Score One for Carriers, HMM Wins FMC Service Complaint from US Importer
Multiple shippers have turned to the Federal Maritime Commission seeking relief arguing that carriers failed to provide contracted space during the pandemic and that they were forced to pay higher rates in the spot market to transport their goods. In a newly released finding, the FMC however rules that the carrier worked with the shipper to address the challenges and finds for the carrier, HMM in this case, saying the shipper derived a substantial financial benefit from its dealing with the carrier.
The case is demonstrative of the ongoing struggle between carriers and shippers which contributed to the reforms to the U.S.’s Ocean Shipping Act as well as the pending decision by both the EU and UK to end the antitrust exemption for carriers. Shippers cite the concentration of the industry to a smaller number of carriers as well as the growth of the three main alliances which represent the vast majority of container capacity and key trade routes.
Like many smaller shippers, the complainant in this case, MSRF, an Illinois-based manufacturer and importer of gourmet foods and gifts, contends that it was squeezed out of the shipping market during the surge in volumes. They argued that smaller shippers lost their contracted volumes and were forced to make alternate transportation arrangements with other common carriers at substantially higher spot market prices. MSRF alleged that the carriers were reselling their contracted capacity in the spot market and its original filing alleged collusion among the carriers.
Administrative Law Judge Linda Harris Crovella however finds in a 32-page decision reviewing the history of interaction between HMM and MSRF that HMM carried almost double the minimum quantity commitments by extending the period of the contract. MSRF, the decision says derived substantial financial benefits through its dealings with HMM.
The original complaint filed in June 2022 was against HMM and Yang Ming and included allegations of collusion. The two complaints were later separated and the record shows a confidential settlement was reached with Yang Ming.
The FMC’s analysis shows that the shipper contracted with the two carriers plus two other unnamed carriers in 2021-2022. HMM’s minimum quantity commitment to MSRF was 25 FEUs and it came out in testimony that they agreed to carry no more than about two containers per 30-day period. MSRF contended that HMM only transported nine containers under the contract.
While there were challenges securing space, the testimony showed that the contract was amended 14 times with the judge writing that many of the amendments were “at the initiation or for the benefit of MSRF, including the addition of shipping lanes and the continuation of 2021 prices during the contract extension.”
MSFR contended that it had incurred at least $1 million in damages, but the judge wrote that none of MSRF’s claims were successful. The conclusion was that MSRF “has not met its burden of establishing that HMM engaged in unjust or unreasonable conduct.”
The FMC experienced a dramatic increase in the number of complaints filed against carriers. Many were smaller value disputes over fees and specifically D&D charges that were easily resolved. However, there were also other complaints from smaller shippers similar to MSRF related to the allocation of space during the surge in volumes. This is the first decision affirming the actions of the carrier in support of the shipper.
Final Bids Submitted in Two-Way Showdown to Win Control of HMM
Final bidding began today for control of HMM with reports from South Korea that one of the three companies pre-qualified dropped out. The estimated price tag for control of the world’s eighth largest container shipping company is believed to have increased with the two state-run financial institutions looking for between $4.6 and $5.4 billion for a 58 percent stake in the company and management control.
Korea Development Bank declined to comment to the Korean media about the specifics of the bids which were due today. A spokesperson however confirmed to the Korean JoongAng Daily that there was more than one bidder in the final round. The bank said at the close of the day “A workable competition has been established for HMM."
The bidding process was launched earlier this year with multiple Korean companies expressing initial interest but only three submitted first-round proposals. Hapag-Lloyd also expressed interest but was excluded from the process as the banks wanted to retain ownership of HMM in South Korea. The owners of SM Line, South Korea’s second-largest container shipping company expressed interest but did not enter a bid.
Media reports indicate that Dongwon Group, which has a shoreside logistic business and operates a container terminal in Pusan, was one of the two final bidders. The other is the Harim Group, which is the parent of Pan Ocean, a large dry bulk carrier. Harim is believed to be partnering with the JKL Consortium, a large financial institution in Korea. The third pre-qualified bidder, Korean conglomerate LX International with a global logistics company as well as chemical, semiconductors, natural resources, and low e-glass, is believed to have not submitted a final bid.
One of the key challenges to the deal is reported to be the financial expectations of KDB and Korea Ocean Business Corp. Reports indicate that the creditors, which began the restructuring of the shipping company then known as Hyundai Merchant Marine in 2016, are expecting a management premium above the current market value of the company’s shares. They completed a conversion of bonds placing a total of approximately 380 million shares up for sale. They are believed to be citing the 30-day average from the stock price of $11.75 per share, which is below today’s market close of $12.52 per share. The low end of the projected price range is $4.6 billion, equal to the share value before adding in a management premium.
The market price of HMM’s shares however is down significantly due to the declines in the container shipping business. The share price is off 70 percent from its 2021 peak.
Overhanging the market after the sale will be a further 336 million convertible shares held by the two financial institutions. They have indicated that they would work with the buyer to develop a plan for the additional shares. Near-term it is believed the banks would continue to hold their convertible perpetual bonds but would eventually be looking to sell those shares as well.
The financial institutions have previously said they wanted a buyer with strong management experience and the financial strength to continue to invest in the development of HMM. The carrier has placed orders for new containerships as well as moving to expand its operations in both tankers and dry bulk. It was also speculated that they were among the interested buyers for Hyundai LNG, the gas shipping company that had been sold off during the reorganization of the company. The investment bank controlling the LNG carrier has reported that it is looking to sell the shipping company.
KDB and KOBC are working with Samsung Securities which is managing the bidding for HMM. They have reported that they will review the financial status, management capabilities, and operational plans for HMM developed by the bidders. The preferred bidder is now expected to be named by next month although media speculation continues that the financial institutions might also withdraw the offering if their target price is not achieve
Bankrupt Retailer Bed Bath & Beyond Says MSC Owes it $315M in Compensation
Bankrupt former retailing giant Bed Bath & Beyond is continuing its battle against the shipping industry which it blames as a key contributor to the demise of its business. The company closed down earlier this year and as it works to resolve the creditor claims it is once again turning to the Federal Maritime Commission. This time it filed a whopping $300 million claim against MSC Mediterranean Shipping Company seeking compensation for the increased shipping costs and detention and demurrage charges the company incurred in 2020 and 2021 and now also for lost profits.
The bankruptcy estate known as DK-Butterfly filed the 36-page complaint with the FMC today, November 28, detailing its allegations and calling for a trial. The company says it is seeking reparations for injuries caused by MSC’s violations of the Shipping Act of 1984. It is the third such complaint filed by the former retailer which has also asked the FMC to order reparations from Orient Overseas Container Line and Yang Ming for their failures to honor service contracts and the charging of D&D fees.
MSC has repeatedly defended itself against these types of complaints denying similar allegations. The company cites the extreme pressures placed on the industry during the pandemic saying it was working with customers to meet the challenges.
The latest filing alleges that MSC “took advantage of price inflation in the container shipping sector and unfairly exploited its customers.” They allege MSC engaged in a practice of systematically failing to meet its service commitments in two contracts covering a period from July 1, 2020 through April 30, 2022. The 2021 contract called for the carriage of 4,240 forty-foot-equivalent container units or an average month allocation of 353 FEUs. The filing reports MSC provided 40 percent less or only approximately 2,553 FEUs.
The filing calls MSC's performance under the 2021 Service contract “abysmal.” They contend Bed Bath & Beyond had to make up for the shortfall on the spot market costing it nearly $7.3 million.
The complaint goes on to allege that MSC repeatedly coerced the retailer into paying premiums despite promises that it would honor the contract prices and only charge premium fees on extra shipments. The filing details repeated exchanges between the two companies showing they contend that they were forced into paying premium rates and surcharges for its containers to be at “the front of the line” as volumes surged and capacity and equipment became scarce.
They argue the added costs above the contracts cost Bed Bath & Beyond over $5.5 million in the 2021 contract period and a further $9 million in the 2022 contract.
Repeating an argument made by many shippers and trucking companies. they also allege that MSC penalized the company by charging D&D fees when the conditions were outside Bed Bath & Beyond’s control. They cite the inability to make reservations, backlogs to return containers, and equipment shortages. They allege Bed Bath & Beyond wrongfully paid over $13 million in demurrage charges and nearly $10 million in detention charges.
The kicker to the complaint comes in the allegations that the delays in shipping, caused a scarcity and uncertainty in the business, and disrupted Bed Bath & Beyond’s ability to operate. They propose that the company made profits of at least $66,924 per container and multiplying that by the 1,686 box shortfall, they propose that Bed Bath & Beyond’s lost profits were nearly $133 million. The final amount of lost profits they suggest should be determined during the trial.
The complaint details nearly $158 million in compensation the bankruptcy estate believes is due from MSC. They justify the compensation by suggesting that MSC’s actions were willful and purposely designed to inflate profits citing media reports of MSC’s massive profits and MSC’s tonnage buying spree as proof of the windfall profits produced at shippers’ expense. They also cite the other cases filed against MSC as corroborating evidence of the pervasiveness of the practices.
Under FMC rules, Bed Bath & Beyond if it can establish that MSC’s actions included retaliatory conduct the shipping can seek a doubling of any award of reparations. As such, the bankruptcy estate is inferring it could be due at least $315 million in compensation from MSC.
The claims are staggering by comparison to the earlier nearly $32 million claim against OOCL. They also filed a $7.7 million claim against Yang Ming. OOCL fired back in May 2023 responding to the first filing by Bed Bath & Beyond saying the shipper was distorting the facts. They responded by saying that Bed Bath & Beyond repeatedly failed to manage its own supply chain exacerbating the bottlenecks.
The filing is the beginning of a long process of review at the FMC. The bankruptcy estate is also seeking relief in the bankruptcy court detailing in its plan to the court the role it believes the container shipping industry played in the demise of its business.
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