The Wall Street Journal
By John. W. Miller
Original Publish Date: October 8, 2008
Last year, the basic price of shipping a large container of goods from Asia to Europe, the world's busiest route, was $2,800. This week, with demand plunging amid a worsening economy, that price was an unprofitable $700.
That rate is "unsustainable," says Eivind Kolding, chief executive of Copenhagen-based A.P. Moller Maersk AS, the world's biggest shipping company by sales. The industry would be crippled if that price doesn't rise soon, he says.
Hit by the global economic downturn and a financial meltdown that promises an even sharper drop in once-hot trade flows, container-shipping companies are cutting routes and capacity to stem a sudden flow of red ink.
Weak global demand and a capacity glut are sinking shipping rates.
Making their plight worse, the container shippers during boom times ordered fleets of new vessels for as much as $50 million apiece that are getting delivered only now -- just as business dries up. Analysts say companies likely will try to cancel their orders, sell the ships, or even convert them to tankers or cruise vessels.
The plight of the $150 billion container-shipping industry shows how the credit crunch and global downturn have caught up to companies that make investment decisions years in advance.
Other shipping routes, including Asia-U.S. lanes, also are suffering from declining demand. But the U.S. has tighter harbor space than Europe. Prices for the smaller ships docking in California, Texas and the East Coast have settled around a barely profitable $1,500 a container, analysts say.
The past 10 years were a gold rush for shippers. China joined the World Trade Organization and sold hundreds of billions of dollar of goods to European and American consumers, who were enjoying low interest rates and steady economic growth. Factories relocated to Asia, stretching supply chains around the globe. Oil was cheap, ships were relatively scarce and shipping prices soared.
Container-shipping traffic on the Asia-Europe route rose at roughly 15% a year through the period. This year it will increase just 5%, says Philip Damas, of London-based maritime consultant Drewry Shipping Consultants Ltd. Capacity is growing much faster. "There's a glut of new large container ships entering the market," Mr. Damas says.
Freight-shipping prices are notoriously volatile, depending on weather, ever-changing capacity and shifting trade flows. But the recent slide is unprecedented, analysts and shipping-company executives say.
Maersk, the world's No. 1 shipper with sales of $51.2 billion last year, waited until Thursday to cut container rates to their present low. Mr. Kolding, the Maersk CEO, told trade publication Lloyd's List that he hadn't seen the collapse coming. He promised "changes" later this month. That means running fewer vessels in a bid to run up prices, and maybe dropping an Asia-Europe route, a Maersk official said.
Rates for ships heading from Europe to Asia are even more depressed than the reverse trip -- about $200 per 40-foot container. These days, 60% of containers making that trip are empty, reflecting Europe's trade deficit with China, which stood at $223 billion last year.
Zim Integrated Shipping Services Ltd. on Saturday canceled its new Asia-Europe route, which it started in January with nine ships. Zim, based in Haifa, Israel, says it is betting that rates will pick up in time for the arrival late next year of two mammoth container ships being built.
Eager to cash in on the trade boom, companies such as Zim a few years ago put in a wave of orders to South Korean and Chinese shipyards. Those boats are being launched now. Marseille-based CMA CGM SA, for example, has placed orders for 80 ships, at a total cost of roughly $1 billion, to complement the some 400 it already runs. Geneva-based Mediterranean Shipping Company SA is scheduled to receive 57 ships, adding to its 427.
Maersk received 15 vessels in the first half and has 48 ships on order for delivery by 2012. "Given the present market conditions we're quite pleased that we don't have the largest order book in the industry," says spokesman Michael Christian Storgaard.
Maersk officials decline to disclose their plans for the new ships, but, if demand collapses, there are few options, says Dirk Visser, an analyst with Dynamar BV, a consulting firm based in Alkmaar, the Netherlands. "The best option is to convert the ship to a tanker or a cruise ship, then sell it at a loss," he says.
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