August 24, 2009
Less than two years ago, analysts were predicting a bright future for maritime shipping. Demand for new ships seemed strong, container throughput at ports was increasing, and the number of Ultra Large Container Ships, that is, those with a capacity of 10,000 containers (TEUs) or greater, was expected to grow from four to 152 ships in four years [“Wang: Container Market Strength to Continue,” MarineLink.com, 2 November 2007]. The Economist now reports that “the recession is buffeting the world of shipping—with even rougher waters ahead” [“Sea of troubles,” 1 August 2009 print issue]. The article reports:
“From the sheltered waters of Subic Bay in the Philippines to Falmouth on the south coast of England, a vast, swelling armada lies idle. In Asia’s deep-sea havens 750 vessels—container ships, bulk carriers, tankers, car carriers and others—are laid up. A further 280 are sheltering in European waters. According to Lloyd’s Marine Intelligence Unit, nearly 10% of the world’s merchant ships are swaying gently at anchor because of a collapse in global trade. … World trade in general remains in its worst slump for generations, although it too is no longer falling.”
All those new orders for ships mentioned in my opening paragraph could exacerbate the situation. As the article observes:
“Worse, there is a huge supply of new ships on order and due off the slipways over the next four years. For bulk carriers alone, the backlog is equivalent to more than two-thirds of existing capacity. Philippe Louis-Dreyfus, departing president of the European Community Shipowners’ Associations, has called for an industrywide scrappage scheme to shrink the surplus. Warning of a ‘bloodbath’, he said in June that shipping capacity would exceed the needs of the market by between 50% and 70% in the near future. … By last year annual completions were up by nearly 60% compared with a decade ago and the ships were 30% bigger. No wonder Lloyd’s List, an industry journal, is full of news of ship seizures and bankruptcies.”
The Economist believes that many of the ships on order simply won’t built and it calls that otherwise bad news “a ray of sunshine … breaking through the storm clouds.” Not all observers believe that the future of shipping looks bleak, however.
“Analysts at ICAP Shipping Research in London shrug off the idea that there will be a glut, since shipments of cheap Australian coal and iron ore to China have for years been constrained by a lack of big ships. More giant bulk carriers will lower the prices of ores delivered to China and stimulate trade growth, they say.”
But bulk carriers represent only a portion of the maritime industry. The outlook for container ships and crude carriers is less clear.
“The outlook for tankers is less clear because of the volatility of crude-oil prices. … Lower demand will be offset by a scheme to phase out single-hull ships on environmental and safety grounds in European and North Atlantic waters. … The part of the shipping industry headed for the choppiest waters is the container trade, which had steamed ahead gloriously since the mid-1970s. The forging of global supply chains in the past 20 years, the rise in merchandise trade and the emergence of China as the workshop of the world created growing demand. Vessels became gigantic, with the latest capable of carrying 15,000 standard containers. Now the box trade, as it is called, is in the midst of its first decline. AXS Alphaliner, an information service that tracks the trade, has estimated that some 15% of capacity will be idle by October. Shipping companies that operate the main container services linking Asia, America and Europe will lose about $20 billion this year, after making only $5 billion profit in 2008, according to Drewry.”
One sure sign that things are bad is when companies go out of business. And things are bad in the shipbuilding industry. Consider the case of the Odense Steel Shipyard located in Lindo on the Danish island of Funen. The shipyard was founded “in 1918 and moved to its present site in 1956, [and it] has played a key role in the development of the Maersk Group, which operates the world’s largest container-ship and product-tanker fleets as well as substantial numbers of oil and gas tankers” [“Maersk shipyard to end production,” by Robert Wright, Financial Times, 11 August 2009]. According the Wright:
“[The yard will] stop making new ships once it has completed the 15 orders it currently held, Maersk said. … The last order – for three Danish navy frigates – is due to be completed in February 2012. … As well as ceasing production at Lindo, Maersk will seek to sell Lithuania’s Baltija shipyard and an associated design facility. In recent years, some of the most labour-intensive fabrication work was moved from Lindo to Baltija and an Estonian yard, whose planned sale was announced in May.”
If you still have any doubts that things are bleak in the shipping industry, Maersk announced “it could record a full-year loss for the year, for the first time in its 105-year history.” Even the Chinese are feeling the pinch. According to a Wall Street Journal article, Cosco Corporation reported that “its second-quarter net profit fell 71% amid lower earnings from the Singapore-listed company’s shipbuilding and repair businesses” [“Chinese Shipbuilder Posts Earnings Decline of 71%,” by P.R. Venkat, 4 August 2009]. Maritime supply lines have always been an important source of international commerce. They will remain important once the recession ends if developing countries hope to gain from the benefits of globalization. The Economist worries, however, that the maritime industry, especially its container ship segment, might not recover.
“The grim outlook for container shipping is not simply a reflection of the recession. There is a deeper concern. Containerisation helped to promote globalisation by reducing the cost of shipping goods so sharply that manufacturers could afford to search the world for factories where costs were lowest. As a result, the amount of sea transport involved in manufacturing a given product rose. But some analysts worry that this one-off restructuring may be almost complete. So even when the world economy recovers, the rapid expansion of container trade may not resume.”
The “gruesome excess of capacity” that is currently plaguing the industry will likely last for a few years. With prices down, developing countries can only hope that their manufactured products find a clientele before shipping costs once again rise. For some developing countries, the downturn in shipping affects their economies in other ways. Some countries, like Liberia, depend on revenues from shipping companies who register their ships under flags of convenience in order to save money. In addition, many of the crew members who man ships are from developing countries. These are jobs that developing countries desperately need. A recovery in the shipping industry is necessary if globalization is going to continue to reach those desperately trapped in poverty’s grip.