Analysis: Box shipping battered from all sides

Janet Porter - Wednesday 5 November 2008

NEVER in the half century of containerisation has the industry faced such a bleak future. Ocean freight rates are under unprecedented pressure on most routes as cargo demand falters, with some now at record lows. Charter rates are rapidly heading towards levels that would push earnings for newbuildings below operating costs. 

Many large boxships are now at anchor while owners and operators consider whether to go for full lay-up. Some such as Neptune Orient Lines have already decided to mothball tonnage as capacity is axed on key routes. 

Speculation is rife that yards are being pressed to accept order cancellations, even though pulling out of a signed contract could land the client with a hefty lawsuit. 

A number of smaller lines have gone bust and others will struggle to survive this maelstrom, although the big players should have built up sufficient reserves over the past few boom years to survive the crash. Even so, there are whispers about whether one or two are over-stretched. 

Profits are plunging even before the full impact of the downturn starts to feed through to the bottom line. Just last week, Evergreen Marine posted a 94% slump in third quarter profits. 

All eyes are now on Maersk Line whose parent company AP Moller-Maersk will release its latest numbers next Wednesday. 

Neither is there anything obvious in the pipeline that could spark a sudden rebound, as there was during the last slump of 2001-2002 when China’s membership of the World Trade Organisation spurred an extraordinary recovery across the entire shipping industry. 

Even the sudden rush to containerisation by US commodity exporters earlier this year as the stratospheric bulk trades became too expensive has disappeared, now that bulker rates have returned to earth. 

While the industry is busy blaming the totally unexpected slump in cargo growth for its plight, much of the crisis is self-inflicted. Just like homeowners, shipowners were tempted by cheap money into a massive investment spree that will see containership fleet capacity expand by more than 50% over the next four years and a whole new generation of super-sized vessels begin to enter service from 2010. 

The one consolation is that most of these are ordered against long-term charter contracts, in contrast to the more speculative bulk trades. 

Not surprisingly, ordering activity is now at a complete standstill, with ship finance no longer available and yards yet to reduce their prices to levels that will tempt back customers. This will bring some relief to the supply side, as will negotiations to stretch out deliveries, and a pick up in ship scrapping. 

The secondhand containership market is even more challenged, with buyers and sellers so far apart that most brokers have stopped publishing price indications and will only conduct valuation work with strict disclaimers to protect them from future complaints. 

But amid such dire circumstances, those in the industry are at pains to stress to the outside world that there is still plenty of cargo moving around the world, contrary to some of the wilder perceptions.
“Shipping hasn’t stopped,” Braemar Shipping’s chief executive Alan Marsh felt compelled to stress a few days ago as the bad news piled up. 

World container volumes are still growing, albeit at a much reduced pace, but what is weighing so heavily on the entire industry is the massive orderbook. 

Clarkson Research, which tracks supply and demand growth, now expects trade to be up by just 6.8% in 2008. In isolation, this looks quite good, but is way down from the figure of more than 11% that was being projected this time last year, and largely reflects the collapse in Asia-Europe growth that has nosedived from more than 20% in 2007, and is now close to zero. 

The fleet, on the other hand, is still expected to expand by more than 13%, leaving a massive differential over trade growth of 6.4 percentage points, compared with a gap of less than two percentage points that was being forecast in the autumn of 2007. 

Initial hopes that port congestion, which has been such a problem in recent years, would help to absorb the surplus tonnage as ships waited to be handled, are now a nonsense. With cargo volumes down in the key import gateways of North America and Europe, congestion is a thing of the past. 

That has spread to inland haulage, with all the transport bottlenecks that were causing such aggravation three or four years ago also vanishing. 

“The lines of trucks have gone,” Atlantic Container Line chief executive Andrew Abbott observed on a recent visit to Long Beach where gridlock has been such a headache until recently. 

While port delays are no longer an issue, slow steaming driven by record high fuel prices has been of more help in soaking up extra ships, with lines showing no inclination to return to higher speeds now that bunker prices have dropped. 

With other costs still rising and reduced speeds delivering environmental benefits, lines say slow steaming “is here to stay.” 

One of the very few positives right now, apart from falling oil prices, is the stronger greenback. With most freight rates still quoted in US dollars, many lines should benefit when converting income into their local currency. 

The container shipping industry will be anxious about the possibility, albeit a slim one, that a significant amount of manufacturing will shift back from Asia to locations closer to the main consumer markets, although there is less chance of that happening at today’s rockbottom freight rates. 

What has really shocked experienced industry veterans, who are well-used to volatility, is the speed with which the liner trades have imploded. 

Slowdown first emerged on the Pacific trades as the housing bubble burst and Americans stopped spending so much on household goods such as furniture or electric appliances. 

But with European economies still in good shape and the emerging east Mediterranean markets contributing to very strong growth figures, lines acted fast to remove surplus tonnage from the wilting Pacific onto the Asia-Europe trades. 

When westbound volumes from Asia appeared to slow at the start of the year, it was blamed on one-off external factors such as the storms that crippled much of China in the early weeks of the year, or distortions caused by the Olympic Games. 

But by the summer, it was clear that something more fundamental was at play. Lines abandoned attempts to secure the peak season surcharge usually levied on goods heading to European stores for the Christmas sales. There was no cargo surge. Even before the full extent of the banking crisis became clear, consumers were already in retreat. 

Spot rates to move a 20 ft container from Hong Kong to Rotterdam of as low as $250 were being quoted by some lines. That compares with $1,400 or more a year earlier. 

As the outlook deteriorated, Singapore’s NOL refused to raise its bid for Hapag-Lloyd, which was up for sale and was eventually acquired by a Hamburg consortium. 

That outcome brought relief in some circles, with the threat of two alliances being reorganised, and the inevitable disruption that would have caused, receding. But consolidation is still seen as necessary by most in an industry that remains fragmented and so highly vulnerable to extreme price swings. 

Upheavals now taking place in the marketplace have been accompanied by sweeping regulatory change, with the conference system outlawed in Europe last month. 

No longer can lines meet under the umbrella of a conference to discuss freight rates or capacity, with these previously lawful cartels now illegal. 

Dozens of conferences have closed down over the past couple of years as the industry prepared for the change, ranging from lesser known agreements such as the Europe Morocco Conference or the Europe Canary Islands Conference, to the two heavyweights, the Far Eastern Freight Conference and the Trans-Atlantic Conference Agreement. 

Lines have spent two years preparing for the change, with the help of Brussels guidelines, and putting staff through compliance programmes to ensure they understood the law. Even so, some remain concerned about whether plans by the European Liner Affairs Association to publish aggregated supply and demand data, and a price index, could run into legal problems. 

Rather than take that risk, Japan’s MOL has decided to quit the ELAA in what is undoubtedly a setback for the association’s plan to publish the most accurate data available, based on the assumption that input was coming from all the global carriers. 

The ELAA has been recruiting members in recent months, and one newcomer contacted by Lloyd’s List is in no doubt about the benefits, and the valuable advice that ELAA lawyers have been able to provide on the new legal environment. 

But ACL, which resigned earlier this year for much the same reasons as MOL, has no regrets, with Mr Abbott convinced that membership could come with legal risks attached. 

And as if the transition to a post-conference era were not enough, container shipping now faces another regulatory spat over the block exemption from EU competition law enjoyed by consortia. 

Co-operation between lines in the form of vessel sharing or space exchange agreements, but without any joint pricing, is regarded by shippers, regulators and the lines themselves as an efficient way of reducing costs and improving service quality without restricting competition. So lines were taken aback when a draft regulation issued by the European Commission last month, on new rules to replace the current set that expires in 2010, proved to be far more restrictive than they had anticipated. 

The regulation needed to be updated to allow for the end of conferences, but it seems clear that Brussels has been preparing the ground for the end of the block exemption, which gives alliances legal certainty, by 2015. 

Legal opinion is divided on some of the proposals, with moves by the commission to aggregate the market shares of interlinking alliance agreements the most controversial as far as ocean carriers are concerned. 

But some lawyers are asking what all the fuss is about, pointing out that the commission is trying to bring container shipping into line with other industries. 

Others believe there may be room for movement. 

“The commission’s draft should be seen as the first shot,” says Holman Fenwick Willan partner Philip Wareham. 

Under the proposals now on the table, a number of consortia would no longer be covered by automatic exemption, and would have to carry out individual assessments. 

As Brussels points put in a technical paper, there are several alliances that have a market share above the proposed 30% on thin trades. In the Europe-West Coast South America trades, for example, the Euro Andes alliance of Hapag-Lloyd, Hamburg Süd, CSAV and CMA CGM has a market share of almost 50%, while CSAV is also in another joint service that has a market share of around 11%. 

But Olivier Guersent, acting director in charge of transport, port and other services at DG Competition, points out that container lines should not feel too hard-done by. 

“The liner industry is better treated than many other industries, and therefore it is a bit disingenuous to complain,” he responded recently to grumbles that Brussels had not provided sufficient detail in guidelines issued to help the industry adapt to a world without conferences. 

Liner shipping is also the last transport industry to benefit from a block exemption, he said in reference to the consortia rules. “The maritime industry is privileged in this respect.” 

But as containership owners and operators watch aghast as the industry is buffeted from all quarters, most do not feel particularly privileged at the moment. This is a battle for survival, with very few players likely to emerge unscathed. 

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