Business | Features
The lull before the storm
The shipping industry faces tough times as their major clients succumb to the financial crisis. Operators are cutting services, merging and slowing down ships to reduce costs and ensure they are full of cargo.
- By Robert Wright, Financial Times
- Published: 23:51 December 21, 2008
Anyone looking out from the restaurants and offices of Singapore's tree-fringed south shore in the last few years has had a grandstand view of globalisation in action.
Scores of ships would be either anchored offshore or passing by in one of the world's busiest shipping lanes. Among the commonest sights have been huge container ships either taking vast quantities of manufactured goods from Asia towards Europe or, largely empty, heading back for more.
The view has started to change in the last few months. As well as the gainfully employed ships, there are now substantial numbers laid up, waiting for the end of a sudden and deep collapse in their earning power.
First came the dry bulk carriers that shift iron ore and coal around the world. Now, container ships are beginning to appear among them, mothballed by operators who have seen demand growth either slow down or go into reverse. Consumers in western Europe and North America are buying far fewer of the toys, computers, furniture and other manufactured goods that go inside the stackable steel boxes they carry.
"It seems to be going faster and deeper than expected," Michel Deleuran, a senior executive in Denmark's Maersk Line, the sector's biggest operator, says of the downturn.
Container trade between Asia and Europe, which rose 16.5 per cent last year, is shrinking for the first time in history, according to some estimates. The spot rate for moving a 40-foot container from Hong Kong to Rotterdam plummeted from about $2,700 (Dh9,917) in autumn last year to as low as $200 now.
Severe shock
Such figures represent a severe shock for an industry that has grown used to the double-digit annual volume growth and buoyant freight rates it has enjoyed for nearly all the seven years since China joined the World Trade Organisation.
The sector has not only been ideally placed to benefit from globalisation but arguably caused it. The introduction of the container in the 1960s and 1970s slashed the costs of transporting goods compared with the general cargo ships they superseded and encouraged manufacturers to move further away from their markets.
For retailers, manufacturers and other shippers who are container lines' customers, the rate slump continues the long-term trend under way since the first container ship set sail in 1956. Many will now be able to send cargo the thousands of miles between Asia and Europe or North America for a fraction of the trucking or rail costs of moving it a few hundred miles on land.
But the trade-off is likely to be poorer service, according to John Fossey, editor of Containerisation International, a trade journal.
On most routes, container lines or alliances of lines run a "string" of ships - traditionally eight for the round-trip from China to northern Europe and back - a week apart on a circular route.
Lines and alliances are now cutting services, merging different strings and slowing ships down to reduce fuel costs and ensure that ships run full. That often requires the use of an extra vessel to maintain a weekly service - Asia-Europe round-trips now typically take 63 days and require nine ships, against 56 days and eight ships before.
"Shippers, who have benefited enormously in recent years from carriers offering them multiple weekly sailings from a wide variety of ports, are probably going to suffer from fewer sailings per week," Fossey says. "They probably will find themselves having access to fewer port calls and probably have to face longer journey times as the liner companies are slowing their vessels down."
Many of the aggressively growing European companies that have come to dominate container shipping in the last five years look set for years of struggling to meet the cost of ambitious fleet expansion plans.
The mainly German funds that own large parts of such lines' fleets could face still tougher times as shipping lines terminate charters and struggle to finance what Nick Sjoberg of Braemar Shipping Services, a London shipbroker, calls a "feeding frenzy" of ship orders.
"The person who ordered the ships has a problem," he says. "He has to raise the equity and nobody wants to finance him. That has the potential to create significant problems for banks and for investors."
At the heart of the industry's problems is the coincidence of the demand slowdown with the start of a wave of deliveries of mammoth ships ordered at the height of excitement over China's manufacturing boom.
The largest container ships now - nearly 400 metres long, 55 metres wide and able to carry 13,000 containers - have about one and a half times the capacity of the biggest of barely five years ago. They have been designed mainly to handle exports from China and other Asian countries to Europe, although some could be used on services between Asia and the US west coast.
Sjoberg says shipowners need to raise $500 billion (Dh1.8 trillion) to pay for ship purchases to which they have committed. For the lines with the largest fleet order books, that promises to be an onerous burden.
Bigger vessels, when full, can transport each container more cheaply. But many see the giant ships proving a liability in the downturn. Container ships, unlike tankers or dry bulk ships, operate to fixed schedules, like a bus, train or airline service. Like nearly all businesses, they need to attract enough customers to cover fixed operating costs before making a profit.
Larger ships can make filling the available space harder and force operators to offer deeper discounts.
Huge discounts
Mark Page, research director at the London-based Drewry Shipping Consultants says the arrival of big new vessels on the Asia-Europe services of CMA CGM, the Marseilles-based world number three line, helped to push down rates on the whole route.
"In a falling market, the last thing anybody wanted was some really cargo-hungry new ship on the berth every week, needing to be filled," he says.
CMA CGM, along with some other believers in big ships, counters that the new vessels are part of the answer for the industry, not the problem.
Nicolas Sartini, in charge of its Asia-Europe trades, says CMA CGM benefits from its worldwide network, parts of which - such as Asia-west Africa trade - are still growing.
It is counteracting the slowdown in Asia-Europe volumes by topping up with cargo bound for west Africa, which is discharged at Tangiers for delivery by a second vessel.
Even if future vessel orders cannot be cancelled, lines will seek to postpone deliveries, to avoid the depressing effect on rates of a glut of new capacity.
Many will also be able to dispose of ships chartered from specialist owning companies to cut their costs and fleet size.
CMA CGM has the option to hand 150 of the 385 vessels it currently operates back to their owners during 2009, according to Sartini.
Still, the slowdown is likely to shift the industry's balance of power eastwards. Asian operators such as Singapore's Neptune Orient Lines and Hong Kong's Orient Overseas Container Lines, whose smaller ships until recently looked a liability, now appear better placed than others.
They largely held back from placing big orders in recent years.
Further fall
AXS Marine, a Paris shipbroker, predicts that world container fleet capacity will grow by more than 14 per cent a year on average between this year and the start of 2011. Even corrected for the effects of slower speeds and ship scrapping, Drewry expects vessel capacity to grow by about 12 per cent this year and next - well above any predictions of traffic growth.
In fact, it is possible to argue the problems may be only just beginning. Preliminary figures from Drewry's annual report on the sector, to be published next week, suggest shipping lines' rates have still been rising this year by 4.1 per cent.
For next year, they predict a fall in average rates of nearly 20 per cent. That could leave shipping lines facing still more unpalatable choices. The container ships laid up off Singapore are mostly older, smaller workhorses that lines are taking out of service to concentrate on filling their latest craft.
If the downturn continues much longer, Braemar's Sjoberg suggests, they may instead need to send gleaming-hulled new vessels each costing $170 million straight to the parking bay.
Freight: Ever bigger
Goods have been moving in stackable steel boxes on ships since 1956 in a technique that quickly established itself as the main means of shipping manufactured and semi-finished goods around the world.
The idea was devised by Malcolm McLean, a North Carolina entrepreneur, who saw it as a way of slashing the time spent in port.
Lines quickly recognised that it made sense to create vessels far larger than would ever have been possible with the traditional manual handling methods used to load and unload older cargo ships. The current question is how large vessels can become before being impossible to handle.
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