The shipping industry was recently in the headlines when on 31 August 2016 Hanjin Shipping Co filed for bankruptcy protection in the Seoul Central District Court. Hanjin was South Korea’s biggest container carrier and the seventh largest in the world.

Upon obtaining bankruptcy protection, 66 of its ships containing an estimated $14.5bn of cargo were left stranded at sea. Ports around the world refused entry to Hanjin’s ships, on the basis that they feared that Hanjin would not be able to pay docking fees and stevedore services. Elsewhere, Hanjin’s ships were arrested in various countries including the United States, China and Panama following liens being exercised by creditors. End-customers were left facing difficulties in how to liberate goods which were urgently required in order to operate their business; containers were stuck at sea with consequential losses mounting.

A US bankruptcy court granted Hanjin a temporary order of protection in September, which allowed Hanjin to pay port fees upfront and provided protection against seizures once the ships docked.

Whilst Hanjin’s problems have been the most serious and widely publicised, the industry as a whole is under financial pressure, with some estimating that container lines may lose up to $10bn this year on turnover of $170bn.

The causes of those difficulties are multi-faceted. Container volume growth has lagged behind global GDP growth, with 2015 marking the first year since the 1950s that growth in container volumes was below the level of global GDP growth. What are the reasons for this change?

Some point to the slowdown in China, along with an increasing number of manufacturers locating their plants in the markets that they are supplying to, so cutting out the costs of transit. As a result of the over-capacity in the market, freight prices have dropped dramatically since 2011. Simply put, carriers have been ordering new ships faster than they have been scrapping old ones. That overcapacity has resulted in the price of shipping a container from Shanghai to Europe to fall by 50% when compared to the rates in 2014. Similarly, the Baltic Dry index (indicating the price of moving major commodities in bulk by sea) has dropped by 95% since its high in 2008.

Whilst such price drops will be welcomed by customers, the suppression of market rates will inevitably cause difficulties for the carriers. Companies that represent almost 75% of the market have sought to follow the lead of the airline industry and have proposed entering into various alliances with each other; an example being Maersk Line and Mediterranean Shipping Company’s alliance, known as 2M, through which they will seek to resolve over-capacity by sharing space on each other’s ships. The impact of such alliances are yet to be seen, but unless the over-capacity is addressed by other means (such as implementing a significant scrapping programme), the industry may well have to continue to navigate some very troubled waters in the meantime.