The bankruptcy of the world's seventh-largest shipping line, Hanjin Shipping, is creating a crisis for retailers because cargo bound for the U.S. is stuck at sea as the company battles creditors looking to seize its ships. Unless the billions of dollars worth of cargo can make it into U.S. ports and be unloaded, retailers may be plunged into a crisis all their own this Christmas.
That sinking feeling
Hanjin, which filed for bankruptcy in South Korea, carries nearly 8% of the U.S. market's trans-Pacific trade volume. A U.S. federal bankruptcy judge has (temporarily at least) prevented creditors from seizing Hanjin's ships, allowing them to leave U.S. ports -- a ruling he admitted was made for commercial purposes "to get these vessels moving," but one which the creditors' attorneys slammed as contravening both U.S. and international maritime law. However, the disorderly way in which Hanjin declared bankruptcy has still prevented cargo from being unloaded, with little chance of progress being made in the immediate future. More than 100 ships and their cargoes remain stranded at sea.
There are several problems for retailers with Hanjin's bankruptcy, aside from the obvious. August through October are prime shipping months for deep-sea routes, and Hanjin ships stuck at sea and unable to enter ports are beginning to cause traffic jams. Further, some countries that don't abide by U.S. law are seizing ships. China has already seized 10 ships, and other countries are doing the same.
Lost at sea
Moreover, the loss of Hanjin's services in shipping product from overseas is raising costs. Although other shipping lines like Maersk, China Cosco, CMA CGM, and others were offering additional capacity for trans-Pacific importers, because it is peak season, the Journal of Commerce said Hong Kong-to-Los Angeles spot rates spiked 40% last week, to $1,743 per 40-foot container. The cost of shipping goods from China to East Coast ports rose from $1,700 to $2,400.
Hanjin is also reportedly demanding payment in cash to release the goods aboard its ships. Attorneys for consumer electronics giant Yamaha said the situation "could absolutely destroy American businesses."
Some of the largest retailers in the U.S., including Wal-Mart (NYSE:WMT), J.C. Penney (NYSE:JCP), and Target (NYSE:TGT), all rely upon Hanjin to ship a good portion of their merchandise. The shipper typically carries consumer electronics, clothing, even car parts. Some $14 billion worth of goods is in limbo. While the retailers often use multiple shippers and have contingency plans in place, it doesn't mean they're not without risk.
J.C. Penney, for example, has made the introduction of furniture a centerpiece of the next phase in its financial turnaround. In its earnings conference call last month, CEO Marvin Ellison noted that, after adding Ashley Furniture to its regular furniture assortment, its comparable sales enjoyed a 1,500-basis-point improvement.
While J.C. Penney planned ahead when it learned of Hanjin's problems, rerouting much of its merchandise to other shippers, Ashley Furniture was one of those complaining to the bankruptcy judge about the lack of clarity on gaining access to goods on ships that were only leased by Hanjin, not owned by them. This, apparently, is a whole new problem.
Target and Wal-Mart, however, have chosen a wait-and-see approach, which indicates they may encounter problems if the situation doesn't clear up.
Hanjin's troubles aren't expected to be resolved anytime soon, however, as a week-long Asian holiday has put the matter on hold. With goods adrift at sea, ships being seized if they come into ports, and a challenge to the U.S. judge's order filed immediately after his ruling was issued, retailers may end up with a big lump of coal in their stockings this Christmas.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.