We know we are operating in one of the more volatile industries in the world and have been through severe down cycles before, but his time it is different. Slowly, but surely the realization that the commodity boom and the unprecedented Chinese hunger for raw materials was likely a “once in a lifetime” bubble, is sinking in.

Effectively all data relating to the dry bulk market, whether on the supply – or demand side, underlines the fact that we are now moving into a very different environment than what we grew accustomed to post-2000. It is therefore likely that the market will see less volatility on both freight rates and asset values for the foreseeable future. Keeping these fundamentals in mind, it is important to consider what the most sustainable dry bulk business model might be in this “new normal.”

Looking forward, underlying demand growth will most likely at best be in the order of one to three percent. Demand will not solve the tonnage overhang this time as it did during the China boom, unless to significantly alter existing barriers (or the lack of barriers) to international trade. For the market to return to even modest break-even levels it is the supply side of the equation that needs to be significantly adjusted – and history tells us this will be a drawn-out process.

Recognizing these hard facts, the next step is for the industry is to adjust to a new norm, with more realistic expectations relating to market trends and profit margins. And this realization process is painful for many reasons:
• We all think the other shipowners should scrap their vessels. My vessels are superior!

• The moment there is the smallest uptick in the market, owners choose to hold onto their older vessels rather than recycle.
• It hurts to take and accept a loss. Many companies choose to close their eyes and hold on tight for as long as possible, even if this means a further deterioration of their position.

Unfortunately, the reasons above are driven as much by emotion and hope as the cold reality of the accountant’s ledger. Fewer ships may be the answer, but this will require the manifestation of a sense of mutual solidarity, something this industry has never been known for. Such decisions and actions do not come easily or without cost.

If we are looking for a silver lining, the dry bulk industry has probably seen the worst of this unprecedented downturn, at least for the more robust Handy and Supramax markets. Western Bulk Chartering has a strong history for producing positive margins in all market scenarios, but it is obvious that it is also harder for commercial operators to extract a substantial margin when rates are around opex levels. Harder, but still possible.

We have learned to always be prepared for the unexpected, and so far this year there are at least two elements that may yet provide the market with some long awaited tailwind; Firstly, China may continue to close domestic coal mines and could further strengthen the trend we have seen lately with increased imports of coal. The other element that may play out positively is the fact that IMO now finally managed to get sufficient support for the Ballast Water Treatment regulations that may over time force more recycling of tonnage as an alternative to investing $1-2 million in older vessels.

The question is, therefore, what we can expect the market to do going forward? Our best-case scenario is for modest demand growth and reduced supply of vessels. This will improve the tonnage balance slowly, and contribute to a recovery over the next 18 months. It will be a fragile recovery, and will very much depend on the world economy and continued soberness on behalf of shipowners.

Hopefully I am wrong, but we need to be prepared for markets, from a historical perspective, to stay low for at least the next 18 months – which is also probably what is required to bring scrapping to the level where it will support a more permanent recovery. As the downward trend reverses, we also expect our margins to return more in line with traditional performance levels.

It is hard to answer the question as to which is the most viable business model for survival in the dry bulk business – through asset plays or through a pure operating model? However, irrespective of how the recovery plays out, we believe our operating model is a safer place to weather the storm than to be exposed to the asset markets.

Jens Ismar is CEO of Western Bulk Chartering.
The opinions expressed herein are the author’s and not necessarily those of The Maritime Executive.

THE court-led receivership of Hanjin Shipping may have come as a shock to many in the industry but it was unlikely to lead to a systemic collapse in the container shipping system worldwide, according to Alphaliner executive consultant Tan Hua Joo. Mr Tan was responding to comments made by Seaspan Corporation chief executive Gerry Wang on Bloomberg TV, comparing Hanjin’s situation to the implosion of Lehman Brothers in 2008, which eventually led to the global financial crisis.

He noted that Hanjin only accounted for about 3% of global capacity for container shipping. “Even in the largest market that Hanjin was serving, which is the transpacific market, it had a 7% share of the market. So a 7% disruption of the US inbound supply chain is unfortunate but it is not a catastrophic event.” The event caused a two-week delay in inventory for most cases at 7% of the entire market, Mr Tan added.

Putting things into perspective, he does not expect the Hanjin event to be one that the container shipping system is unable to recover from fairly quickly. Hanjin’s 3% of global capacity should be easily replaced by other container shipping lines, Mr Tan noted, given that idle capacity in the containership market is around 5% — significantly more than what Hanjin is operating. Additionally, with the number of containership newbuildings scheduled for delivery over the next four months (September to December), “it is almost similar to the capacity that Hanjin is withdrawing”. With both these factors in mind, he feels the 3% global capacity taken up by Hanjin can be easily replaced.

Looking at situation so far since Hanjin entered court-led receivership, Mr Tan notes that nearly 70% of Hanjin’s capacity on the transpacific trade has already found replacements. “The speed of the capacity substitution is incredible.”

Although Hanjin’s filing for receivership occurred amidst the so-called traditional peak shipping season, Mr Tan said it was fortunate that the peak season this year had been fairly tepid. As such he expects the entire logistics crisis to be resolved roughly a month and a half from now. “The whole impact of the Hanjin situation is going to blow over. It is not a Lehman event. If we were to look back on this situation several months from now, I think we would see that this thing is going to revert back to normal,” he said. Unfortunately, that would also mean that the increase in freight rates seen over the past few weeks in light of Hanjin’s predicament will be short-lived as the market enters its lull period, with the Chinese bank holidays coming up in early October. Mr Tan expects cargo volumes to slide by then, with the extra capacity offered by Hanjin’s competitors.

Hanjin’s situation has also barely made a dent in the charter market so far, and will not be of much help to shipowners, he said. But he did say that the situation with Hanjin’s vessels could have a major impact on how alliances are set up, especially for The Alliance, which Hanjin would have been part of. “Without the inclusion of Hanjin, the [alliance] at this point looks particularly weak and that, in a sense, is only going to drive the uncertainty as we move towards the new alliance set-up, which will come about in the second quarter of next year,” he said. Hanjin would have contributed about 20% of planned capacity in the alliance.

Hanjin’s situation can be viewed as a one-off event and can be blamed on bad timing, said Mr Tan. “If the situation for Hanjin did not occur today and it was pushed back six months from now, I think the Korean government would have stepped in. There is really no justification for the Koreans to step in to bail out Hyundai [Merchant Marine] a couple of months earlier and then failing to do the same for Hanjin because clearly Hanjin was the stronger of the two Korean carriers and I think they had a much better organisation, they had much better coverage and a fairly strong [information technology] system used by other competitors.” He noted that Hanjin also had more strategically attractive assets, such as worldwide container terminal holdings. Thus it would have made more sense to save Hanjin rather than HMM. In Mr Tan’s view, the main reason Hanjin was not bailed out by the government was political, in light of the recent alleged accounting scandals plaguing shipbuilder Daewoo Shipbuilding and Marine Engineering, previously rescued by the authorities. Thus lawmakers were unwilling to put their support behind Hanjin lest history repeat itself.

Looking at the broader shipping industry downturn, Mr Tan said that more of such shipping bankruptcies would be needed to restore the supply and demand balance. The industry possesses quite a poor track record in terms of self-regulation, Mr Tan said, in spite of persistently below average earnings mainly due to the ‘too big to fail syndrome’. He cited cases such as Zim, CSAV, Hapag-Lloyd and CMA CGM as recent examples. “The fact remains that there have not been sufficient exits in this market at all. If we look at the rest of the bankruptcies and exits that have taken place in the past, they have all been relatively small scale.”

ON BOARD THE HANJIN ROME—For almost three weeks, two dozen men have been whiling away the hours off the coast of Singapore on a rusty old cargo ship loaded with frozen meat and other goods. They had been headed from South Korea to the Persian Gulf. Now they’re stuck, not allowed to dock or to leave. The crew spends its days tending to the cargo and googling for news on their phones about their ship’s ill-fated owner, Hanjin Shipping Co., which filed for receivership in South Korea last month. Mostly “at ease,” they surf the Web, chat, play cards, go the gym and watch movies—“legally downloaded,” according to the captain, Kwon Do-moon. “Family is worried, but we are in touch,” said one crewman. Their biggest concern: When will they get off the ship, and will there be any jobs left in the industry for them when they do?

Hanjin, one of the world’s largest shipping lines, fell victim to a world-wide capacity glut resulting from the slump in global trade. Creditors have already moved to seize some of its assets. A Singapore court on Aug. 29 granted a provisional request to seize the Hanjin Rome filed by Rickmers, a Hamburg-based company, which says Hanjin owes it money. That means the container ship, with a gross capacity of 65,000 metric tons, is banned from any shipping operations. A security guard has been posted on board to ensure it doesn’t leave. The men aren’t allowed off, unless there is a medical emergency, because the ship can’t dock. Hanjin owes money to the port operator, PSA International Pte. Ltd, as well.

Since Hanjin filed for bankruptcy protection, dozens of its ships carrying more than half a million containers have been denied access to ports because of uncertainty about who would pay docking, unloading and storage bills. As much as $14 billion worth of cargo has been stranded at sea at a time when retailers are stocking up for the Christmas season. The company had 89 cargo vessels—74 container ships and 15 bulk carriers—stranded as of late Wednesday, according to a Hanjin spokeswoman in Seoul.

Capt. Kwon had the guard buy local SIM cards for his crew—10 other South Koreans and 13 Indonesians—so they could call home and keep up with the news. The crew is free to top-up when the cards run out—as long as they can pay for it. No one knows how long they are stuck there. The last they heard from Hanjin headquarters was a greeting for the Korean Thanksgiving holiday, which began Wednesday. “They don’t have enough information,” said Capt. Kwon, a portly, 36-year-old father of twin 8-year-old girls.

Food hasn’t been a problem; supplies were delivered on Aug. 29 and the captain said he was expecting another shipment this weekend, to be paid for with funds the company gave him at the start of the journey. The Korean crew cherishes kimchi and pork, while the Indonesians, who are Muslim, have beef and lamb. To drink, machines turn seawater into fresh water—16 tons to 17 tons every day, he said. “That’s the magic.” They also have bright-blue cans of Pocari Sweat, a Japanese sports drink. The ship has four generators on board and 200 days-worth of fuel. The captain said he expects there will be an end to the stalemate before that runs out, possibly by the end of November.

He has been on board since the ship started its journey from Busan, South Korea, on Aug. 19. It stopped in China before reaching Singapore, from where it was scheduled to go to Malaysia, Sri Lanka, the United Arab Emirates, Iran and Oman before returning. He wouldn’t give much detail on his cargo, aside from saying it included frozen meat and poultry. The crew has special instructions from the Korean office on handling special cargo, he said, without elaborating.

For a reporter’s visit to the ship on Wednesday, organized by three trade unions, crew members were reluctant to speak, but had prepared neatly lettered placards in English and Korean appealing for help. Most had gloomy faces. The youngest was a 22-year old apprentice and the oldest was 53. The union members brought two bags of treats—fried rice, chicken drumsticks and buttercake from a Singapore bistro—and assured the men they were doing everything possible to help them. Two young officers said they worried about finding work again, given the state of the industry. “I don’t know what’s next,” one said. “Maybe I’ll prepare my CV and look for a new job. [We’ve got] enough time.” The officers received their monthly pay last week as usual; the next payday for the seamen is Sept. 20. Under Korean law, Hanjin has to pay them for three months—meaning through November—and three years of retirement benefits, according to the seamen. Hanjin officials weren’t immediately available for comment. Meanwhile, the men are stuck on the rusting Hanjin Rome, which was commissioned in 1998 and is nearing the end of its 20-year lifespan.

Capt. Kwon joined the company in 2000 and like his men is used to life at sea. “Mentally it’s a tough time,” he added. Still, he said he worries more about another Hanjin vessel stalled outside Singapore, which hasn’t been seized but isn’t being allowed into port. “They can’t get any food from the shore,” he said. “If someone’s sick, nobody can help. It can take half a day or one day to contact with coast guard.” He said he hasn’t been able to talk to anyone on that ship. “My colleagues only send emails.”

THE collapse of Korean boxship major Hanjin stands to hurt everyone from blue-overall indie truckers to bankers and all points in between, according to a new report published today from leading broker Marsh. While the document inevitably devotes considerable space to the insurance aspects of the high-profile bankruptcy, as detailed in an accompanying article, it also spotlights potential pain for huge swathes of the maritime industries.

Problems are already in evidence for the CKYHE alliance, in which Hanjin sits alongside Cosco, K Line, Yang Ming and Evergreen. The others have announced that they will no longer ship goods on Hanjin vessels, and will not carry Hanjin containers on their own vessels. Many ports are refusing Hanjin vessels entry, for fear of not being paid port fees. A number of Hanjin ships are also reported arrested. Additionally, goods due to be loaded onto Hanjin vessels barred from entry have begun to build up in ports. Cargo interests are thus exposed to financial risks, as contractually agreed delivery dates are likely to be missed. Goods will need to be stored, and extra expenses incurred as alternative routes for delivery are arranged.

The timing could not have been worse, as August to October is generally the busiest time of the year for the container shipping industry, with retailers stocking up for the holiday season. The majority of vessels operated by Hanjin were chartered rather than owned. Owners are likely to terminate charterparties and retake possession, with a view to chartering the vessels out elsewhere. The increased supply of tonnage could put downside pressure on rates. “As a result, owners may face a reduction in income when they do find a new charterer, or, failing that, be forced to have the vessels laid up and suffer a complete loss of earnings,” Marsh predicts.

Terminals and ports may need to protect their own financial position, to ensure that they are covered for port fees and tug and pilot services. Ships owned by Hanjin may be subject to mortgages from banks, which could seize vessels under the terms of the finance agreements if the Korean outfit defaults on loans.

Freight forwarders could find themselves over a barrel if they have taken goods into their care, or contractually agreed to do so, as contracts may impose financial penalties if goods are not delivered to the right place at the right time. If goods are scheduled to load onto a vessel that does not arrive, forwarders will have to find an alternative. That could prove expensive, particularly as other forwarders will be chasing the same slots with the same carriers. All this could lead to ports becoming rapidly inundated with containers that cannot be shipped quickly, Marsh adds. Some might even close their gates to Hanjin-scheduled containers.

This could mean knock-on effects for truckers, rail freight companies and hauliers, as those refused entry to ports will have to find somewhere to park a backlog of boxes. Alternatively, they may have to refuse to load boxes scheduled to be carried on Hanjin vessels. “Since many trucking companies work on very tight financial margins, the financial insolvency of Hanjin could lead to the financial default of others all along the supply chain,” Marsh suggested.

Crews are at risk of not being paid, or receiving reduced pay, or being left stranded at various ports around the world. Hanjin’s port agents stand to see loss of income if their agency fees are unpaid. Bunker, food and equipment suppliers may also be in the firing line.

Shipping restructuring specialists speaking at the Capital Link New York Maritime Forum on 13 September predicted that Hanjin Shipping will ultimately be liquidated, not rehabilitated. “Clearly, it’s not ‘too big to fail’, because the Korean government did not want to pump capital into what could be considered a mismanaged company for a very long period of time,” said Deloitte managing director Robert Frezza. “It was a very big signal to the rest of the industry.”

Frezza predicted that an “orderly liquidation” will be attempted for Hanjin, “which will probably lead to some other bankruptcies in the near term”. Frezza does not believe the Korean government will save Hanjin Shipping and referred to recent cash injections by major shareholders as “too little, too late. We don’t see other parties rushing in to create a consortium to help and we don’t believe the Korean government will be part of any kind of bailout,” said Frezza. “Honestly, given where the company is today, I think it’s virtually impossible to restart, in terms of confidence and everything else – it’s kind of done,” said AMA Capital Partners president Paul Leand.

Hanjin’s Chapter 15 bankruptcy filing in the United States will protect the company’s ships from arrest in American waters during cargo unloading, but that protection does not extend to non-US ports. According to Leand, “There is a commitment to at least try to get these cargoes off, but unfortunately, what happens after that [outside the United States] is that every single one of these ships will be susceptible to maritime liens for bunkers, crew, and everything else. This company did not file in the US [as a primary Chapter 11 proceeding that provides global protection]. It filed in Korea and there is no global stay [under Korean bankruptcy law] that can be imposed, so nature will take its course in terms of the maritime process,” said Leand.

Miller Buckfire managing director Kevin Haggard also predicted that Hanjin will not be rehabilitated. “If the Korean government was going to invest [in Hanjin’s rescue], it would have done so by now. It looks more likely to me that it may just be liquidated and the assets will get absorbed into the market,” said Haggard. If so, there will be broad fallout. Leand warned, “When you release over 80 ships into the market – and I don’t think it will take all that long for those ships to get into the market – it’s going to have an overall negative impact. A lot of these ships are chartered-in and those are the companies that are going to take it on the chin first. But beyond that, any companies that have charter rate options or extensions that are coming up in the next 18–24 months are going to have to be paying attention as this tonnage comes in,” said Leand.

Yet another argument against rehabilitating Hanjin is that its owned fleet is simply not high-quality enough, according to Leand. He pointed out that ship design and fuel-efficiency advances have had a major impact in the container sector, unlike in other shipping sectors where ‘eco ships’ have not met expectations. “When you look at the [Hanjin] fleet, it’s just not that great of a fleet,” opined Leand. “That’s going to be one of the challenges of redeploying those assets. At a price, you can make up for those fuel differentials, particularly in today’s oil price environment. But if the oil price starts to come back and bunker prices start to come back, what you’re going to find is that a lot of those ships are not very favourable in the market. Also, they have a whole group of ships in the 5,000 teu range, which the market doesn’t seem to care about. “Those ships will have to be absorbed and they will get absorbed,” said Leand. “At some price, they will trade. But in the medium term, this is just going to put more supply into the sector, which is not what anybody needs right now.”

Star Bulk has finalised an agreement with 15 banks to defer USD223.9 million in debt payments until June 2018 and relax financial covenants until the end of 2019. “This agreement assists our company to successfully weather current market conditions even if they were to last well into 2019, and positions us to take advantage of a subsequent market upturn,” Star Bulk CEO Petros Pappas confirmed in a 14 September statement. Pappas added that the deal was “based on the strong relationships” with its lenders and credit agencies “and their faith in Star Bulk’s high quality management and low cost operations.”

The NASDAQ-listed bulk vessel operator announced in June it had made a standstill agreement with the group of lenders to give the company time to finalise the restructuring. The final agreement, executed on 31 August, waives 100% of principle repayments for 25 months for the period starting 1 June 2016 and ending 30 June 2018. The agreement will also waive or “substantially relax” financial covenants until 31 December 2019.

To comply with the conditions of the restructuring, Star Bulk also announced on 14 September it agreed to raise USD51.5 million, and noted that three major shareholders intend to buy “at least their pro rata share” of the stock sale.

The agreement was announced at the same time Star Bulk revealed a net loss of USD32.9 million during 2Q16, which follows a loss of USD48.8 million in 1Q16 and compares with a loss of USD65 million in 2Q15.

The loss included several non-cash items, including a loss of USD200,000 on the vessels Indomitable, Obelix, Star Taurus and Star Michele, the company stated. Voyage revenues fell 5.6% to USD52.6 million in the quarter.

The dry bulk major had USD1.01 billion of average total debt during 2Q16, up 5.8% from an average of USD958.8 million in the same period last year.

Star Bulk also announced it had agreed on 26 July and 10 August to sell the vessels Star Aline and Star Monisha, respectively, to third parties. The 2004-built, 76,417dwt Star Aline is expected to be delivered at the end of September, the company said. IHS data lists the 2001-built, 164,218dwt Star Monisha as being sold for USD6.9 million and scheduled to be broken up.

Star Bulk has a 73-vessel fleet consisting of Newcastlemax, Capesize, Post Panamax, Kamsarmax, Panamax, Ultramax and Supramax vessels with carrying capacities of between 52,055 and 209,537 dwt, and aggregate capacity of 8.2 million dwt. The fleet includes five newbuildings under construction in China that are expected to be delivered in 2017 and 2018.

As logistics crisis of Hanjin Shipping lengthens, the toll on cargoes and crew on vessels stranded at sea as well as its clients around the world due to delays and possible ruins in their products is getting bigger and bigger.

More than 40 vessels of Hanjin Shipping cannot dock in fear of losing the ships and cargoes to creditors.

Sources say the vessels are struggling to save fuel as a containership typically uses up 100 tons of fuel a day for engine propulsion and power generation although some variance exists depending on vessel size and cargo volume.

Vessels that carry perishables consume more fuel to keep them chilled and frozen.

Any shipping delay will be especially detrimental to food freight owners because food past the shelf life would have to discarded, said Cha Mi-sung, vice president of Korea International Freight Forwarders Association.

Conditions onboard are getting tougher for the crew. A captain of a ship told the Wall Street Journal that his crew was trying to get by without air conditioning despite the heat to save power.

Some companies fretting over state of their cargoes have taken matters in their own hands but only to be upset by various hurdles due to different set of rules in different jurisdictions.

Samsung Electronics last Thursday filed a petition to a U.S. bankruptcy court, offering to pay the overdue port service fees for their cargoes on behalf of Hanjin Shipping. The U.S. court issued stay order to protect Hanjin Shipping cargoes at U.S. ports. But the situation remains in a stalemate in ports elsewhere around the world.

For smaller cargo owners, the matter is not as simple as paying the port service providers as Samsung Electronics has done to recover and unload its cargoes. It is not easy for them to track their cargoes and also find them from a bulky container.

“It is almost impossible to find specific cargoes and get them out of a packed container box,” one industry official said.

The matter would get more complicated and beyond control if ship owners get involved in the crisis for cargo owners and shipping companies. The ship owners that charter carriers to shippers have the right called cargo lien, or claim to the properties onboard. The fate of cargoes will become more uncertain if any of the ship owners exercise the right over the company in court administration.

The crisis surrounding Hanjin Shipping has rocked the industry, but even more shipping lines could find themselves in trouble thanks to the huge amount of overcapacity in the industry, warns the CEO of a logistics company.

Hanjin, which had around 3 percent of market share in shipping, filed for court receivership at the end of August, which has meant that its ships have been denied access to ports and, in some cases, have been seized.

One result of Hanjin’s troubles is that shipping rates have spiked. Prices for shipments between Asia and the U.S. have risen 50 percent through September, according to data from Freightos, an online shipping rate marketplace. However, this is likely to prove temporary, as prices will fluctuate and currently empty container slots are brought into use, the company added.

Not only have shipping rates risen, but companies which were using Hanjin have received charges from some ports, according to Philip Damas, director for supply chain advisors at Drewry.

“Some ports have imposed surcharges on exporters and importers who used Hanjin as a carrier and are waiting for their products in the destination port to cover the port costs unpaid by Hanjin. This is also increasing exporters’ costs,” he told CNBC in an email.

Hanjin has been a shock to the system, but a glut in the number of ships carrying goods around the world is still an issue, warns Dr. Zvi Schreiber, CEO of Freightos, an online logistics marketplace.

“There has been a significant overcapacity, which is why rates have been so low and that’s why Hanjin went bankrupt in the first place, but it’s not clear if that’s enough,” Schreiber told CNBC in a phone interview on Thursday.

“Hanjin is only 3 percent of world trade and it seems the overcapacity in the industry is more than that. This is just one of the painful steps for the industry correcting its overcapacity, but there may be more.”

The shipping industry is in dire straits. Because of overcapacity, shipping rates have fallen and the value of vessels has dropped. A market report released last week by market analyst’s VesselsValue showed that the total number ships being sold for demolition for all ship types had risen 50 percent this August, compared to the same month last year.

Schreiber outlined three scenarios which may help solve the overcapacity issue: economic growth; further collapse; or consolidation.

“Perhaps the world economy will get back into growth and catch up with capacity, which would be the best solution for everyone. If there’s economic growth and people are buying more products again, then you can utilise the capacity better,” Schreiber said.

“I’m afraid we’ll see more collapse,” he warned. “There could easily be another bankruptcy or two. I hope not, but that certainly can happen.” Shipping companies are likely to merge and consolidate, and this could support prices, according to Damas.

“We expect that the rapid consolidation of the shipping line industry through carrier failures and M&As, the inability of most shipping lines to continue the current price war and the possible avoidance by exporters of financially vulnerable shipping lines will push shipping rates up even after the short-term market shock caused by Hanjin,” he said.

However, Schreiber warned that consolidation may have some negative consequences.

“If you have consolidation and fewer players, they could find it easier to fix prices and keep them high, which would be good for them, but we don’t want to go back to a situation of cartels and price fixing in the industry,” said Schreiber.

Rear Admiral Paul Thomas, assistant commandant for prevention policy at the U.S. Coast Guard, has welcomed the news that the 2004 International Convention for the Control and Management of Ships’ Ballast Water and Sediments (Ballast Water Management Convention) has been ratified and will now enter into force in September 2017. It is an important step forward in controlling invasive species spread by ballast water and meeting the challenge of reducing the environmental footprint of international shipping, he says.

“We also understand that the announcement heightens concerns in the industry about the differences between the Ballast Water Management Convention and the U.S. ballast water regulations.” Thomas says the entry into force of the Convention will not change the U.S. Coast Guard approach to or enforcement of the U.S. ballast water regulations.

“Ships operating in U.S. waters must comply with U.S. requirements, including using one of the ballast water management practices described in 33 CFR Part 151.2025 and 2050. Therefore, ships in U.S. waters will not be subject to Port State Control verification of compliance with the Ballast Water Management Convention.

“Ships equipped with a Coast Guard approved Alternative Management System (AMS) will remain in compliance with U.S. regulation until five years after the compliance date (for an individual ship) is set. Compliance dates will be determined on a vessel-by-vessel basis after Coast Guard type approved ballast water treatment systems are commercially available. After five years, the AMS must either achieve Coast Guard type-approval, or be replaced with a type-approved system.”

The discharge standards required by U.S. regulations are the same as the standards proposed in the IMO Ballast Water Management Convention. However, there are differences found in the testing and verification protocols as well as confusion about the definition of “viable” as meaning living and non-viable as meaning dead.

U.S. type-approval testing procedures are mandatory and specify testing that is independent from manufacturers. They are also very detailed and require more testing than foreign type-approval procedures.
Currently, there are 19 ballast water treatment system manufacturers with systems approved by other administrations (AMS) that are seeking type-approval from the Coast Guard. Three of these manufacturers report they have recently completed testing with the Coast Guard independent lab.
“On the basis of information provided from manufacturers and independent labs, we expect to receive applications for Coast Guard type-approval in the next few weeks,” says Thomas.

“In the meantime, the Coast Guard continues to work with the IMO to harmonize the international testing procedures within the Ballast Water Management Convention, known as the G8 Guidelines, with U.S. type-approval processes.” The IMO type-approval guidelines are currently under review, and recommendations for revisions are being developed for the Marine Environmental Protection Committee (MEPC 70) meeting in October 2016.

“The Coast Guard is committed to protecting our waters from invasive species and supports a strong national and international solution that does not disrupt the continuous flow of maritime trade which drives the global economy. We will continue to work with all stakeholders to encourage and facilitate Coast Guard approval of ballast water treatment systems.”

The Wall Street Journal has recently observed that if Hanjin Shipping Co. Ltd. fails in its attempts to reorganize and emerge from bankruptcy proceedings in Korea, it would represent the largest container shipping company to date to collapse. In the meantime, its creditors have apparently been active in Chinese, Singaporean, and American ports. At this time, the federal district court in Los Angeles has allowed the arrest of one vessel (the Montevideo) on account of unpaid bunkering charges, and is still considering two requests for the attachment of Hanjin’s assets on behalf of two owners who charter vessels to Hanjin.

Hanjin’s decision to file a chapter 15 ancillary bankruptcy proceeding in the United States this past Friday does not put an automatic freeze on further ship seizures. However, the U.S. Bankruptcy Court judge assigned to that proceeding has indicated that he will consider Hanjin’s petition this afternoon, and if granted, the automatic bankruptcy stay will begin protecting Hanjin within the United States (and within U.S. waters). Not much time remains for further creditors to obtain maritime attachments or arrest orders against Hanjin’s vessels or other assets.

Beyond the effectiveness of the automatic bankruptcy stay, not much is else is so settled in the law concerning bankruptcy shipping companies. The Second Circuit’s 2005 decision in In re Millenium Seacarriers, Inc. points out the continuing uncertainty in U.S. law concerning the boundary between exclusive bankruptcy jurisdiction and exclusive maritime jurisdiction. As Judge Sotomayor (as she then was) observed in Millenium Seacarriers, while a bankruptcy judge can preside over the distribution of maritime assets, only a federal district court judge sitting in admiralty can dispose of a vessel by judicial sale, free and clear of maritime liens. In the meantime, there seems little disagreement that judges sitting in admiralty recognize the paramount impact of the automatic bankruptcy stay. Thus, once an automatic stay is instituted for Hanjin, there can be no more vessel seizures in U.S. waters.

If any maritime attachment has been perfected prior to entry of the automatic stay, there is precedent in the form of last year’s In re Daebo International Shipping Co. decision, in which the bankruptcy judge vacated the attachment without requiring the debtor to post any security, in part on the basis that the Korean bankruptcy judge’s order in that case was meant to have worldwide effect. In the current Hanjin petition before the U.S. Bankruptcy Court, part of Hanjin’s submission is that the Korean court’s protection is worldwide and is merely being confirmed by the use of U.S. chapter 15 proceedings. Thus, there is a good chance that attachments obtained on or after September 1 will be vacated by the U.S. Bankruptcy Court.

There is much less chance that the arrest of the Montevideo will be summarily vacated without the obligation to provide “protection” to the arresting lien holder. The bunker supplier who arrested the Montevideo will claim the existence of a “maritime lien” for the supply of bunker fuel, since this was a prerequisite to the arrest itself. Maritime liens create great headaches for bankruptcy judges, as they do not fit within the usual definitions or categories normally provided for liens in bankruptcy (or much else in non-admiralty matters). There is precedent in bankruptcy and admiralty court decisions for allowing the bankruptcy judge to release an arrested vessel upon the payment of adequate security for the release of collateral, but also for the bankruptcy court’s reliance on the arresting admiralty court for ultimate disposal of the vessel. Whether it is the bankruptcy judge in Newark or the district court judge in Los Angeles who ultimately has authority to release or auction the vessel will be sorted out in the coming weeks and months.