Why billions of dollars of goods are stuck at sea
economist.com
economist.com
Management didn't have a plan for an orderly shutdown, so when the company went into receivership, everything just stopped. Just like many failing startups, the web site continued to indicate nothing was wrong. They've now put up a spreadsheet with current vessel status, but that took weeks. The status has entries such as "Arrested", "Unpaid Canal Fee (Suez)", "Arrested by Bunker Supply Co. (Panama Canal)", and "Port labor rejected" (they're way behind on their payments)". There are about 500,000 containers stuck with Hanjin.
Admiralty law is especially harsh on bankrupt shipowners. In many jurisdictions, ships can be seized regardless of bankruptcy status. Some Hanjin ships have been seized. Some are waiting offshore until somebody puts up the money for unloading and refueling. There were four stuck off the coast of California. Hanjin has come up with enough money to get two of them into the port of Los Angeles and unloaded. Those appear to be ships Hanjin leased, rather than owned, and a court in Korea has told them to unload and return all their leased ships ASAP. Courts in about 15 countries are involved, trying to untangle this mess. The US Maritime Commission is trying to get cargoes unloaded, but they don't have much authority. Ports are unwilling to let Hanjin ships in unless they have enough money to fuel up, pay a crew, and leave - they don't want them stuck at their docks. Meanwhile, some of the ships are running low on food and water.
Then there's the empty container mess. In the container business, you pay a per-day fee when you hold someone else's container, so everyone tries to return their borrowed empties quickly. But most of Hanjin's empty container return points are shut down, and are not taking empties back. Many of those empties are on trailer bodies, and are tying up trailers needed to move freight. Truckers are angry about this. Shippers are having trouble getting enough empty trailers.
This will all get unwound, but it's going to take weeks or months. There are going to be really big post-Xmas sales as the delayed cargo is unloaded.
EDIT: More on arrest of a vessel: http://www.maritimelawcenter.com/html/arrest_of_vessel.html
Just like pretty much anybody. Everyone keeps hoping against hope, everyone is afraid to show weakness, and nobody likes to tell the boss no. Typically the staff knows for months that the end is nigh until some minor event precipitates the final undeniable crisis.
Megan McArdle has some interesting things to say about this in her book "The Up Side of Down." Chapter 5 is about handling crises (in general) and the GM failure (in particular).
"Wagoner [the head of GM] seemed to believe that by not admitting GM might declare bankruptcy, he could somehow keep it from happening. What he thought would take place when the company ran out of cash is not clear. Nor is it clear why his executives and his board of directors nodded and said 'Yes, Rick' rather than insisting that he confront reality. Instead, they helped him sustain his delusion by formulating a mad plan to merge with Chrysler, as if strapping together two nearly bankrupt auto firms would somehow make both of them solvent."
https://www.amazon.com/Up-Side-Down-Failing-Success/dp/01431...
Hanjin just stopped in place for weeks. No plan.
Does "this" just refer to Hanjin's mess, or does it also include the possibility, described in the OP, of several other shipping companies also going under?
The structure of present day shipping implies there could not be an orderly shutdown.
Continuously moving modern freight is akin to a bank. Any efforts to quickly "wind-down" the operation leads to a shortfall in cash, accelerating the bankruptcy process rather than stopping.
Office and factory workers of a suddenly-derelict company can walk off the premises and go home. Imagine finding out that not only will the paychecks stop, you also can't leave your desk.
But am not aware of reports about how things are for them this week.
Obviously not ideal, but at least you get fed and eventually get back home.
On the other hand, unlike factory workers in a totally bankrupt organization, the ship crews will get paid - they get "priority" on the ship and cargo; if the ship gets sold in some auction or restructuring, the new owner can't take possession until the previous crew gets paid.
1: "I need water"
2: "Don't worry, next year you'll (probably) have enough money to buy some"
Surely there are international agreements with remedies for such situations? When do the coastguard step in and save the crew from dehydration/starvation?
I guess this is because every big industry runs on commuters nowadays, so there are all these people who both are in the industry and read HN.
My favorite typo of the week!
I'd imagine in many cases, the cost of solving the problems caused by not being able to pay fees is going to be higher than the fees themselves. So are there not insurers who benefit from paying these fees, rather than paying out larger claims later?
The way this is supposed to be solved is bankruptcy protection; no-one can claim their specific debts, the administrator will figure out the best way to get as much money as possible and distribute it equally. I suspect the problems in this case are mostly caused by the international aspect: Korea may recognize a bankruptcy but that doesn't necessarily mean all the ports around the world do. I'd guess that international bankruptcies are probably rare enough that the system hasn't really been ironed out yet.
I'm not sure where insurance comes into it?
Also of interest, they also did a game theory analysis of ocean liners: https://www.flexport.com/blog/game-theory-ocean-carrier-comp...
Do they continue working aboard, knowing that they probably won't be paid (because the company is bankrupt)?
What's morale like? Can they leave, and how would they logistically?
What kind of laws and rights (if any) apply to them in these circumstances?
It's funny to me to be thinking about how our Christmas may be "ruined", meanwhile hundreds or thousands of workers may be out of jobs and effectively indefinitely stranded at sea.
Do note that calling mayday gives the rescuing vessel significant rights to the ship and cargo. If your ship is not at risk of sinking, that would be a really expensive way to solve a comparably minor problem, ordering a daily helicopter delivery from the closest McDonalds would be much cheaper.
Eating? Paying rent? These are the crew's problem. You can't seriously expect them to prioritize the employer that isn't paying/feeding them over their own well-being.
While the cargo is owned by others, and the ship may be sold during bankruptcy, but maritime law prescribes that none of them can get their stuff until the crew has been paid in full; so in essence they can (and will) hold these billions of dollars of goods as hostage. $16b / 66 Hanjin ships means that an average ship will have cargo $250 million worth, and if anyone wants to receive that cargo, they'll find a way to pay the outstanding wages, which is, rounding to whole millions, approximately 0.
They can also get food and 'maintenance fuel' (enough for running the internal systems, not the huge amount required for main engines) with the ship/cargo as effective collateral, even though they're not the owners - it's the owners legal responsibility to supply that, the crew is authorised to run up a bill and the owner (the new post-bankruptcy owner) will have to pay that or get the ship seized until they do.
The main trouble of these seamen is that it will take an unknown amount of time to get this settled, not that they'd not get paid for these months.
What do you mean by this? Is there a legal case for a rescuing vessel to commandeer the ship and cargo somehow?
;-)
Does anybody have visibility into shipping rates to see if larger players are getting a bigger premium?
[1] http://www.chinalawblog.com/2016/09/hanjin-shipping-and-arre... [2] http://www.mondaq.com/unitedstates/x/528816/Insolvency+Bankr...
Yes, it is likely that cargo owners will have to pay extra to get their cargo delivered where they want - they have paid for a service, Hanjin won't provide that service, and anyone else will require payment for that same service. Even if the service (or a part of it) is practically unavoidable e.g. the cargo is at a ship and needs to be unloaded, so someone needs to pay for the loading. Maybe they have insured that, maybe not, but they can get their cargo anyway if they want.
It's not that simple.
Yes, premiums will adjust depending on the finances of the carrier but the cost of insuring the risk itself is quite variable and can be ruinous. The value of a delayed shipment of iPads is much higher than a delayed shipment of board games, yet Apple can tolerate the former while the latter could sink a company. The board game company might not be able to afford to insure the risk, even though the premium could be lower.
The fact is an Apple can manage the risk by spreading the load (they already do it multi modally, and probably already do it for ships too). A small company with one container or less of goods, cannot.
This will undoubtedly have some effect, but I doubt anyone on Hackernews can reliably predict it.
In response to slv77:
The bankruptcy means (1) demand has substantially decreased for shipping services, or (2) large established shipping companies are not lean enough to survive and losing market share.
In no way could this accelerate losses for 'small players'. In fact, this should grow their business. I also have no idea what this vicious loop is you are talking about.
Shipping costs may go up slightly, but it will likely already be priced into current the market.
I think this is not as big of a deal as the article is making it out to be.
Due to all the anti terrorist rules, it's not easy getting onboard of a container vessel.
Third quarter reporting should be very interesting for the markets.
That's already happening in the U.S. (well, not "creating a process" so much as "using an existing process, to wit, Chapter 15 bankruptcy protection".) [0]
[0] http://www.bloomberg.com/news/articles/2016-09-09/hanjin-win...
To be clear: I work in this industry. In case of an (factory) assembly line shutting down they'll resort to airfreight. I noticed people downvoting my reply, while it is entirely factual.
It's in every party's best interest to get these ships docked and unloaded but no single party will own more than a fraction of the total cargo. Cooperation is possible but it will take months for hundreds of primary owners to come to an agreement. Before that happens, each one of those primary owners will need to come to agreements on cost-sharing with all the party's downstream from them in the supply chain first.
It's the very definition of "tragedy of the commons" played out in private enterprise.
Nothing free about boats. Best two days of your life: the day you buy a boat, and the day you sell it.
Paying a prostitute can be cheaper than marrying and then divorcing.
Should Business X pay to just unload their own containers? But containers are in large stacks on the ship; it is improbable that the containers they want are all on top. They'd have to unload at least some others to get the ones they want.
Should Business X join with all the other businesses that have containers on board? That might be the most equitable, but it's a huge coordination problem (their could be a thousand businesses), and it's still unjust - Business X (and all the others) had to pay for unloading on top of what they already paid Hanjin.
It might be better than the alternative (having your assembly line idled), but it's not an easy or cheap solution...
Also to charge creditors that 'arrest' a ship the mooring fee for the port (since they're the ones demanding it stays there).
The ship, any unclaimed cargo, and any unclaimed containers, would then be fire-sold with the base price of the remaining debt for that ship and the condition that whoever buys them is then responsible for them. Any additional proceeds go first to lessening the unload fees (presumably already paid for by the cargo's owners in their transit fees) and finally back to the former owner of the ship.
I forgot to add: The nation receiving the cargo should have an economic stability interest in backing the loans to do this, but those receiving cargo obviously also need to be in on the underwriting of these efforts.
Second edit: It also becomes obvious to me that the equilibrium price for 'when is it bad enough to execute this' is when those who need to claim the cargo from the ship value what they're getting enough to bail out the price of selling the vessels for scrap.
I mean, if I pay $1,000 to ship my $30,000 car, what's stopping the port from saying they want $20,000 to give it to me?
As for the input costs, they'd probably (and should) enforce the standard market rate of processing fee.
The idea isn't that the company is bidding on the value of their cargo; it's that the companies FIRST get to declare if they're writing off their cargo or paying whatever their split of the loading fee is (possibly a maximum value they'd claim at) and THEN anything left is sold off (to get rid of it).
EDIT: Yes I read the article. Seriously, oil is so cheap and this still happened? It's just mind boggling to me.
> Hanjin’s bankruptcy—and the abysmal performance of so many lines—is the result of overcapacity in the shipping industry. Since the financial crisis, too many vessels have been built and not enough scrapped, while the growth in global trade has decelerated.
If a boat could be operated for free, then overcapacity wouldn't matter, just ship boats underloaded. Of course there are costs so that notion is silly. I suspect he thought that fuel costs were among the biggest costs in shipping. I bet licensing and legal fee are the biggest costs, then I bet personnel cost come in second, then boat maintenance, then somewhere below that oil.
Long answer, when the global financial crisis hit it lowered demand. But shipbuilding has a long lead time and shipyards can't/won't stop production(what do you with a half finished ship, you can't just put in storage). So all the ships that were ordered get built. By now the economy is starting to recover but your shipping capacity is greater than demand. So prices fall and the least efficient companies go bankrupt.
http://www.dailymail.co.uk/home/moslive/article-1212013/Reve...
Shipyards are probably next.
It probably takes 5,000 trucks to carry the containers stacked on one of the larger cargo ships and they burn way more than 19 gallons of fuel per day.
And as you say, the cost of road shipping dwarfs that.
Today, marine freight can move a ton nearly 1,000 miles on a gallon of fuel. Rail maxes at about 400 ton miles/gallon, trucking is about 50 tm/g.
Adam Smith's Wealth of Nations has a telling comparison of ship vs wagon travel from Edinburgh to London in the 1770s. Smart money was in boats.
But the problem was overcapacity. Everyone was lowering their rates, trying to get enough business to fill their ships. Lower oil meant that Hanjin could survive on lower rates. But lower oil meant that everyone else could, also, and they lowered rates to a place where Hanjin couldn't make it.
Wouldn't it be the creditor's obligation to pay the fees or move it somewhere else to be moored?
Also, the ports don't want the money from extended docking fees, they want a flow of ships. Docking fees alone won't compensate all of the teamsters, longshoremen, etc. idled while the berth is blocked.
"Repossess" is an inaccurate term here. Arrest of a vessel is a different (though conceptually related) process [0]. Notably, the creditor does not take ownership or possession of the vessel, and so can't be responsible for fees; the ship is taken over by the government and its operation restricted unless it is either "bailed out" by the owner providing alternative security, the underlying litigation resolved, or the ship ordered sold by the government while the litigation proceeds.
If its sold, the costs incurred will be paid out of the sale proceeds, but they may take some time.
[0] http://www.maritimelawcenter.com/html/arrest_of_vessel.html
[1] http://fortune.com/2016/09/23/hanjin-shipping-cash-unload-ca...
And yeah, obsolete tech is a business disruption, as is perishable goods. I wanted to also include things like having to pay a premium to expedite replacement inventory so that your store or factory keeps working while the goods are stuck on a ship.
Unsupported assertion. There are both positive and negative aspects to more companies. Consolidation isn't just profitable because it turns an industry into a cartel, but because there are real economies of scales in some industries, especially logistics. This could go either way.
> with overcapacity, who would like to join?
No one needs to join until the overcapacity goes away, do they?
Moloch who kills shipping companies!
Still enjoying peaceful Yunnan.
What stops pirates from taking over the ships? What about the crews just taking what they want and leaving?
If you have another self-loading container ship you might be able to pull off a big heist, but who has one of those just kicking around?
But then what?
The navy kills the pirates and liberates the vessel... And Hanjin refuses to take it back? The navy now has the responsibility of getting it to port and unloading it, despite ports not wanting to do that?
These are just random ships at sea. No such advantage here. It's truly a needle in a haystack problem.
If you want to steal the ship, a more practical plan would be to convince the crew to abandon ship (bribes?) and then claim it as salvage.
The sorts of ships routinely subjected to piracy are those carrying an easily transportable commodity (e.g. oil) that can be pumped out or stolen quickly and offloaded on a market without arousing suspicion.
You'd spend weeks going through all those containers to look for anything useful. Many, I'm sure, contain half-finished products, super cheap consumer goods, promotional merchandise, and niche application bulk supplies with almost zero value on the grey market.
If you had someone on the inside that could position the crate you wanted to steal right on top and ready to pick off, you'd just do that with a helicopter anyway and save yourself the trouble of hijacking it.
There's various physical limitations. You cannot have too many cranes working on a vessel (need to have space between cranes). Further, most cranes aren't that quick. Depending on a region you might hit 45 containers per hour, but that's pretty high (usually only seen in Asia).
Smaller vessels can be cleared out inside a day, but the larger ones are still a project for all but the best equipped ports.
Where are they offshore? Pirates are not globetrotters with ports all over the world. But if this was off the coast of Somalia type things you'd think it would happen. Unless they are only interested in the ransom in which case probably mot a good score anyway.
> What about the crews just taking what they want and leaving?
Most people dont steal because they know its wrong. Not because they couldn't get away with it before. And where are they off to? If you're a Filipino on a ship sitting off US coast, what your going to fill a lifeboat full of Chanel perfume, head for the coast, lug it from lifeboat and hail a taxi? Sell it somewhere and try and get out of the country you have no visa for and get back home... doesn't sound too appealing.
The containers. Stopping the crew from stealing the cargo is and always has been one of their primary purposes.
There was a time I believed his posts, until I read one of his mini-essays on a topic I happened to know about (cryptography) and it was painful obvious that it was someone who spent 10 minutes googling the topic and took it upon themselves to give a dangerously incorrect "authoritative" lay of the land. Since then I've tagged those people as "faux experts". I don't blame him, I did the same thing for high-school essays, albeit with a more jilted writing style. Just be careful who and what you believe
(Yeah, multi-sig, etc.. Not that it helped Bitfinex.)
As I know absolutely nothing about the shipping industry or Hanjin, what is your background or interest in it?
He's not representing himself as an insider. Most of what I've seen checks out fairly well, and he's got a maturity and insight I wish were more frequently found here. He's not infallible, and doesn't portray himself as such. Few of us are.
Some background from earlier: https://news.ycombinator.com/item?id=9048947
Your comments are quite uncharitable.
That aside: comments like this are extremely inappropriate for Hacker News. We don't write comments whose sole purpose is to take down other commenters.
I'd be embarrassed to have written something like this in public. Maybe you were just having a bad night or something.
OTOH, some enterprising sailors could make some money relieving stranded ships of their contents.
One of the reasons why shipping switched to containers (and away from break-bulk) is precisely because it is difficult to steal from containers.
It is common for businesses to assess risks and forgo adding the cost of bonding to a contractual transaction.
I really don't think there are large parts of the world that would not be viable through local agriculture.
Obviously, there will be islands etc for whom this isn't viable, but I doubt they were getting food by massive ships anyway.
It's a delicate curve. Perhaps gradually increasing tariffs can support the actual increase of local production. Perhaps taxing oil consumption to subsidize poorer countries farmers is another way to go.
As an end in itself? Why?
It would, only by making food more expensive -- specifically, by driving up the transportation costs so that the more-expensive-to-produce local food was competitive with less-expensive-to-produce imported food. This might be pleasing to those with an ideological preference that other people should eat locally, but the other effect is increased cost of living for everyone.
No, local food production increases pollution. The lowest pollution is obtained when food is grown in the climate most suited to it.
Transportation energy (or pollution) is absolutely minuscule compared to energy used in growing the food.
Optimizing for transportation costs in food production is a horrible idea from an environmental point of view, because the other costs so dwarf it as to make it utterly irrelevant.
I have difficulty believing that eating imported pineapples in the UK pollutes less than eating local apples
So what you are saying is no one should eat bread in the UK? (The UK is not great at growing wheat.) I don't need to give a lot of examples, you get my point I hope.
> I have difficulty believing that eating imported pineapples in the UK pollutes less than eating local apples
Do apples grow well in the UK? Do you need lots of chemicals to grow them? (Pesticide, herbicide, fertilizer, etc, etc.) Do you need to spend a lot of time (i.e. energy) managing the trees, or do they just grow themself?
Importing a pineapple costs basically nothing (both in terms of energy and money). If growing a pineapple in HI uses less stuff than growing an apple in the UK, then yah, eating imported pineapples pollutes less. (I don't know if that's the case or not.)
It's easy enough to tell: Just compare the cost of the fruit (per weight).
I think the entire point of sustainability is to avoid the much lower quality of life that would come with climate change and resource depletion.
Oh, yea, we would have to get used to paying more for some things, get used to paying Americans a decent wage, get used not being able to manufacture in the cheapest countries, get used to the poor having better opportunities to join the middle class, and probally a lot of more get's.
And yes--I know--our reliance on manufacturing in the cheapest country helps those poor people live better lives. Those people at Foxcon, and other Chinese/whatever countries workers seem like they are treated so well. These foreign countries care so much about the enviorment. Some of these countries have become so rich they built up their military--like China. Some foreign enterprising individuals become rich, and buy American houses, even though they don't live here. That last one is great.
At one time, we got along fine without the cheap goods from other countries--with the exception of one commodity--oil. Oh yea, the cheap cost of goods at Apple don't seem to be passed on to consumers?
For the vast majority of the people who don't live in the USA or Europe, life was certainly much worse back then. Foxconn might not be the best place in the world to work, but it beats the hell out of living in a small town under a Maoist government.
> even though they don't live here
We could have made a crapload of money off their insecurity by taxing non-occupied housing, perhaps even building ghost cities/property tax farms from scratch. We could have used the revenue on infrastructure or social services. But no, we didn't have the political will to do that.
Yes, they really were. At least, I remember the '90s, and quality of life was a lot worse back then, I assume the trend continues as you go further back.
> Those people at Foxcon, and other Chinese/whatever countries workers seem like they are treated so well. These foreign countries care so much about the enviorment.
Chinese wages are trending upwards and China is putting a lot more environmental regulation in place - to the extent that some manufacturers there are now offshoring to poorer countries. Will it take them time to catch up? Yes. Are they doing it a lot faster than the US did the first time around? Also yes. It would be a bizarre kind of ethics that said that it would be fine for Chinese workers to earn less and Chinese factories to pollute more as long as we weren't buying from them.
> Some foreign enterprising individuals become rich, and buy American houses, even though they don't live here. That last one is great.
Their reasons for doing that are the same as Americans' reasons for doing that (which they do quite a lot - it's just easier to blame everything on evil foreigners). Fix the incentives and you'll fix the problems. If you don't like empty houses, how about strong squatters' rights?
> At one time, we got along fine without the cheap goods from other countries
We didn't "get along fine". We survived, but life was a lot worse.
> Oh yea, the cheap cost of goods at Apple don't seem to be passed on to consumers?
I have no idea why people buy expensive things from Apple when they can get better versions cheaper from their competitors, but that's their lookout.
Yes. It's simply inarguable.
The less money people have the less they care about the environment. That's why as quality of life went up in Western countries the environment became more and more important to people, to the point that it's almost an obsession for some people now.
For example, there may be a missing middle step there - as quality of life went up
(due to massively increased international trade which allowed suppliers in emerging markets to bypass strict first-world environmental regulations and massively pollute)
Then the reaction to the worsening environment because of overall consumption increase caused a backlash and increase environmental awareness...
You think the only way for people to increase their quality of life is to pollute?
And you think people want a better environment as a backlash? That's such upsidedown thinking. People always want a better environment, but if they are searching for their next meal they have better things to worry about.
But once they are secure then they worry about their local environment, and when they are very secure they worry about remote environments as well.
So the best way to improve the environment is to significantly increase the quality of life of everyone. And one way (not the only way) is trade, and yes, lots of consumption.
You have to remember: It's impossible for us to run out of resources because those atoms aren't going anywhere. All we need is energy and anything is possible.
You want an amazing environment? Then find a way to MASSIVELY boost energy output. With all that energy we can do anything, including fix the issues caused by using all that energy.
But for some reason environmentalists want people to go the other way, and reduce energy usage. This will just cause an environmental catastrophe because now people will have a lower quality of life and would not care in the slightest about the environment.
Lets remove what I think - the facts are pretty clear, as industrial/trade increases, so does pollution.
Wishing otherwise doesn't change the facts.
Once we live in at > 50% renewable/sustainable reality, I'll take your point of view seriously.
Labeling people as "silly environmentalists" because they strive for efficiency is pretty pompous.
We will only get to a sustainable ecology when 1) solar power provides energy for less than fossil fuels, 2) the majority of human women have control of their fertility, and 3) the majority of humanity's basic needs are fulfilled enough that they can worry about the environment. #1 will lead to less pollution and climate restoration, #2 will lead to decreased or sustainable global population, and #3 will lead to the preservation and restoration of ecosystems. All of these things are only possible because of the wealth generated by capitalist economies.