Sea of troubles

Jul 30th 2009
From The Economist print edition

The recession is buffeting the world of shipping—with even rougher waters ahead

AFP

FROM the sheltered waters of Subic Bay in the Philippines to Falmouth on the south coast of England, a vast, swelling armada lies idle. In Asia’s deep-sea havens 750 vessels—container ships, bulk carriers, tankers, car carriers and others—are laid up. A further 280 are sheltering in European waters. According to Lloyd’s Marine Intelligence Unit, nearly 10% of the world’s merchant ships are swaying gently at anchor because of a collapse in global trade.

Since the recession bit hard last autumn a lot of attention has been paid to the plunge in the Baltic Dry Index, a composite measure of the cost of shipping bulk cargoes such as iron ore and coal. It fell by over 90% between June and October last year, although it has since recovered slightly and is hovering at just above a quarter of its peak. World trade in general remains in its worst slump for generations, although it too is no longer falling. Two of the biggest shipping banks (RBS and HBOS) are in state-backed rehab. The parlous state of the world economy could mean more shipping companies following Eastwind Maritime, which went bankrupt in June. On July 28th Hapag-Lloyd, Germany’s largest container-shipping company, secured a €330m ($468m) bail-out from its shareholders while it seeks up to €1.75 billion to keep it from sinking altogether.

Worse, there is a huge supply of new ships on order and due off the slipways over the next four years. For bulk carriers alone, the backlog is equivalent to more than two-thirds of existing capacity. Philippe Louis-Dreyfus, departing president of the European Community Shipowners’ Associations, has called for an industrywide scrappage scheme to shrink the surplus. Warning of a “bloodbath”, he said in June that shipping capacity would exceed the needs of the market by between 50% and 70% in the near future.

Nothing like this has been seen since the early 1970s, when lots of super-sized oil tankers, known as VLCCs (very large crude carriers), were built in expectation of huge growth in oil consumption just before the first oil shock. The result was a persistent surplus and no more orders for VLCCs for a decade. By the late 1990s the number of ships completed was running at around 1,300 a year. But from 2004 production picked up. Ships have also been getting larger (see chart). By last year annual completions were up by nearly 60% compared with a decade ago and the ships were 30% bigger. No wonder Lloyd’s List, an industry journal, is full of news of ship seizures and bankruptcies.

Yet a ray of sunshine is breaking through the storm clouds. The world’s shipbuilders are unlikely to convert all of their huge backlog of orders into deliveries given their unrealistic workloads and likely cancellations. Drewry Shipping Consultants estimates that nearly half the ships due to be delivered last year are still sitting on the slipway or the drawing board. Analysts at ICAP Shipping Research in London shrug off the idea that there will be a glut, since shipments of cheap Australian coal and iron ore to China have for years been constrained by a lack of big ships. More giant bulk carriers will lower the prices of ores delivered to China and stimulate trade growth, they say.

The outlook for tankers is less clear because of the volatility of crude-oil prices. Rates recovered strongly in June, according to ICAP, partly because large vessels were in demand for storage, as oil companies waited for crude prices to strengthen. Looking further ahead, the International Energy Agency expects oil demand to fall by 2.5m barrels a day this year, having already dropped by 300,000 b/d in 2008. But lower demand will be offset by a scheme to phase out single-hull ships on environmental and safety grounds in European and North Atlantic waters. The decline in production from mature oilfields in the North Sea and Alaska also means that replacement supplies will have to be hauled longer distances by sea to the refineries of Europe and North America.

The part of the shipping industry headed for the choppiest waters is the container trade, which had steamed ahead gloriously since the mid-1970s. The forging of global supply chains in the past 20 years, the rise in merchandise trade and the emergence of China as the workshop of the world created growing demand. Vessels became gigantic, with the latest capable of carrying 15,000 standard containers. Now the box trade, as it is called, is in the midst of its first decline. AXS Alphaliner, an information service that tracks the trade, has estimated that some 15% of capacity will be idle by October.

Shipping companies that operate the main container services linking Asia, America and Europe will lose about $20 billion this year, after making only $5 billion profit in 2008, according to Drewry. To blame is a $55 billion fall in expected revenues, only partly offset by savings from lay-ups, “slow steaming” to conserve fuel and opting for the longer and cheaper route round the Cape of Good Hope, which avoids hefty fees for using the Suez Canal. The canal faces a drop in revenue of 14% this year. Container rates have tumbled: before last summer it cost $1,400 to move a container from China to Europe; today the rate is barely $400. Chang Yung Fa, the boss of Evergreen group, the world’s fourth-largest container fleet, based in Taiwan, talks of a “gruesome” excess of capacity. Three years ago he dropped plans to order new ships. Now he is scrapping part of his 176-strong fleet.

The grim outlook for container shipping is not simply a reflection of the recession. There is a deeper concern. Containerisation helped to promote globalisation by reducing the cost of shipping goods so sharply that manufacturers could afford to search the world for factories where costs were lowest. As a result, the amount of sea transport involved in manufacturing a given product rose. But some analysts worry that this one-off restructuring may be almost complete. So even when the world economy recovers, the rapid expansion of container trade may not resume.

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