The fate of South Korea’s two largest container carriers -Hanjin Shipping Co. and Hyundai Merchant Marine Co. - that are sailing through rough waters hinges on whether they are able to strike a deal with ship owners to bring down chartering payments that are known to be five times higher than the current market rate. Unless the two debt-ridden shipping companies reduce their spending on chartering fees, it would be difficult for the debt-ridden companies to put business back in order.

In the shipping industry, chartering is an activity in which container carriers rent vessels from ship owners for either short term or long term to engage in freight shipping business. Of the 151 vessels the country’s largest carrier Hanjin Shipping has for operations, 91 ships are chartered ones while 85 of 125 vessels for Hyundai Merchant Marine.

An unnamed official from the shipping industry said that a majority of the vessels operated by Hanjin Shipping and Hyundai Merchant Marine have been chartered for long-term since mid-to-late 2000 when the global shipping industry was in its heyday, leading them to rent at high rates. Under the contracts, each company pays astronomical chartering costs of up to 2 trillion won ($1.7 billion) every year.

As of 2015, Hanjin Shipping has spent 1.01 trillion won on chartering payment while 1.9 trillion won for Hyundai Merchant Marine. Both companies’ charter costs are excessively high considering that Hanjin Shipping’s sales during that year were 7.7 trillion won and 5.8 trillion won for Hyundai Merchant Marine. Industry observers note that their high charter costs are blamed for the huge losses they have been logging over the past several years.

Meanwhile, other sources note that it isn’t only the managerial fault of Hyundai Merchant Marine and Hanjin Shipping that has led them to be caught in the trap of high chartering cost. Another official from the shipping industry who asked to be unnamed said that during the Asian financial crisis in 1997, both shipping companies were advised by the government to maintain their debt ratio to below 200 percent, and to fulfill the advice, they sold most of their wholly-owned vessels and rented ships. However, there was a prevalent view that with the overall shipping industry picking up after a while, it was unnecessary for the shipping companies to sell their vessels and operate chartered ships.

The continuing boom in the overall shipping industry led Hanjin Shipping and Hyundai Merchant Marine to inevitably increase the number of chartered vessels in operation, which in return buoyed chartering fee costs.

Focus, meanwhile, is now on whether the two container carriers will be able to reach an agreement with foreign ship owners on lowering chartering fees.

According to multiple sources from the government and shipping industry, since early February, Hyundai Merchant Marine has met with 22 foreign ship owners including Danaos Corporation from Greece and the Zodiac Maritime Ltd. from the United Kingdom on two separate occasions and negotiated on lowering charter costs. The shipping company was able to persuade more than half of the ship owners and receive their consent on reducing chartering fees and is currently managing follow-up details. Hyundai Merchant Marine needs to reduce about 300 billion won from near 2 trillion won worth of spending on chartering costs to get out of the red. Creditors led by the state-run Korea Development Bank is known to have set a conditional restructuring guideline putting into account the shipping company’s up-to-date progress in negotiations with ship owners. Hanjin Shipping is also in talks with ship owners to moderate charter costs but according to sources, only little progress has been made.

By Yoon Jin-ho

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