Deep Enough?

Deep Enough?

The great global downturn of 2008-2009 may have been the steepest, most widespread economic decline the world has seen in 60 years, but don’t tell that to Seaspan’s Gerry Wang.

To the CEO of the world’s largest container ship charter and leasing company, the oversupply of shipping capacity and large backlog of ships on order suggests the recession didn’t do what economic hard times are supposed to do — make markets more efficient. Carriers that have scaled back operations, and in the container shipping industry piled up an estimated $11 billion in losses in the first three quarters of 2009, may disagree, of course.

Yet capacity across transportation remains relatively plentiful. The sudden race for space in some container shipping markets early this year was largely the result of an upturn in demand rather than a contraction in usable capacity. To Wang, that suggests the economic crisis may be going to waste.

“My worst fear is the losses haven’t been deep enough, the crisis is not deep enough, not big enough to supply a correction to get rid of the speculative forces and get rid of the behaviors that we have seen,” he told last week’s Containerisation International Global Liner Shipping Conference in London. “We have too much supply; we have too many ships.”

Wang has a stake in that capacity: an oversupply of ships drives down the value of the assets Seaspan brings to the global shipping market. But he believes the market value of those assets has been distorted by forces similar to those that hit the housing market. Cheap financing through subprime mortgages, he said, was not only a problem in the housing market.

“They overbuilt too many apartments, too many houses, and now they are going through their deleveraging. That is painful, but it is necessary . . . We certainly had subprime in shipping as well. Two or three years ago, financing a ship was as simple as going to a Starbucks to get a cup of coffee,” Wang said.

Wang is among many looking warily at a capacity cloud hanging over the industry. Despite the downturn, orders amounting to 34 percent of the existing fleet remain in place, according to SeaAxis, a transportation fleet analyst based in France, and cancellations since the economic shock hit in September 2008 represent only 6 percent of the container ship fleet on order, measured in TEUs. Generally, SeaAxis Vice President Philippe Hoehlinger said at the London meeting, the industry has the equivalent of about 20 percent of its existing fleet capacity on order.

After billions of dollars in losses, an efficient market would cut that order book down, but Wang and others don’t see that efficiency in the container ship construction market.

Wang said he has taken his concerns to the Korean shipyards that hold the bulk of the ship orders. But, “when I came to them to talk about these orders, their philosophy was to avoid seeing me.”

Seaspan’s problem is that the company has a strong balance sheet and it actually reversed a 2008 loss in a big way last year, so shipbuilders know the company has the financial support for its orders. That, however, is a problem carriers can only dream of.

Paul Page is editorial director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com.