Major Industry Trends
The year 2009 will go down as one of the worst ever experienced by the global shipping industry. The global downturn that began in 2008 caused export volumes across the world, particularly in China, to contract sharply, and demand for shipping slumped. Shipping companies suffered US$1 billion losses or more in 2009. The collapse in demand was exacerbated, ironically, by large numbers of new ship deliveries. At the height of the 2007 boom, just prior to the global downturn, the global shipping sector had placed some of the biggest bets in the sector’s history. These bets took the form of billions of dollars spent on a new generation of extra-large container vessels, which take anything from 18 months to three years to build.
Nor was it just the huge container lines that suffered. Bulk dry carriers, accustomed to an endless stream of orders to bring iron ore and steel from commodity-exporting countries to feed China’s massive building boom (the country was, before the downturn, committed to building 200 new cities), were also faced with collapsing demand.
The bulk dry carrier sector has been affected by a massive expansion of capacity. After decades of minimal new dry bulk carrier supply, fleet additions picked up strongly from 2004 to 2007 and the total bulk carrier fleet expanded rapidly. During 2004–08, the average annual growth rate for the dry bulk fleet hovered around 7%, significantly above the levels of previous decades. More recently, there has been a major step change in fleet additions. In 2009, the total dry bulk fleet expanded by 10% year-on-year, or 42 million deadweight tonnage (dwt), the strongest growth in the fleet’s history, ending the year with 460 million dwt of capacity. On top of that, the fleet grew another 12% in 2010, adding a further 55 million dwt, after accounting for cancellations, delays, and fleet scrappage.
Niche business sectors in shipping, which is rich in niche opportunities, fared better, but they, too, are under pressure. Liquefied natural gas (LNG) carriers looked like an excellent investment at the height of the boom in early 2007. The world was hungry for gas as a cleaner alternative to oil, and a major global power production program based on newly built gas-generation power plants fueled demand for security of supply.
In the first half of 2009, demand for LNG carriers fell but it recovered in the second half of the year, and demand was boosted by the very cold weather seen in North America and Europe during the winter of 2009–10. But by March 2010, there were reports that freight rates for transporting spot cargoes of LNG had dropped by at least 20% since December 2009, as warmer weather crimped demand for the heating fuel. In April 2010, the Japanese broker Nomura also said that “while shipping rates have recovered from their 2009 lows, “the sustainability of very large crude carrier (VLCC) and chemical tanker rates looks less than clear, with vessel overhang risks remaining.”
For this sector, there is some long-term hope in that new gas-generation plants provide a greener alternative, whatever the state of the economy. Moreover, several major LNG projects that were due came on stream in 2009, have now materialized and are boosting demand for LNG shipping. It also has to be remembered that, despite the drop that took place in 2009, long-term charter rates had increased by about 17% between 2004 and 2010.
The main drama, though, is being played out in the container market. Containers were the invention of the North Carolina entrepreneur Malcom McLean back in 1956, and they have completely revolutionized the transport of goods and cargo worldwide. In fact, many credit containerization for the globalization of trade, as containers make it very easy for many manufacturers to ship their specific products as part of a large, general shipment. When McLean invented the container, it cost almost US$6 a ton to hand-load a ton of cargo onto or off a ship. Using containers, that price comes down to US16¢ (source: Wikipedia). The container was a huge step beyond the previous best “invention,” namely palleted goods in break bulk cargoes.
The novel element in McLean’s approach was the idea of a sealed, steel box that was never opened in transit, and that could be speedily loaded, unloaded, and transshipped, or switched from rail to ship to road freight. The transformation of the whole process of shipping goods around the world was immense. Instead of having to unload ships by hand (or, in more modern times, by cranes swinging pallets of goods onshore to be checked, then warehoused until they could be freighted out), containerized goods take very little time to shift from ship to shore, or vice versa, and there is no checking of goods because the containers are sealed.
From there, the shipping industry slowly but surely moved in the direction of economies of scale. The fixed overhead costs associated with shipping a container come down when the number of containers being shipped goes up. When the world is booming, and the demand for container shipments is huge, this approach provides a fast route to superior profits. The largest of today’s container ships are some 400 meters in length and 55 meters wide. They can carry 13,000 containers, or 50% more containers than the biggest ships in 2003–04.
Average global container freight rates saw a major rally in late 2009, according to Drewry’s Container Freight Rate Insight. After collapsing in the first half of 2009, the Drewry Global Freight Rate Index increased by 18% between July and September, and rose by another 6% between September and November, from US$2,040 per 40-foot container to US$2,160.
The upturn continued into 2010. The trade rebound, capacity cuts, and cooperation all helped container lines to raise rates, after a series of price wars, allied to falling demand, caused industry-wide losses in 2009. The Transpacific Stabilization Agreement, which consists of a group of 15 lines including Nippon Yusen and K-Line, was formed to try to present a united shippers view of appropriate pricing on some routes, in an attempt to return routes to profitability. The TSA, for example, wants an US$800 per 40-foot container rate increase on Asia–US West Coast routes in new contracts. China Cosco and China Shipping Container Lines Co., the nation’s two biggest container lines, both said in April 2010 that they expect the higher rates to be accepted. The increase will make the route profitable again, said China Shipping Chairman, Li Shaode.
The upturn continued into 2010. Danish logistics operator DSV, for example, reported in April 2010 that it saw maritime container volumes surge 19% in the first quarter of 2010, and added that deep-sea freight rates had reached a peak on the Far East to Europe trades, which accounts for half of its ocean business.
In March 2010, Li Shaode, chairman of China Shipping Container Lines, the country’s second-largest sea freight company, said that China’s 2010 container shipping rates would surpass the figure for 2009 because demand for transporting goods has exceeded current capacity. Container volume shipped in the first two months of 2010 rose 30% on the same period in 2009, Li said.
By July 2011 the picture for ship owners had changed dramatically. In its June 2011 Focus, Drewrey highlighted both the Q2 2011 collapse of the freight market and its continuing softness. “The dry bulk freight market stayed near the dreadfully low levels witnessed in May,” it said. Rates were under pressure across all classes except the Panamax segment, which saw some increases. Owners got some relief, however, from lower bunker fuel costs as the price of fuel plunged over global fears over slower growth.
In August 2011, Safety4Sea, a pro bono site which comments on shipping trends, said that the mood in the industry had once again darkened. “Concerns in the nation’s shipping industry are rising as companies see no end in sight for their struggles. Where the industry had been doing well through 2010 and the first quarter of 2011, on the back of lower oil prices and the resumption of strong global demand, both those “drivers” have now turned negative. As a result, the big three shipping companies, Hanjin Shipping, Hyundai Merchant Marine, and STX Pan Ocean, all reported losses for Q1 2011 and expected to report further losses for Q2. All three companies cited the huge oversupply of ships as a prime cause.
The Baltic Dry Index is an index of freight shipping maintained by the Baltic Exchange, based in London. It provides a measure of the daily average cost of shipping bulk dry commodities such as iron ore, coal, and grain. As global growth is the major driver of increased shipping of bulk loads around the world, and as these contracts are struck months in advance of the goods actually being shipped, the Baltic Dry Index offers a very good window into whether the world’s trade is contracting or expanding. In basic terms, the higher the demand is for bulk freight around the world, the higher the index rises. If it falls away, then that is a sign that trade will contract sharply some months hence. By April 2010, the Baltic Dry Index had risen by 58.5% over the previous 12 months. It suffered a major reversal in January 2011 but then picked up again in Q2.