If current trends continue, Ron Widdows says, he'll soon be able to see much of the world's container ship fleet from his office window in Singapore. The chief executive of Neptune Orient Lines is joking, but it's gallows humor -- the growing number of laid-up ships is a sign of hard times that are likely to become worse.
The container shipping industry is being hit by a synchronized global economic shock more severe than any recession since the advent of containerization. The impact is only beginning to be felt. It's likely to change the face of the industry by forcing some lines out of business, forcing others to merge or sell off ships and cause layups of hundreds of ships in the next year or two.
Until the end of October, the slowdown appeared to be a cyclical downturn that container lines could manage the way they have managed previous slumps. But then consumers in the U.S. and Europe, seeing what was happening in the financial markets, closed their wallets and purses. With businesses hit by weak demand and tight credit, container lines saw their cargo bookings plummet.
It's quickly become apparent that the slowdown has become a shock of massive proportions, one that comes just as shipowners and container lines are about to take delivery of record numbers of big new ships. Those deliveries will soon create an unprecedented surplus of vessel capacity that could last years, not months or quarters.
"This is nothing like we've remotely seen in the past," said Widdows, who in addition to heading NOL is chairman of the World Shipping Council and of the Transpacific Stabilization Agreement. "My own view is that this is much deeper and longer than anything we've seen in the past. We've got companies around the world that are going bust every day. It's a cycle: Companies go bust; people are unemployed; it reinforces the desire to hold cash whether you're an individual or a company."
He said companies are no longer investing in expansion and are pulling back on buying raw materials for their production processes, because there are no buyers. "The unemployment levels are headed north to pretty frightening levels, especially in the U.S. and parts of Europe," Widdows said in a telephone interview. "To have that going on a global scale is going to have a negative impact on trade flows for quite some time. You don't reverse that in months."
Widdows, who tracks the numbers on APL's advance bookings every day, thinks the falloff in consumer spending is setting off structural changes in trade and the economy that are difficult to discern. He fears that the rise in U.S. unemployment will ignite protectionist legislation to curtail free trade. As a result, when the world markets eventually start to grow again, the patterns of growth and the trade flows are likely to be quite different from the last decade.
There's no question that the slowing of container trade volumes worsened dramatically in mid-October. "We've seen a precipitous drop in exports from the U.S. in the past few weeks -- off a cliff," Widdows said. "All of those agricultural products that shifted into containers have shifted back into bulk with the collapse of bulk shipping rates and the fact that commodity shipments have been softer. So not only are there lower bulk rates, but there's bulk capacity available. That happened almost overnight."
That's why NOL decided in October to pull out of the bidding for German carrier Hapag-Lloyd, which TUI AG is selling to a Hamburg-based group. "We didn't make the decision until close to the end," Widdows said. "Events in the world certainly helped develop a comfort level regarding that decision. I was very comfortable making that decision when we did. And that decision looks better every day."
The sudden worsening of the container trade indicates that carriers' bottom lines will take a beating in the quarters to come. Several major carriers -- including APL Ltd., Evergreen, China Shipping, Cosco, Hanjin and the three Japanese lines -- reported weaker container shipping results. But those numbers don't reflect what's happening now.
"Just keep in mind that when you saw that our third quarter was significantly off from where it was in last year's third quarter, it's not anywhere close to the story," Widdows said. "The third quarter was affected to very little degree by what's taking place now."
It's already too late for container lines to take the steps they normally take to reduce capacity. They've already resorted to standard measures such as curtailing winter services, slow-steaming, the elimination or combination of services and the suspension of some sailings. Some lines have begun turning back chartered vessels to their owners at the end of leases.
The problem for container lines is that even if the economy begins to rebound by 2010, as some predict, so much previously ordered vessel capacity is being delivered that overcapacity appears almost certain, along with rate wars. New container ship capacity scheduled for delivery is expected to increase 14.3 percent this year and 15.9 percent in 2009, more than double the expected growth in demand, according to figures compiled by AXSLiner. Clarksons, the London-based ship broker and ship services provider, estimates that global container volume will grow 6.8 percent this year and 7.2 percent in 2009. Clarksons may reduce those estimates later this month.
Widdows said that some 1.6 million TEUs of new vessel capacity is scheduled for delivery in 2009 on top of 1 million TEUs in 2008 that's in place and absorbed. "There's too much capacity in the world today, but that's not horrible," he said. "What becomes horrible is whenever that next 1.6 million TEUs hits the market and absolutely none of it is needed. A few carriers -- not all -- have created a capacity dynamic for our industry that's going to affect us for quite some time."
Carriers have been trying to control the oversupply. On the Asia-Europe trade, where base rates are reported to have fallen to as low as $200 per container, Maersk Line has cut capacity by 10 percent. The New World Alliance of APL, Hyundai Merchant Marine and MOL this month combined two Asia-Europe services, reducing their capacity by 20 percent.
Taiwanese carrier Yang Ming said it has laid up one 3,000-TEU ship and will lay up another eight vessels, with capacities totaling up to 20,000 TEUs, by the middle of next year.
Maersk, the world's largest container carrier, said it hasn't laid up any ships in the wake of the current downturn in container volume and does not plan to do so except for usual seasonal maintenance during the normally slow winter months. "We will, however, likely need to consider the possibility in the near term, as the lack of activity in secondhand vessel markets makes it difficult for us to adjust our vessel portfolio," said Henrik Bjornsen, director of fleet management.
APL is laying up 20 ships, and its partners will lay up another 20 by the beginning of next year. "If this goes a bit deeper, then we'll extract more capacity, because to do otherwise is just simply going to cause losses," Widdows said. "Most of them will wind up outside my window here in Singapore. I'll have a larger view of my fleet than I've ever had." Small maintenance crews remain aboard the idled ships.
Other carriers have idled their ships at anchor in harbors throughout the Far East. "The people who say they're idling them waiting to see how the market turns out? Those will translate into layups," Widdows said. "There is a need for hundreds of ships to be laid up."
One likely result is that some carriers will exit the business. "Quite frankly, some people won't survive," Widdows said. "Clearly, the billions of dollars of investment (in new ships) that some folks have made and are now obligated to in this environment is going to put an incredible amount of stress on folks who have gotten maybe over their skis relative to their appetite."
Widdows is not the only carrier CEO who predicts that the global downturn will spur further consolidation, accelerating a process well under way in most sectors. "We will not all survive," Maersk Line CEO Eivind Kolding told a recent logistics conference in Germany as he predicted a fresh wave of mergers and acquisitions in the industry.
It's already too late for shipowners to cancel their orders for ships that are scheduled for delivery through the first half of next year. For deliveries scheduled further out, the situation is more fluid.
Peter Shaerf, managing partner of AMA Capital Partners, a New York investment bank specializing in the maritime trade, said there may be as many as 150 ships of more than 3,000 TEUs that are on order by German KG partnerships for delivery over the next three years that do not yet have charters. "So we may begin to see cancellations or the inability to fulfill the commitments. It's still early days," he said. "The question is whether the banks will fund the commitments when they come due."
Widdows said most of the ships on order for delivery in 2009 would come to market. "You have to assume that what comes in 2009 will all be delivered. It's mostly built and mostly paid for. Are people going to walk away from delivery of the ship because of the last 20 percent? Probably not," he said. "Whether the guy who intended to buy them is still around or not is kind of irrelevant. They are not going to sit in the shipyards 90 percent built."
That may create one of the few silver linings in this otherwise dark cloud for carriers. "In these times, for the folks who have a strong balance sheet, who don't have a lot of debt, who haven't overinvested, there will be opportunities that one could never have imagined," Widdows said. "If there's good news out there, there will be some most excellent opportunities down the road, whether that's just buying ships or other things that would enhance your business."
Peter Leach can be contacted at email@example.com.