• The industry will consolidate further, with the number of container lines shrinking by as much as a third.
• Freight rates will stay low until trade recovers enough to absorb vessel overcapacity. That process could take as long as four years unless many existing orders are canceled or postponed.
• Surviving carriers will have to differentiate themselves on the basis of customer service, simplicity of rates, and contracts.
• The north-south trade lanes will become more important as South America’s trade with China and India grows.
• The top terminal-operating companies will remain dominant and will acquire smaller, less geographically diversified operators.

One unanswerable question that crops up every time the container shipping industry plunges into the trough of its perennial boom-bust cycle: Will it ever learn from experience and refrain from ordering too many ships the next time it recovers, and from competing only on basis of low rates? Few expect that to happen.

“I’ve been in the industry for almost 30 years and they’ve never learned a lesson to date,” said Steven L. Horton, principal of Horton Global Strategies, an Atlanta consultant who negotiates freight rates for shippers.

Peter Shaerf, managing partner of AMA Capital Partners in New York, agrees. “Shipping lines follow each other into the water time after time, just like their mascot, the lemming,” he said.

Maersk Line’s chief executive, Eivind Kolding, told a logistics conference in Germany recently that he expects a fresh wave of mergers and acquisitions in the industry. “Quite frankly, some people won’t survive,” said Ron Widdows, chief executive of Neptune Orient Lines, parent of APL.

Widdows is also chairman of the Transpacific Stabilization Agreement, a group representing 14 lines that carry cargo from Asia to the United States.

With load factors deteriorating and freight rates at historic lows, carriers are seizing on every option they can to staunch the bleeding. They are cutting capacity by eliminating at least one of their Asia-Europe or trans-Pacific loops and combining others in vessel-sharing agreements with erstwhile competitors.

New World Alliance partners APL Ltd., MOL and Hyundai Merchant Marine are laying up 40 vessels, and APL has announced 1,000 layoffs worldwide. Mediterranean Shipping Co. and CMA CGM have suspended two services on the Asia-Europe trade because of tumbling cargo volumes and falling freight rates on one of the biggest liner routes.

Maersk, the market leader on the Asia-Europe trade with an estimated 15 percent of traffic, has already temporarily suspended two services, trimming its capacity by around 10 percent from a year ago.

The four-carrier CKYH alliance, composed of Cosco Container Lines, “K” Line, Yang Ming and Hanjin Shipping, has suspended two services, cutting Asia-Europe capacity by 30 percent, or 16,000 TEUs per week, until March. The New World Alliance and the four-carrier Grand Alliance announced they will pool services between Asia and the western Mediterranean. Cargo volume on the Asia-Europe trade fell in the third quarter from a year ago, the first decline since 2001, after growing by around 20 percent through 2007.

Some carriers, such as Zim Integrated Shipping Services and Pacific International Lines-Wan Hai, which only operate one Asia-Europe service each, are eliminating those services and buying slots on other carriers to tide them over with existing commitments. Israel Corp., the Ofer family holding company that controls 98 percent of Zim, moved to rescue it in late November with an injection of $150 million if needed, after the carrier swung to a third-quarter loss. The company also is preparing a restructuring program. Israel Corp. said Zim’s strategic plan envisaging large increases in shipping capacity and cargo volumes in 2009-12 “cannot be implemented under current market conditions.”

Other carriers may not have a guardian angel, and liner shipping executives expect some carriers to fail, which will lead to widespread consolidation in the still-fragmented industry.

The lines that fail are likely to be among the smaller carriers, most say. “I don’t believe that the big companies will go out of business,” said Anil Jay Vitarana, president of United Arab Agencies, which represents United Arab Shipping Co. in North America. “They have deep pockets. Eight of the (top) 10 are not totally liner operators.” The Japanese carriers have large Japanese trading companies behind them, and the Chinese carriers are largely government-owned or -backed.

Several of the top-tier operators have formed vessel-sharing agreements such as the ones that Maersk and CMA CGM announced in November between Asia and North America. “A year ago, we would have called them strange bedfellows,” Vitarana said. “People will find ways to survive.”

The liner shipping industry lacks the political clout that has allowed the banking and auto industries to pressure governments for bailouts. This is largely because liner carriers don’t employ large numbers of workers in the countries where they are based.

Governments may eventually face heavy lobbying pressure as some big shippers push for intervention, but that’s not likely until after one or two of the big carriers begin to totter. Their host governments may realize that carriers help grease the wheel of global commerce and understand that their loss would result in less competition, but there are no guarantees.

Some container terminals may be in trouble, too. Terminals that were snapped up by investment banks and infrastructure funds in the heady days three years ago when they looked like money trees may again become candidates for acquisition. With the slippage in U.S. container volumes this year, some of the recently acquired terminals have failed to meet covenants their buyers struck with lenders, who could force their sale to recover the loans.

Similarly, carriers that operate terminals in their major markets may also be forced to sell some of them as a means of survival. The top global terminal-operating companies whose geographical diversification enables them to survive the downturn would be logical buyers of any terminals that come on the market.

Further consolidation of liner companies appears inevitable. There will be fewer and larger carriers among the surviving lines, and they will have to compete by differentiating themselves on the ease of doing business with them. They won’t be able to differentiate themselves on individual vessel services, because many of them will be transporting cargo on the same ship through vessel-sharing agreements.

“They’ll have to compete on customer service, simplicity of rates, simplicity of contracts and by providing visibility through information technology,” Horton said. He said it will be much more important for the importer and the exporter to spend the time to know about every single carrier and their rates and services, “because the days of (rate-setting) conferences are over when everybody’s rates and surcharges were the same.”

The likeliest targets for acquisition may be the smaller lines that specialize in north-south services. “The trades with Latin America are still doing all right because most of the major carriers have pulled out,” Horton said. The north-south trades will become more important with the continuing growth of the economies of China and India, which will demand more raw materials of the kind that Latin America and Australia produce, which will, in turn, fuel further demand on the southbound leg for the kind of consumer goods that those Asian countries make.

The death in October of CSAV founder Ricardo Claro could make the Chilean carrier a target for acquisition, Horton said. CSAV has been experiencing problems raising capital, and Standard & Poor’s placed its ratings on CreditWatch Negative. Horton thinks that Hamburg Sud, which specializes in the north-south trades, might become another takeover candidate.

All of this assumes that the carriers can work their way out from under the huge amount of vessel capacity that is hanging over the main east-west trades. Carriers that have been ordering huge numbers of big, new vessels of up to 13,000 TEUs have nowhere to put them when they are delivered next year and in 2010.

“I’m sure 2009 will be awful for shippers, logistics companies and container shipping lines,” said Philip Damas, division director of Drewry Supply Chain Advisors. He thinks there’s a 50 percent chance that the ration between the supply of container capacity and the demand for cargo space could pick up halfway through 2010, because many of the ships on order may be canceled or delayed. “It all depends on how many of the existing orders are canceled. If all of the tonnage on order is delivered, you’re talking about a downturn in the container shipping sector lasting four years.”

Trevor Crowe, container analyst with Clarksons, the London ship broker and shipping services provider, is more optimistic. “Over the last 20 years, the average annual growth rate of the container trade has been close to 10 percent,” he said. “If, over the next five to 10 years, once we get through this horrible downturn in the world economy, the average growth rate in the trade gets back up to that 8 to 10 percent range, that would create a requirement for quite a lot of new capacity. This is going to create new challenges in its own right: Can we build enough ships and create enough port capacity?” (source: shippingdigest.com)

The idle capacity, up from 420,000 TEUs in December, accounts for 4.5 percent of the existing world container ship fleet in TEUs, according to AXS-Alphaliner, the Paris-based consultant. This compares with 3.5 percent of the world fleet that was idled in the depths of the 2002 slump.With the suspension or closure of Far East-Europe loops and volume reductions on regional or feeder services “ships of all sizes continue to gather up at anchorages or in ports,” AXS-Alphaliner said.

The jobless fleet has grown from 165 vessels of 420,000 TEUs two weeks ago and 135 ships of 300,000 TEUs a month ago.

The idled tonnage includes seven ships of 7,500-10,000 TEUs, and 24 vessels of 5,000-7,500 TEUs. Feeder tonnage is the hardest-hit sector with 68 vessels of 1,000-2,000 TEUs at anchor.

Idle vessels include 125 ships whose charters have expired and are seeking employment.

The total weekly capacity of the three main East-West liner routes has fallen by 11.5 percent from 916,000 TEUs to 812,000 TEUs since Aug. 1, AXS-Alphaliner said. The decline accelerated in December when several Far East-Europe loops were abruptly closed or suspended, removing almost 30,000 TEUs of weekly capacity.

Capacity on the Far East-Europe-Mediterranean trades has declined 16 percent in the past five months, from 418,000 TEUs per week to 351,000 TEUs. Far East-North America capacity is down 9 percent to 342,000 TEUs from 376,000 TEUs.

Europe-Mediterranean-North America capacity has been cut by 2.5 percent from 121,500 TEUs to 118,000 TEUs (source: joc.com).

As the global economy inches closer towards recession, it will trigger a domino effect that will affect the industry.

As much of international trade is carried by seaborne transport, the industry will surely feel the pinch of slumping global consumption, production and trade volume.China, whose economic growth has driven global economic growth in the last decade, will also suffer a drop.

The International Monetary Fund (IMF) has projected that China’s GDP will grow at a slower pace of 8.5% next year from its earlier projection of 9.3%.

Consumers will also continue to tighten their spending and industries will cut down on production.

This will result in lower demand for goods, materials and components, and lessen the volume of global trade.

And several shipping trades will suffer more than most.

The woes of the bulk trade looks set to continue as demand for bulk items decline further.

The container trade will also suffer a sharp fall, partly also due to the impending entrance of huge new tonnage in the market.

These will cause freight rates, which have taken a severe beating of late, to spiral down further.

It will also drive the prices of vessels down and also affect the net worth of shipping companies, whose valuation will be lowered as the prices of their assets decline.

However, players with deep pockets and huge cash reserves will find plenty of opportunities to acquire vessels on the cheap and expand their fleets.

As a result of the credit crunch, banks are expected to tread more cautiously in the ship financing markets.

Less funds will be made available, especially to small shipping companies.

Shipping companies which manage to secure financing will have to pay higher rates for it.

As funding becomes scarce and expensive, shipping companies will defer from borrowing and delay their fleet expansion programme.

Shipyards will also see demand contraction as shipping firms defer their orders while distressed shipowners are expected to cancel orders.

In addition, the ‘funding freeze’ will also result in banks tightening the issuance of letters of credit and trade finance facilities to importers and exporters, which will adversely affect the volume of trade.

The issue of maritime security will also be keenly monitored as the spate of attacks on merchant ships in the Gulf of Aden continue.

Although the surveillance and naval patrols have increased in the strategic sealane that facilitates much of the world’s seaborne transportation of crude, the frequency and intensity of attacks have continued unabated.

A more drastic and effective action should be taken by the international community to eradicate the threat of piracy there.

Due to the rampant piracy cases, insurance underwriters are expected to increase their coverage for ships, crews and cargos.

Shipowners and shippers will have to take up extra coverage such as kidnap and ransom coverage and ‘war risk zone’ premiums in high risk areas such as the Gulf of Aden.

The focus on protecting the marine environment will also become more intense, due to the introduction of new environment conventions and growing public attention and concern on the issue.

Several countries which have introduced stringent laws to protect their maritime areas from pollution by the shipping industry will strictly enforce them, in the wake of several recent high profile incidents.

The imprisonment of the master and chief officer of the Hebei Spirit tanker that discharged oil off the coast of South Korea in December 2007 has provided a precedent that has worried many shipowners and seafarers.

Although no shipping trade is immune to the widespread slump in the demand for shipping services as a result of the global economic woes, the offshore shipping sector should continue to perform well as offshore oil and gas activities continue.

Demand for offshore services vessels, especially, will remain strong as oil majors continue their exploration and production activities in deepwater fields.

The tanker market should remain resilient as global demand for energy continues to grow, albeit at a modest pace.

Economic growth and demand for container shipping services in the Middle East and South Asia are expected to remain buoyant.

Shipping, being a demand-derived service, stands to rebound quickly once consumer confidence, industrial output and the global economy pick up steam (thestar.com.my).

The first priority for the cargo container business, of course, is making good decisions in an economy in which consumers have zipped their wallets, orders are a fraction of what they were in good times, Asian factories are shuttered and unemployment rates are rising.

Long-term infrastructure improvements, including increased rail service and improved trucking conditions – as well as helping to cleanse the air at pollution-heavy, dangerous ports – will be necessary for the West Coast to hold on to market share amid ever-increasing competition from across the country, experts say.

Container cargo volumes moving through the West Coast ports fell again in October, and 2008 is now expected to be the slowest year since 2004, according to the National Retail Federation. Collectively, the decline at West Coast ports is more than 1 million containers so far this year, American Shipper magazine reported.

Down from last year

Through October, Long Beach, Los Angeles, Oakland, Seattle and Tacoma have handled 17 million TEUs, or 20-foot equivalent units, as the cargo containers are referred to in the industry, a decline of 6.6 percent from the 18 million TEUs processed in the first 10 months of last year.

But even after a recovery, growth in Asian trade is more likely to benefit the Gulf Coast ports, served by the Panama Canal, and the East Coast ports, which handle Southeast Asian cargo routed via the Suez Canal in Egypt, according to the authoritative supply chain adviser Drewry Shipping Consultants Ltd. of London.

In an article getting considerable attention in the industry, Drewry wrote that while the slowdown in volume along the West Coast “looks like the natural result of the credit squeeze,” several factors have combined to undermine the position of the Pacific Coast ports, not the least of which is the complacency and increased rates of U.S. railroads.

Shipping to destinations in the East after goods enter West Coast ports is now more expensive than what is known as the “all-water” route to East Coast and Gulf Coast ports – eliminating rail passage across the country, from West to East, the article notes.

A third set of locks is to open at the Panama Canal by 2014 and, Drewry notes, that will create more transit capacity for container ships using the all-water route linking Asia and the United States.

“Even if growth continues as strongly as it has in recent years, any new trade will probably pass the West Coast by,” the article reads. “Volumes are unlikely to decline, but the days of strong growth on the Pacific Coast are behind us.”

Michael Jacob, vice president of the Pacific Merchant Shipping Association in San Francisco, has bought into the idea the West Coast faces daunting structural problems. His trade association represents 60 maritime terminal operators and ocean carriers.

“In the long term, we are seeing the threat of all kinds of issues – issues on steroids,” he said. These include “the lack of freight-supporting infrastructure,” meaning highway and rail improvements as well as improved port facilities; and pricing, due to fuel, environmental costs, port container fees, and the costs associated with congestion, said Jacob. “Everyone has environmental issues,” he said, “but we have them in spades.”

In addition, Jacob says that some shippers are choosing an alternative route around California, “investing somewhere else.”

He added, “We are actually on the front end of a long-term structural change of business models where people are building their supply chains around California” for goods not destined for California.

At the Port of Oakland, Lawrence Dunnigan, manager of business development and international marketing, agreed that more cargo is moving directly to the East Coast than was the case in past years, but he believes the West Coast remains a viable market that also serves the Midwest. For all its pluses, the Panama Canal route remains an expensive option, Dunnigan said, and far more time-consuming than a 14-day trip from China to the West Coast.

“People are not shutting down warehouses or abandoning the West Coast,” he said. “You still have to supply the West Coast.”

It is true that the Port of Virginia, the Georgia Ports Authority in Savannah and others made infrastructure improvements in recent years, which they accelerated when fuel prices shot up, and that explains some of the volume increase in East Coast and Gulf Coast ports, Dunnigan said.

Savannah thriving

Savannah is particularly aggressive, handling 2.7 million containers each year with the capacity to move more than 6.5 million annually, said Doug Marchand, the executive director of the Georgia Ports Authority. In August, Savannah’s year-to-date growth rate was 10 percent, the highest among all the major ports, and ahead of other ports that were also growing quickly at the time, New York-New Jersey (5.7 percent) and Norfolk, Va. (6.5 percent).

By contrast, the Port of Seattle said October volumes dropped 14 percent. Loaded import containers fell 17.4 percent. Tuesday, the port commission approved its 2009 budget, cutting operating expenses by $9 million. Approximately 109 staff positions will go unfilled into the first six months of the year. To the north, the Prince Rupert Port Authority in British Columbia – served by the Canadian National Railway with service to Chicago – said its container traffic increased 281 percent in the third quarter, compared with the first quarter.

Also on the West Coast, the Port of Long Beach, the nation’s second largest, was down 7.7 percent in October and the Port of Los Angeles, the nation’s largest, was off 3.9 percent from October 2007.

Global economy’s impact

The Port of Los Angeles said, “The global economy continues to play a role in our drop in cargo volume. Exports have declined due to the stronger dollar. Retail sales are down, which naturally affect the import of new goods. We anticipate seeing this trend continue for the remainder of the year.”

The Port of Oakland – recently bumped from fourth largest in the nation to fifth by the Georgia Ports Authority’s facility at Savannah – is far more balanced between imports and exports and so is less affected by the falloff in imports than other major ports. So far this year, Oakland is down 6.4 percent in imports but up 4.4 percent in exports.

That’s still a red number Oakland wants to go away, but recovery is not at hand.

“Certainly 2009 is looking very bleak. That is the word I have heard several times,” Dunnigan said.

A softening of port business on the West Coast is not only in part due to the precipitous downturn and increasing attractiveness of alternate cargo routes, but to financial challenges ocean carriers face at California ports, said Jonathan Gold, vice president for supply chain and shipping policy at the National Retail Federation.

“People are looking at the business environment surrounding California right now,” said Gold, referring to container fees being imposed by ports, and expenses related to cleaner truck programs and other fees. “They’re making decisions on whether to use California ports or other ports.”

Gold added, “They are trying to balance the risk in the supply chain, trying to look and see how they get the best advantage,” including considering Canadian and Mexican ports.

Moreover, said Gold, the 2002 labor dispute at the West Coast ports – when workers were locked out and the ports shut for 10 days after the workers staged a slowdown when contract talks stalled – also influenced decisions to ship around the West Coast this year.

A new contract was negotiated and agreed to July 28, but before the ink was dry, merchants “wanted to hedge their bets” and “did not want to get caught as they did back in 2002,” having all their eggs in the baskets of the West Coast ports, Gold said.

“There is new leadership for the employers (the Pacific Maritime Association, representing ocean carriers and terminal operators) and the union (the International Longshore and Warehouse Union) and we kept hearing a deal would get done, but until we saw the deal in place, there was doubt out there,” said Gold.

At the ILWU in San Francisco, Craig Merrilees, the spokesman, said “some of the employer groups whipped up their members into a paranoid lather urging companies to spend all sorts of extra time and money to reroute their cargo when it was not necessary.”

He added, “Most observers who follow the industry saw there was little or no probability of repeat of the 2002 fiasco.”

But even with a new, improved contract, ILWU members are working fewer hours, feeling the effects of the slowdown like most everyone else.

‘Unprecedented’ conditions

Ron Widdows, the chief executive of Neptune Orient Lines Limited, the parent of APL, its container shipping arm, put it succinctly Nov. 19 when he announced a reduction of 1,000 positions worldwide; the closure of the APL office in Oakland, affecting 350 people, some of whom will relocate to an office in a more “cost-effective” location in another state; and other adjustments when he said, “The negative conditions we are seeing in the marketplace are unprecedented in our industry’s history.”

Widdows added, “This reflects our considered view that what we are seeing goes beyond a normal cyclical downturn.” He said he anticipated further deterioration in trading conditions and described the outlook for profitability in 2009 as “grim.” As evidence, APL is taking 20 of the 130 cargo ships in its fleet out of service.

Said APL spokesman Mike Zampa, “When we come out of this, we will look different. Leaner. Absolutely. Not all carriers have paid close attention to their cost structure. In the end, some of them operate services that are not profitable. That can’t happen any longer.” (source: sfgate.com)

Travel company TUI expects to make a decision about Hapag next year April. TUI wants to strengthten is position in the travel industry with the sale of Hapag.

That Kühne and its investors made a higher bid is surprising. It was expected that NOL’s offer was higher because its merger with Hapag would create synergy effects. The shipping line from Singapore has still the possibility to increase its offer.