The mood among maritime industry executives gathered in Long Beach last week for the 12th annual Trans-Pacific Maritime Conference was unusually positive given last year’s lackluster performance of the trade it’s named for.
Citing an improving U.S. economy, the beginnings of a turnaround in the housing market, a drop in the unemployment rate to 8.3 percent, booming exports and a rise in consumer confidence, keynote speaker Wei Jiafu set the tone for the two-day event when he stated his conviction that “2012 will be better than 2011.”
The chairman of China Ocean Shipping Co. took a pragmatic approach toward the health of the liner shipping industry. Despite continued overcapacity until at least 2015, carriers will do a better job of holding the line on freight rates because the alternative would be a round of bankruptcies. Carriers lost $5.2 billion in 2011 in their global operations, and financial support will dry up if they don’t return to profitability. “Banks have to be paid back,” Wei said.
Carrier executives and industry analysts are banking on the assumption that carriers and their customers want to bury at sea the volatility that has bludgeoned the container shipping industry the past three years. They see carriers making a concerted attempt to achieve compensatory freight rates even though capacity is likely to exceed demand in the major east-west trade lanes for the next three years.
By most measures, 2011 was a disappointing year for trans-Pacific carriers. Containerized imports increased only 1 percent over 2010, said Mario Moreno, economist for The Journal of Commerce and its sister company PIERS. Containerized exports increased 7.3 percent over 2010, but it is the higher-priced imports that determine ocean carrier profitability.
Moreno is also optimistic about trade conditions in 2012. He sees U.S. gross domestic product expanding 2.3 percent, continued growth in the manufacturing sector, an uptick in the housing market, a slight improvement in unemployment numbers and an increase in payrolls.
As a result, Moreno projects imports from Asia will increase 2.5 percent over 2011, and exports will expand 4.2 percent. These projections, however, could be thrown off track by a significant disruption such as a crisis involving Iran that could send oil prices skyrocketing, he cautioned. The U.S. economy is growing below potential, so it’s very sensitive to any disruption, Moreno said.
How carriers respond to the overcapacity resulting from bullish orders for large vessels in recent years will determine carrier health, and a return to freight rate stability.
Shipping lines ordered a slew of large vessels from 2005 to 2008, before the global economy crashed. Some of the vessel deliveries were delayed during the economic downturn, but the new ships are now entering the east-west trades.
Carriers recently launched a second round of orders for even larger ships, ranging in size from 10,000 to 18,000 20-foot equivalent units. Those ships will be delivered in two to three years.
Carriers will have to improve their cash flow to pay for the new ships. “Cash flow is absolutely critical to liner companies,” said Janet Lewis, regional head of industrials and shipping research at Macquarie Capital Securities in Hong Kong. If vessel utilization rates are low, carriers will slash their rates to attract cargo. That inevitably leads to rate wars such as those in 2009 and 2011.
Carriers also are boxing themselves into a corner by ordering so many of the massive ships. Martin Dixon, research manager of container freight rate insight at London’s Drewry Shipping Consultants in London, said 70 percent of the vessels on order are of 8,000-TEU capacity or greater.
Ships of that size can only be utilized extensively in the Asia-Europe and trans-Pacific trades to the West Coast. As these big ships enter those two mainline trades, however, 5,000- to 6,000-TEU ships will shift to the north-south trade lanes. The result could be overcapacity in the north-south trades as well, Dixon said.
Freight rates this year will rise, but how much “depends entirely on how capacity is managed,” Dixon said. He cited two possible scenarios, based on how aggressively carriers reduce excess capacity. If they lay up 6 percent of their fleet, rates in the trans-Pacific, which currently don’t cover expenses, will hardly budge. If carriers idle 10 percent of their capacity, rates could rise 13 percent in the trans-Pacific, he said.
Carriers are reducing capacity during the slack season in the Asia-Europe and trans-Pacific trades, but how long this will last and to what degree capacity is reduced remains uncertain because carriers are achieving reductions through the formation of vessel-sharing alliances and super-alliances that result from combining two or more VSAs.
The danger in this type of consolidation, however, is that when six or more shipping lines are sharing space on a vessel, the industry becomes “commoditized,” said Lars Jensen, chief executive and partner at SeaIntel Maritime Analysis in Copenhagen. There’s little to differentiate the services of the lines.
Jensen believes carriers will exert a measure of discipline this year and will be able to increase rates to a reasonable level as they achieve a tenuous balance between supply and demand. “There will be no big problem with capacity in 2012,” he said.
However, capacity is scheduled to increase 36 percent by 2015. Because demand will increase less than half that amount, there could be overcapacity “everywhere in the world in ensuing years,” Jensen said.
He sees the container shipping industry going through a major consolidation phase in order to survive. Today there are about 20 global shipping lines. By about 2025, there could be only eight, he said.