period, the fleet’s market value shrank from roughly $3.5bn to $670m. During its pre-2008 peak, Hanjin employed roughly 7,000 people. That number has now dwindled to a few dozen.

The Source of the Problem

The plight of Hanjin might seem at first glance to be emblematic of the inordinate power wielded by chaebol, or family-owned conglomerates, in South Korea. But the liquidation of the country’s former flagship shipping company is less a sign of the foundering of chaebol than it is of the decline of the sector as a whole.

Lately, the container shipping industry has been struggling to deal with the most significant financial crunch in 60 years, as a surplus of ships and the slowdown in global trade since 2008 have caused freight rates to plunge.

New Strategies

In response, operators have been engaging in increased collaboration, for instance by filling ships with containers from several different companies to maximise capacity and profits. In addition, a number of new mergers and alliances, as well as bankruptcies such as Hanjin’s, have created further consolidation.

Some observers think that reorganisation will help slow the drop in freight rates, potentially buoying the industry. For example, according to Drewry Shipping Consultants, the average revenue per 40-foot container has rallied to a profitable $1,645 in December 2016, from a low of $1,113 last April. Other sector executives, however, remain concerned about the continued surplus of ships and undersupply of cargo, as well as the potential ripples effects of any more bankruptcies like Hanjin’s.

Mounting Difficulties

In addition to the industry’s continuing struggles to rally, the EU has proposed a set of reforms to the bloc’s carbon market that could have significant implications for shipping companies. On February 15, the European Parliament adopted draft changes to the EU’s carbon market post-2020, which would include emissions from the shipping industry in the union’s emissions trading system for the first time.

An industry trade association, the International Chamber of Shipping, has pushed back against the bloc’s proposed changes, saying that efforts to reduce carbon emissions should be made by the UN’s International Maritime Organization to prevent regulatory fragmentation – and, of course, the likely additional drag on profits.

The Ripple Effect

These developments buffeting the global shipping industry might seem at first glance to only concern the Hanjins and Maersks of the world. But maritime trade is a massive sector, and its health has the capacity to influence numerous others, from retail to electronics to manufacturing.

For instance, Hanjin’s financial woes have already caused significant disruption, and not just in worldwide maritime trade. During the holiday season, the South Korean giant’s bankruptcy proceedings left billions of dollars’ worth of goods stranded at sea. With Hanjin’s ships unable to dock for fear of retaliatory measures by their creditors, companies like Samsung and LG Electronics scrambled to find new transportation companies to import their cargo to the US market.

The Winners

The poor health of the industry has inadvertently provided a boost to China’s efforts to exact more dominance over world trade. These efforts are exemplified in President Xi Jinping’s One Belt, One Road (OBOR), a grand economic and diplomatic effort to revive ancient East-West trading routes, as well as build new ones – this time in favour of China’s interests.

Part of this strategy, known as the “New Silk Road,” involves expanding railway routes that link China with Europe. Last month, London became the 15th European city to join the ever-growing list of destinations for Chinese freight trains. The Chinese-subsidised railroad network has been growing rapidly: in 2016, 1,702 freight trains travelled to Europe, more than twice as many as in 2015.

1,702 freight trains travelled to Europe from China in 2016

The Chinese government is subsidising rail transit, even at a time when maritime transportation is more affordable, to boost not just its economic but also its political clout.

To be able to compete with the US, which possesses unquestionable dominance over the seas, China has been investing in alternate transportation routes. These routes, which pass through neighbouring states such as Kazakhstan, help make these countries more dependent on the Chinese economy and investment.

Why OBOR Will Be a Success

In addition, on a global scale, the railway network and the entire OBOR strategy are part of Beijing’s overarching plan to increase its soft power and to take the lead on international trade and development. At a time when the US administration has been retreating into isolationism and economic nationalism, it seems that the OBOR initiative on a path to success. And even dyed-in-the-wool shipping companies are beginning to take note of the opportunities offered by OBOR infrastructure and investments.

For instance, the world’s largest shipping company, Maersk, has stated that it is exploring potential opportunities in long-distance rail as a way to supplement maritime routes. While this trend might be bad news for Hanjin and the like, it’s good news for Beijing as New Silk Road progresses full steam ahead.

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