Container Shipping Industry Sees Slow Recovery Ahead

UNCLAS SECTION 01 OF 03 GUANGZHOU 000643 SENSITIVE SIPDIS STATE FOR EAP/CM, INR/EAP, EEB/TRA/OTP AND EEB/TRA/AN DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT, KGLATZ LONDON FOR U.S. IMO REP E.O. 12958: N/A TAGS: ECON ELAB EFIN ETRD EIND PGOV SUBJECT: Container Shipping Industry Sees Slow Recovery Ahead Ref A) 08 Beijing 4679, B) Shanghai 111, C) Guangzhou 218, D) Guangzhou 009 GUANGZHOU 00000643 001.2 OF 003 (U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE POSTED ON THE INTERNET. ¶1. (U) SUMMARY: The global container shipping industry hit rock bottom in 2009 and is slowly climbing out of the trough, according to industry experts attending the 3rd Annual Trans-Pacific Maritime Asia Conference in Shenzhen in late October. Executives of shipping lines and major retailers pointed out how falling demand and overcapacity had contributed to the industry's decline. Experts provided mixed forecasts on the future of container shipping, arguing that in order to pull the industry out of the current crisis, companies must discipline themselves and perhaps even take drastic measures like bankruptcy and consolidation to ensure the industry's survival. However, conference participants were generally optimistic when looking at the future of the China market. END SUMMARY. -------------- An Industry in Crisis -------------- ¶2. (SBU) "Shipping has never seen a crisis like this before," said Electrolux executive Bjorn Jensen, one of the keynote speakers at the 3rd Annual Trans-Pacific Maritime Asia Conference. The world's top 18 carriers have incurred collective losses in the first half of 2009 of US$8.6 billion. As an industry, the carriers will lose over US$20 billion in 2009, he forecasted. Neil Dekker of Drewry, a major shipping consulting firm, commented that freight rates globally had hit record lows as both spot and contract rates experienced large declines. Assessing the Asia-U.S. market, he reported that the first and second quarters of 2009 had seen year-on-year volume declines of 20% and 18%, respectively. Hong Kong to Los Angeles spot market rates fell 29.2% year-on-year, while Hong Kong to New York-New Jersey rates dropped 32.0% year-on-year. There was no peak season to speak of in 2009, said Dekker, despite expectations for "improved" performance for the second half of the year. For the Asia- Europe market, there has been some demand recovery since mid-July. However, some of this is attributable to inventory recovery in European warehouses, suggesting that the trend is only temporary. ¶3. (SBU) The Pacific route has been hit particularly hard, said Maersk Shipping executive Eddie Derlich in a separate meeting with ConGenOff held before the conference. Besides volumes being at an all-time low, rates on the Pacific route were down 35% over the last year and a half. He disclosed that Maersk had lost as much as US$500 million in the first three quarters of 2009, and added that smaller companies are likely facing a much worse situation. -------------- Overcapacity Here to Stay -------------- ¶4. (SBU) One of the biggest challenges facing the shipping industry is overcapacity. Ten percent of the global fleet sits idle, said C.L. Ting of Orient Overseas Container Line (OOCL) during his presentation, and more ships are scheduled for delivery over the next five years. Carriers have begun taking steps to modify the over-supply problem, according to Drewry's Dekker. Because it is technically very difficult to cancel a shipbuilding order, there have been relatively few cancellations so far, he said. However, companies are negotiating delayed deliveries and order conversions. For example, Israeli-based shipping company ZIM negotiated the delay of nine 12,600 TEU (twenty-foot equivalent unit) new builds to 2012-2015. Chilean liner CSAV reportedly converted an order for four 12,500 TEU vessels into five 8,000 TEU ones. Dekker predicted GUANGZHOU 00000643 002.2 OF 003 that approximately 40% of vessel orders would be delayed, and about 22.5% of the orders may be cancelled, expecting cancellations to increase in 2010-2011. ¶5. (SBU) While ship lay ups are an alternative, Dekker argued that any lay ups would only be temporary and would not remove the capacity from the long-term supply. Dekker said that a more viable option was vessel scrapping, which would relieve overcapacity somewhat. Shipping lines Evergreen and Mediterranean Shipping Company (MSC) have committed to major scrapping programs, said Dekker, who estimated that global scrapping of 316,000 TEU for this year will take out 2% of overall capacity based on the current fleet. He concluded that the new build market is dead and will remain so for the next few years. In sum, Dekker said that the massive capacity overburden on the shipping industry is here to stay, and adjustment efforts can only "ease the pain" for carriers. Furthermore, because of this overcapacity, freight rates will remain low even if the market does come back, explained another shipping executive. -------------- Analysts Give Mixed Forecasts -------------- ¶6. (SBU) Industry analysts offered mixed forecasts about the future of container shipping. Neil Dekker's 2010 forecast warned that any volume increase was likely to be mild and any increase in rates would likely force volume to decrease. Although volume has bottomed out, the recovery will likely be slow and intermittent. Freight rates will move up from record lows, but not enough for carriers to break even, said Dekker. Overcapacity will be a lingering problem until 2014 despite capacity adjustments and anticipated continued economic recovery. ¶7. (SBU) Tom Kim of Goldman Sachs, on the other hand, provided a more optimistic prediction. He argued that current signs of an economic recovery are good news for the shipping industry. With the recent surge in Asia-Europe spot rates and trans-Pacific rates recovering, Kim is optimistic that margins and returns will revert to levels prior to the economic downturn by 2011, assuming rates are sustainable. -------------- Need Discipline to Survive -------------- ¶8. (SBU) Many of the speakers at the conference agreed that the container shipping industry must discipline itself if it wants to emerge from the current crisis in one piece. Both OOCL's Ting and Al Benki of OHL, a U.S. logistics provider, emphasized that liners must change their mindset about market share and find new strategies to survive. Ting added that it is critical that carriers need to better manage capacity to avoid further exacerbating the current over supply of idle ships. The industry will take a few years to reach equilibrium, he said. ¶9. (SBU) A number of carriers incurred never-seen-before losses during the economic downturn, and yet nobody has gone bankrupt, according to Electrolux's Bjorn Jensen in his keynote address. Others at the conference supported Jensen's view that bankruptcies would be necessary to the industry's recovery. Several speakers commented that shareholders and governments cannot continue bailing out companies and that an actual failure of a major line might send out the best message to the market. -------------- Optimistic about China -------------- ¶10. (SBU) Despite some of the pessimism surrounding the future of global container shipping, participants at the conference were GUANGZHOU 00000643 003.2 OF 003 optimistic about the China market. Agility CEO for Greater China James Gange pointed to steady growth in China's transport and logistics market and China's third-party logistics (3PL) market as reasons for his confidence. With more Chinese companies going global and the central government's large investment in development projects in the western regions and plans to increase domestic demand, he believes that there is great potential in China. Goldman Sach's Tom Kim also looked favorably upon the China market, saying that there are many opportunities with Chinese consumers and companies. Showing that China's exports have historically trended with the country's electricity production and coal consumption, which have surged recently, Kim predicted that exports are on a recovery path, a forecast welcomed by many at the conference. GOLDBECK