World: Shake-Up in the Shipping Industry

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Headline: Shake-Up in the Shipping Industry

Source: New York Times, 11 October 2001

URL: http://www.nytimes.com/2001/10/10/business/10SHIP.html

The port of Tacoma, Wash., was expecting a slack fourth quarter even before the Sept. 11 terrorist attacks. With slowing trade between North America and Asia, container traffic through the port was 11.7 percent lower in August than a year earlier, and Douglas V. Ljungren, the port's business planning manager, was forecasting an 8 percent decline in the final three months of the year.

Now, Mr. Ljungren has revised the forecast to an 11 percent decline and is also projecting no growth in traffic through 2002. Even that is probably optimistic, he says.

Throughout the world, the container shipping industry is in a deepening slump, a result of the one-two-three punch of the sagging global economy, the Sept. 11 attacks and the war on terrorism.

Companies whose vessels ply the shipping lane between the west coast of North America and Asia, the world's busiest, have been hit particularly hard by the economic slowdown on both sides of the Pacific as well as a steady stream of big new container vessels joining the route. Freight rates have dropped sharply and sailing schedules are being trimmed, even as the war on terrorism pushes up insurance premiums. As the financial pressure intensifies on shipping lines and the businesses that depend on them, talk in the industry has turned to mergers, acquisitions and even bankruptcies.

Last week, the shipping world was shaken when the Mediterranean Shipping Company, based in Geneva, chartered a container ship for a year at a rate of $11,500 a day, 18 percent lower than similar deals just a week earlier. Lloyd's List, the London-based shipping publication that reported the deal, said "the unprecedented decline reflects the growing crisis within the liner shipping industry."

According to John Fossey, executive consultant at Drewry Shipping Consultants in London, container freight rates have dropped by double digits so far this year, with single- voyage contracts down as much as 30 percent. "There has been a marked reduction as the year has gone on," Mr. Fossey said. "We believe that Sept. 11 will soften the trade even further."

Containers and the ships that carry them have revolutionized trade over the last three decades. By making it easier — and thus cheaper — to transport everything from coffee to toys, the standardized metal boxes have become a chief instrument of globalization, encouraging businesses to make or buy products in one part of the world and sell them in another.

With the equivalent of about 15 million 20-foot containers, known as TEU's, now crisscrossing the globe, the state of the container shipping industry has become a good barometer of the overall health of the world economy.

Signs of a slump were evident before Sept. 11. "It's very simple economics," said Andrew P. Scott, chief operating officer of the NACA Logistics Group of Long Beach, Calif., which buys container space for importers and exporters. "It's a huge amount of supply and a small amount of demand, and demand is continuing to weaken."

For the first time in several years, lines plying the Pacific have not imposed a surcharge on freight rates during the peak shipping season, July to November. The rates themselves are also sliding. Fay Szeto, import manager in Long Beach for Jet Air Service Forwarding, which is based in Atlanta, said she recently paid as little as $1,300 per TEU from China to the West Coast, compared with $1,600 six months ago and a 1999-2000 peak of about $2,800. "This year's Christmas importing has dropped 50 percent for my clients," she said.

Thomas Grohmann, vice president and assistant general manager at the MI Group, an international moving company based in Mississauga, Ontario, has also seen a big drop. "We can buy freight on a container now cheaper than we could five years ago," he said. The fallout from the terrorist attacks on New York and Washington has not only clouded the outlook for the world economy, and thus international trade, but is also likely to push up shipping costs.

In North America, security at seaports has been stepped up. Inspections of vessels, cargoes and crews have been intensified. Inbound ships must now provide the Coast Guard with crew lists and cargo manifests at least 96 hours before arriving at a United States port, up from 24 hours. Shipping lines report few serious disruptions so far. But in a business where time is money, concern is high that security considerations could put even more pressure on the bottom line. For example, shipping lines and insurance companies are engaged in fierce negotiations on "war risk" surcharges on premiums. These extra levies would be heaviest on routes in South Asia and the Middle East, including the Suez Canal, one of the world's busiest waterways.

"There's a strong sentiment these will be passed on to our customers," said Raymond Miles, chief executive of CP Ships, a former unit of Canadian Pacific and the largest trans- Atlantic container carrier. Insurance, Mr. Miles added, makes up less than 1 percent of total shipping costs. But customers may resist. Mr. Grohmann at the MI Group, for example, said he was concerned that the war risk surcharge could wipe out much of the recent reduction in freight rates.

Hopes of a turnaround soon are also clouded by a surge of orders for big container ships over the last two years, when shipowners were bent on expansion and economies of scale. And much of the expansion by container companies to fill what was an expected need is still in the pipeline.

Drewry Shipping Consultants projects that container shipping capacity worldwide, which grew 11.4 percent last year, will grow another 8.8 percent this year and 10.6 percent in 2002.

The increasing mismatch between supply and demand has hit the Asian trade first. But Mr. Miles of CP Ships predicted that it would have a "cascading effect," putting pricing pressure on ship operators around the world. Each $10 drop in rates on a TEU knocks $20 million off CP Ships' bottom line, even though its costs are lower than many of its competitors.

The pressure is reflected in what many say will be a protracted period of contraction, a period already begun. Cho Yang Shipping of South Korea quit operating in August. The Far Eastern Shipping Company, a Russian line, recently halted services between Shanghai, Hong Kong and Los Angeles.

Five Chinese, Japanese and Korean lines are exploring an alliance in an effort to reverse the recent slide in freight rates. On a smaller scale, Tropical Shipping, of Riviera Beach, Fla., will strengthen its dominance in the Caribbean later this month by taking over the container shipping business of Kent Line International, a company based in Saint John, New Brunswick. Tropical is a unit of Nicor. "We see consolidation as one of the only answers to deal with the overcapacity," Mr. Fossey, the London consultant, said.



-- Andre Weltman (aweltman@state.pa.us), October 11, 2001


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