SINGAPORE SHIPPING WOES REFLECT GLOBAL SLOWDOWN

UNCLAS SECTION 01 OF 03 SINGAPORE 001319 STATE PASS USTR SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EWWT SN SUBJECT: SINGAPORE SHIPPING WOES REFLECT GLOBAL SLOWDOWN ¶1. (SBU) Summary: As a bellwether of global trade, Singapore's shipping companies and ports are being hit hard by the global demand slowdown. Trade flows have dropped in nearly every market, but Europe and U.S. routes have seen particular declines. Intra-Asia trade has held up better than other markets this year, but has fallen off in recent months as well. The decline in trade has driven freight rates to rock bottom prices, just as substantial new additional freight capacity is coming online, none of which is needed. Shipping companies are cutting routes and idling ships to conserve cash, but industry expects at least one major shipper will go under before the crisis is over. Singapore's port is still anticipating positive growth in container traffic for the year, but looking at a decline in 2009 for the first time in years. End Summary. ¶2. (SBU) Singapore shippers are struggling with an unprecedented drop-off in ocean freight, as the global financial crisis has dealt a sharp blow to consumer demand for imported products. Ron Widdows, CEO of Singapore-based Neptune Orient Lines (NOL),told Econoff that patterns in sea trade were changing faster and more dramatically than he had seen in his 40 years in the business. Global supply chains are seizing up, from raw materials in developing countries to final product delivery in developed countries. Although the shipping industry has always been cyclical, Widdows said there was now a transformational change taking place; trade patterns that usually moved glacially were changing in weeks. Shippers are bracing for a deep and prolonged downturn. Routes cut as trade plunges -------------- ¶3. (SBU) Shippers are seeing a serious slowing in trade worldwide, but particularly to E.U. and U.S. markets. Widdows said container traffic had begun to slow to Europe in late 2007 and to the United States early in 2008. However, for the U.S. market at least, shippers had still been doing a healthy business earlier in the year, booking full ships 6-8 weeks in advance. Overall volumes for NOL's container unit, American President Lines (APL),were up 10 percent through the third quarter of 2008 compared to last year. However, in October container volumes dropped almost overnight, Widdows said. NOL's volumes were down 12 percent in November compared to the same month in 2007. Shippers are now estimating a 10-percent contraction in shipping to the United States for the year. NOL estimates Asia-Europe trade will be a negative two percent, not as low as the U.S. market, but far short of the double-digit increases that had been expected and therefore a relatively heavier blow to shippers. ¶4. (SBU) Widdows said intra-Asia trade, including the Middle East, would still show positive growth for the year. Growing domestic demand in China and India has helped to cushion some of the blow from declines in the larger markets, but too little to offset the losses from other markets. Much of intra-Asia trade is in intermediate products whose final destination will be markets in the United States, EU or Japan, which is now falling as well as those markets contract. Widdows said that trade with the Middle East is still strong as additional apparel production is moving into the area, with particular strength in Egypt, Jordan and Turkey. Within East Asia, Bangladesh and Vietnam have seen continued increases in container traffic as some manufacturing shifts out of China. Widdows noted that trade with Latin America is still steady, with food shipments in refrigerated containers growing strongly. ¶5. (SBU) In reaction to the demand slowdown, APL announced in October it was cutting routes and reducing capacity on its Asia-Europe trade by 25 percent and its transpacific trade by 20 percent. APL also cut one intra-Asia route. In November, Maersk Line, the world's biggest ocean container carrier, cut an Asia-Europe service, reducing capacity by 10 percent along that route, and made further changes to its other service networks. Japanese shipper NYK Line also cut its Asia-Europe capacity by 10 percent. ¶6. (SBU) To reduce capacity, shippers are "laying up" ships, dropping anchor and staying idle in port. NOL plans to lay up 20-25 container ships by mid-2009 out of a total 130 ships. Maersk announced in December it had laid up eight container ships, each with the capacity to carry 6,500 containers, or twenty-foot equivalent units (TEU). During the shipping slump that followed the 2001 recession, ships with a total capacity of 180,000 TEUs were idled, representing approximately 3.2 percent of the fleet; in Widdows' estimate, in the current crisis approximately 1.7 million TEUs worth of capacity will need to be idled. Local analysts joke that soon it will be possible to walk to Indonesia across the decks of all the ships laid up in the Singapore port. SINGAPORE 00001319 002 OF 003 ¶7. (SBU) Singapore's port is a prime location to lay up ships as technical and management staff are nearby, as are repair facilities. Singapore-based Pacific International Lines said it was not planning to lay up ships, but would take advantage of the slowdown to send some carriers into Singapore's drydocks for repairs. APL said its 14 U.S.-flagged and U.S.-crewed ships used to ferry military equipment to U.S. forces in Iraq and Afghanistan would not be among the ships it is laying up. Military shipping remains one of APL's core industries and is one of its few markets that remains healthy. Too many ships, too little freight -------------- ¶8. (SBU) Shipping's struggle with the contraction in trade volumes has been compounded by a steep decline in freight rates as ships chase the remaining trade. The Baltic Dry Index, a measure of dry bulk cargo rates, has cratered, dropping approximately 94 percent since its high in May. Container freight rates from Asia to the U.S. West Coast have dropped from US$1700 to US$1300 for a 40-foot unit. Base freight rates on Europe-bound routes have dropped by 80 percent to only US$250 to US$300 for a 20-foot container. NOL said that numerous shipping lines are transporting containers to Europe for essentially no cost, charging only for fuel and terminal handling charges just to keep operating. The recent drop in fuel prices has helped offset some of the drop in freight rates, but fuel cost is a relatively small part of overall costs for container shipment. ¶9. (SBU) Industry attributes the sharp drop in freight rates partly to the slowdown in trade and concomitant competition for the remaining business, but also due to overcapacity in ships. Shippers that had come to expect double-digit annual increases in container traffic had planned purchases of new ships accordingly. NOL estimates that approximately one million TEUs of ship capacity came on line in 2008, with another 5.7 million TEU capacity scheduled for delivery in the next three years. Altogether the extra capacity scheduled is equal to approximately 60 percent of the current total capacity of container shipping. Transportation financers DVB Bank estimate orders for dry bulk ships stand at 72 percent of the existing fleet. ¶10. (SBU) Virtually none of the extra capacity is needed, and the oversupply will continue to depress freight rates. NOL's Widdows told Econoff that many of the orders for new ships are not yet financed and likely only half of what is scheduled for delivery in 2010 will actually be built. However, the 1.7 million TEU capacity scheduled for 2009 and already being built will be delivered. Widdows estimated that even with an immediate recovery of trade to double-digit growth, the oversupply of ship capacity will keep freight rates at rock bottom prices for the next few years. Shippers are removing some capacity by scrapping older ships, but with low prices for steel there is little demand in the scrap yards. ¶11. (SBU) Trade financing has also become tighter and put a further crimp in trade. The evaporation of trust within the credit markets has meant a greater difficulty in obtaining letters of credit and other trade financing to complete a trade transaction. Without advance financing, traders have been unwilling to risk putting goods on the ocean without certainty a buyer will be on the other side once it arrives. Singapore exporters say they have not faced difficulty obtaining financing, but anecdotes abound of cancelled deliveries in other countries and full containers sitting on docks waiting for the letters of credit that would allow them to be loaded onto ships. Air Cargo Also Plunging -------------- ¶12. (SBU) Air cargo firms have not escaped the slowdown. Singapore Airlines (SIA) Cargo reported a 12.4-percent contraction in cargo volumes in November compared to last year, and is cutting capacity and laying off pilots to adjust. SIA says its cargo load began dropping off in September in all regions, but particularly in East Asia and Europe. UPS's local office said caseloads in November had dropped for the sixth consecutive month. The International Air Transport Association has forecast that air cargo traffic will drop five percent in 2009, following a 1.5 percent drop in 2008. Singapore's Port Still Up, But Traffic Slowing -------------- - ¶13. (SBU) The Port of Singapore is still shooting for a five-percent growth in container traffic for the year, but in November faced its first year-on-year drop in monthly container SINGAPORE 00001319 003 OF 003 traffic in seven years. The Maritime and Port Authority reported that 2.29 million TEUs passed through the port in November, down 1.5 percent from the previous year. Mr. LIE Sek Guan, Manager of Research and Statistics for the Port of Singapore Authority, said that growth rates had been healthy earlier in the year and the Port had chalked up ten-percent growth figures for the first three quarters of 2008. Container traffic to the United States and EU had been slow since the end of 2007, but Asian traffic has only recently slowed down. Lie said traffic with Africa and Latin America is holding steady, but with the decline in commodity prices he expects those markets to slide as well. Lie predicted negative growth in the port's container traffic for 2009, a nearly unprecedented occurrence. Lie noted that even during the Asian Financial Crisis, global container traffic still grew eight percent. The Future of Shipping -------------- ¶14. (SBU) Shipping analysts expect a consolidation in the shipping industry as weaker shippers merge with larger players with the deep pockets to ride out the downturn. NOL's Widdows said the industry's recovery would require at least one of the larger shipping companies to go under, although capacity problems would still exist. Widdows also predicted that the difficulties in the shipping industry could eventually begin to shorten global supply chains. Although shipping rates are currently low, congestion in ports is increasing and deliveries are becoming more uncertain. In the United States, NOL is seeing greater traffic to the East Coast as importers diversify away from bringing in shipments solely through the most common West Coast ports of entry in Los Angeles and Long Beach. In Asia, NOL is seeing diversification from China to Vietnam and India, and predicts that manufacturing will shift more to Latin America as well to shorten supply lines to the United States. HERBOLD