Dead wait

Ships at anchor off Singapore: consumers in the west are buying far fewer manufactured goods

Anyone looking out from the restaurants and offices of Singapore's tree-fringed south ??shore in the last few years has had a grandstand view of globalisation in action. Scores of ships would be either anchored offshore or passing by in one of the world's busiest shipping lanes. Among the commonest sights have been huge container ships either taking vast quantities of manufactured goods from Asia towards Europe or, largely empty, heading back for more.

The view has started to change in the last few months. As well as the gainfully employed ships, there are now substantial numbers laid up, waiting for the end of a sudden and deep collapse in their earning power.

First came the dry bulk carriers that shift iron ore and coal around the world. Now, container ships are beginning to appear among them, mothballed by operators who have seen demand growth either slow down or go into reverse. Consumers in western Europe and North America are buying far fewer of the toys, computers, furniture and other manufactured goods that go inside the stackable steel boxes they carry.

"It seems to be going faster and deeper than expected," Michel Deleuran, a senior executive in Denmark's Maersk Line, the sector's biggest operator, says of the downturn.

Container trade between Asia and Europe, which rose 16.5 per cent last year, is shrinking for the first time in history, according to some estimates. The spot rate for moving a 40-foot container from Hong Kong to Rotterdam plummeted from about $2,700 (£1,750, €1,900) in autumn last year to as low as $200 now.

Such figures represent a severe shock for an industry that has grown used to the double-digit annual volume growth and buoyant freight rates it has enjoyed for nearly all the seven years since China joined the World Trade Organisation.

The sector has not only been ideally placed to benefit from globalisation but arguably caused it. The introduction of the container in the 1960s and 1970s slashed the costs of transporting goods compared with the general cargo ships they superseded and encouraged manufacturers to move further away from their markets.

For retailers, manufacturers and other shippers who are container lines' customers, the rate slump continues the long-term trend under way since the first container ship set sail in 1956. Many will now be able to send cargo the thousands of miles between Asia and Europe or North America for a fraction of the trucking or rail costs of moving it a few hundred miles on land.

But the trade-off is likely to be poorer service, according to John Fossey, editor of Containerisation International, a trade journal. On most routes, container lines or alliances of lines run a "string" of ships – traditionally eight for the round-trip from China to northern Europe and back – a week apart on a circular route.

Lines and alliances are now cutting services, merging different strings and slowing ships down to reduce fuel costs and ensure that ships run full. That often requires the use of an extra vessel to maintain a weekly service – Asia-Europe round-trips now typically take 63 days and require nine ships, against 56 days and eight ships before.

"Shippers, who have benefited enormously in recent years from carriers offering them multiple weekly sailings from a wide variety of ports, are probably going to suffer from fewer sailings per week," Mr Fossey says. "They probably will find themselves having access to fewer port calls and probably have to face longer journey times as the liner companies are slowing their vessels down."

Many of the aggressively growing European companies that have come to dominate container shipping in the last five years look set for years of struggling to meet the cost of ambitious fleet expansion plans. The mainly German funds that own large parts of such lines' fleets could face still tougher times as shipping lines terminate charters and struggle to finance what Nick Sjoberg of Braemar Shipping Services, a London shipbroker, calls a "feeding frenzy" of ship orders.

"The person who ordered the ships has a problem," he says. "He has to raise the equity and nobody wants to finance him. That has the potential to create significant problems for banks and for investors."

At the heart of the industry's problems is the coincidence of the demand slowdown with ??the start of a wave of deliveries of mammoth ships ordered at the height of excitement over China's manufacturing boom.

The largest container ships now – nearly 400m long, 55m wide and able to carry 13,000 containers – have about one and a half times the capacity of the biggest of barely five years ago. They have been designed mainly to handle exports from China and other Asian countries to Europe, although some could be used on services between Asia and the US west coast.

Mr Sjoberg says shipowners need to raise $500bn to pay for ship purchases to which they have committed. For the lines with the largest fleet order books, that promises to be an onerous burden.

Bigger vessels, when full, can transport each container more cheaply. But many see the giant ships proving a liability in the downturn. Container ships, unlike tankers or dry bulk ships, operate to fixed schedules, like a bus, train or airline service. Like nearly all businesses, they need to attract enough customers to cover fixed operating costs before making a profit. Larger ships can make filling the available space harder and force operators to offer deeper discounts.

Mark Page, research director at the London-based Drewry Shipping Consultants says the arrival of big new vessels on the Asia-Europe services of CMA CGM, the Marseilles-based world number three line, helped to push down rates on the whole route. "In a falling market, the last thing anybody wanted was some really cargo-hungry new ship on the berth every week, needing to be filled," he says.

CMA CGM, along with some other believers in big ships, counters that the new vessels are part of the answer for the industry, not the problem. Nicolas Sartini, in charge of its Asia-Europe trades, says CMA CGM benefits from its worldwide network, parts of which – such as Asia-west Africa trade – are still growing. It is counteracting the slowdown in Asia-Europe volumes by topping up with cargo bound for west Africa, which is discharged at Tangiers for delivery by a second vessel.

Even if future vessel orders cannot be cancelled, lines will seek to postpone deliveries, to avoid the depressing effect on rates of a glut of new capacity. Many will also be able to dispose of ships chartered from specialist owning companies to cut their costs and fleet size. CMA CGM has the option to hand 150 of the 385 vessels it currently operates back to their owners during 2009, according to Mr Sartini.

Still, the slowdown is likely to shift the industry's balance of power eastwards. Asian operators such as Singapore's Neptune Orient Lines and Hong Kong's Orient Overseas Container Lines, whose smaller ships until recently looked a liability, now appear better placed than others. They largely held back from placing big orders in recent years.

AXS Marine, a Paris shipbroker, predicts that world container fleet capacity will grow by more than 14 per cent a year on average between this year and the start of 2011. Even corrected for the effects of slower speeds and ship scrapping, Drewry expects vessel capacity to grow by about 12 per cent this year and next – well above any predictions of traffic growth.

In fact, it is possible to argue the problems may be only just beginning. Preliminary figures from Drewry's annual report on the sector, to be published next week, suggest shipping lines' rates have still been rising this year by 4.1 per cent. For next year, they predict a fall in average rates of nearly 20 per cent.

That could leave shipping lines facing still more unpalatable choices. The container ships laid up off Singapore are mostly older, smaller workhorses that lines are taking out of service to concentrate on filling their latest craft. If the downturn continues much longer, Braemar's Mr Sjoberg suggests, they may instead need to send gleaming-hulled new vessels each costing $170m straight to the parking bay.

HAMBURG PORT: 'IT HAS ALWAYS BEEN A CYCLICAL INDUSTRY BUT THE SPEED OF THE SLUMP IS VERY DRAMATIC'

Every ship that enters the port of Hamburg must pass the expansive window of Hermann Ebel's modern office on the banks of the river Elbe, writes Chris Bryant .

This commanding view of one of Europe's biggest container terminals puts the owner of Hansa Treuhand in a good position to discuss how the financial crisis has affected German shipping. "It has always been a cyclical industry but we've experienced an economic slump in just three months. The speed is very dramatic," says Mr Ebel, whose shipping finance company controls a 70-strong fleet of mainly container vessels.

'Respite': repairs on the go in Hamburg

As liquidity has dried up and trust evaporated, banks have refused to write the letters of credit vital to the shipping of bulk goods. Some container ships have been forced to carry lighter loads while bulk cargo piles up in ports around the world, particularly in east Asia.

As one of the world's most important shipping nations, Germany is particularly vulnerable to these problems. German companies own 36 per cent of the world's container ship capacity, while the country's banks are responsible for about 40 per cent of global shipping finance. This latter activity has ground to a halt as demand for new vessels slumps and German lenders grapple with the turmoil in financial markets.

HSH Nordbank, the world's largest shipping lender, was forced to seek up to €30bn ($41bn, £27bn) in loan guarantees from the government's banking rescue fund and is set to slim its balance sheet as part of a restructuring. Several other Landesbanken – regionally owned public lenders – are also heavily involved in shipping finance and lending could contract further. "I am not sure how much shipping finance will be available next year," says Christian Hennig, head of shipping credit at MM Warburg, a Hamburg-based private bank.

Germany's strength in container shipping is due in part to an innovative funding model known as KG finance, which spreads the costs of shipbuilding by giving private investors tax incentives to buy equity stakes in such projects. German shipping KG funds last year attracted about $5.6bn of equity, according to Clarkson Research Services, a maritime database company.

Yet this model has come under pressure as anxious investors hoard cash and demand for shipping charters falls, forcing some companies to lay up vessels. For those shipowners able to renew their charters, lower rates are barely covering the cost of operating vessels.

Particularly worried are shipowners that have placed orders for a new generation of super-sized container vessel due to come into service from 2010. Such companies are likely to try to delay or cancel these projects – possibly forfeiting hefty deposits – in order to avoid taking possession of ships they cannot charter.

Although Hansa Treuhand is expecting the delivery of 11 ships in the coming years, they are relatively small and most already have contracts. Investors' exposure to lower charter rates will be limited, the company says, as most invest in pools rather than single vessels.

Shipowners emphasise that not all is gloom and doom, notably in the tanker markets where charter rates have held up. People in the industry say Hamburg's terminal operators are almost grateful for the respite after months of operating flat-out.

Moreover, shipping companies are confident that the financial crisis will not mark the end of globalisation and the rewards it has brought. "Notwithstanding the current economic deterioration, in the long term world trade and the shipping industry have an excellent future," says Hans-Heinrich Noll, head of VDR, the shipowners' association.

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