Capacity Concerns

Capacity Concerns

Ocean vessel capacity was the most pressing concern for shippers at last year’s Journal of Commerce Trans-Pacific Maritime Conference. It was also the most important issue at the event’s 11th annual edition last week in Long Beach, Calif., but this time it’s the ocean carriers that are concerned.

That’s because just about every forecast, projection and prognostication at the event showed global capacity growing faster than even the most optimistic outlooks for economic expansion that feeds cargo growth.

There’s no shortage of pain among carriers over the prospect that the rapid financial gains they made in 2010 could hit an abrupt wall, one as tall as a super-post-Panamax ship, against profit growth in 2011.

“There will be no sustained overcapacity this year,” Y.M. Kim, president and CEO of Hanjin Shipping and chairman of the Transpacific Stabilization Agreement, told the opening economic panel at TPM.

Kim said global container ship capacity will increase 7 percent during this year’s peak season compared to the last peak season. But he said most of the expansion this year will consist of vessels with capacities of more than 10,000 20-foot equivalent container units that will be deployed in the Asia-Europe trade. “Some vessels will cascade onto the trans-Pacific, but the number is not that great between supply and demand,” Kim said.

The Alphaliner consulting and research group had a sobering view of the future for carriers, however. Alphaliner’s Hua Joo Tan said capacity grew 9.2 percent in 2010 and will grow 8.7 percent in 2011 and 2012. The good news for carriers is that represents a sharp slowdown from the double-digit annual growth in capacity the container shipping industry experienced from 2005 to 2008.

But there’s that inevitable bad news: The growth lags the 8 percent growth in demand Alphaliner foresees this year and 8.2 percent next year. That’s hardly a gaping chasm of a difference, but the expansion in capacity comes amid ongoing protestations about the fragile recovery in the global trade economy. And it comes as ocean carriers are ordering the largest ships they’ve ever ordered, and as the muscular rate increases carriers won last year are weakening in 2011.

Those rates have a direct impact on carrier earnings prospects, according to Sophie Loh. The Singapore-based vice president at Morgan Stanley Asia is forecasting a 40 percent decline in container shipping industry profitability this year from last year’s strong results.

“Shipping companies are not as focused on profitability as they were in 2010,” she told the TPM event.

Carrier executives would argue forcibly with that point, but she’s looking strictly at how the numbers add up. Loh notes she has a “positive long-term view” of carrier prospects, but the short-term outlook, she says, is “a cautious view.”

Carrier executives insist they’re also taking a cautious view. C.C. Tung, chairman of Hong Kong-based carrier OOCL’s parent company, told the TPM audience carriers have shifted from an “asset management approach” that put a premium on load factor and market share because operating costs have grown ahead of vessel capital costs.

Until demand catches up to supply, those capital costs may be on a higher growth track. Shippers may not be so concerned about that, however.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.