Tough year for shipping industry

It has been a painful experience given that 2010 was a time when container shipping lines rebounded into healthy profits after the global recession.
It is as if the industry had been condemned to relive that grim year, 2009, when container shipping lines suffered a collective US$19.5-billion (Bt619-billion) loss, its worst year in history according to many experts.
Back then, freight rates fell below the cost of moving the cargo, there were so many spare ships that many were mothballed and parked out in the middle of the ocean, and many shipping firms either went under or were bailed out by governments.
Things did not get that bad this year, but it has been uncomfortably close to a rerun.
First, there are again too many ships, a result of overbuilding in previous years. The building has continued, with shipping lines such as Evergreen, Neptune Orient Lines (NOL) and Maersk Line all taking out their chequebooks and adding to their supply. These vessels are set to come on stream over the next two years.
A combination of more ships and slowing trade growth amid the economic slowdown in the United States and Europe has forced down freight rates.
As a result, slowing trade volumes and low margins on cargo are sending shipping firms deep into the red.
It is a similar, if not worse, problem in the tanker industry, which is tackling its biggest glut of vessels in 29 years and charter rates at the lowest in at least 14 years.
Owners of supertankers are losing money for a sixth consecutive quarter, and this will probably result in the highest number of ships being mothballed in more than two decades.
Singapore Shipping Association president Patrick Phoon used one word to describe the year – “difficult”.
“The shipping industry had experienced a delivery bulge amid rising fuel and operating costs,” he noted. “Overcapacity, low freight rates and the weak US dollar have increasingly pushed bottom lines into the red and the industry has been forced to scrap or lay up vessels in a bid to maximise cost efficiency.”
Singapore-listed NOL, for example, reported a net loss of US$157.8 million for the nine months to September 23 compared with a net profit of $283.5 million for the same period a year ago.
It expects to post a loss for the 2011 financial year on the back of continued low freight rates and slowing trade demand.
Similarly, Danish maritime giant AP Moller-Maersk said last month that its container shipping arm fell into the red in the third quarter and was expected to continue to record a loss for the remainder of the year amid weak freight rates.
Investors have also lost confidence in shipping stocks.

A recent Nomura analyst report said average container freight rates will have declined 11.5 per cent this year and will dip a further 3.6 per cent next year.
The busy and lucrative Asia-Europe trade has been hit particularly hard.
Thomas Knudsen, chief executive of Maersk Line, Asia-Pacific, said: “Current Asia-Europe freight rates are unsustainable. Although volumes have increased, too much capacity has been introduced on the Asia-Europe trade.”
As a result, the major shipping lines have joined forces or come up with innovative schemes to try to attract more clients and boost volumes and cargo rates.
It started with Maersk, when it launched a Daily Maersk service that, according to The Journal of Commerce, “created a domino effect of new vessel agreements that look to rationalise costs and services while staving off full-fledged carrier mergers”.

But Phoon said these moves “will not necessarily remove capacity”.
“Coupled with expectations of a relatively weak outlook for exports, this does not bode well for the industry.”

GETTING WORSE, NOT BETTER
Andreas Sohmen-Pao, a member of the Maritime and Port Authority of Singapore (MPA) board and BW Maritime chief executive, said this year had seen far more bankruptcies than in 2009.
Sohmen-Pao, whose company has 15 supertankers in a fleet of 105 ships, said: “When the financial crisis first struck, government stimulus measures led to a rapid rebound in demand. Although asset values dropped considerably in 2009, earnings remained at a sustainable level.
“This time around, cash flow is negative, leading to a far more significant problem for the industry.”
And he thinks the overall industry will “do even worse” next year.
“New ship deliveries will add to an already oversupplied market, and global economic headwinds will put pressure on the demand side,” he said.
Phoon, who is also deputy managing director of Evergreen Shipping Agency Singapore, said the influx of new vessels would weigh down on already fragile freight rates next year.
“The situation can only get worse unless there’s a strong resurgence in trade volumes coupled with withdrawal of capacity,” he said.
Knudsen believes industry consolidation is the only solution to allow the industry to return to stable profitability.
“While the withdrawal of capacity by some players seen lately may in the long term prove beneficial for the industry and its customers, the overall industry characteristic of being highly fragmented with many smaller players remains,” he said.
“If the overall rate level does not increase, we may see further reduction in capacity by carriers either partially or fully by leaving the Asia-Europe trade.”
The senior manager of Drewry Maritime Advisors, Jason Chiang, is equally pessimistic: “Compared with 2009, I don’t see who will be immune this time around. It is a matter of how long it will last, but 2012 will not be good all around.
“If everyone takes out capacity, it could help stabilise shipping rates. But next year, all the big ships are coming up so there will be a supply overhang in 2012 and 2013. So it will take time for all that capacity to be absorbed.”