Empty Promises

Ronald White, an LA Times Staff Writer, has a habit of telling it like it is. Mr. White was quoting Mr. Charlie Woo, the owner of Megatoys. Mr. Woo had determined that shipping rates were dropping because the anticipated growth in trade failed to keep pace with the construction of ever-larger ships. “If their ships are full and their business expands, they want to raise the rates,” Mr. Woo said. “I think the ships are not completely full, and the competition to fill them is fierce.”

“‘The deluge hasn’t hit yet, but we will see more and more vacant space on these ships,’ said Mark Page, director of research for Drewry Shipping Consultants of London … For some time now, we have been receiving far too much in the way of ships and in very large ships in particular. Now we are looking at three years to 3 Ω years of overcapacity'”.

The Times story went on to say that rate cuts signaled choppy waters for the shipping business. The industry had enjoyed five years of rising rates, the Times said, but now A.P. Moeller-Maersk, the world’s largest shipping line is feeling the pinch and has warned of future lower earnings. In March, the company warned that earnings would fall ‘considerably’ because of a sharp decline in rates, and maritime experts are now saying that economic headwinds could bring even more of a cool-down. That sparked a round of stock downgrades by investment companies, including UBS, which in a May 31 report to investors said, ‘With capacity increasing an average by up to 15% through ’06-’08, and demand running at 10%, we believe it is very early in the current shipping downturn’.

By some measurements, the Times article stated, the blistering growth has already begun to lag. In both 2003 and 2004, dubbed ‘the super cycle’ by Drewry, worldwide trade grew by 14%. The growth rate slowed to 11.5% in 2005 and is expected to drop to less than 10% in 2006 and about 9% in 2007, Mark Page said.

Several factors are weighing on the industry, according to the Times. “Chief among them is the growing evidence of economic cooling in the U.S. and other countries, coupled with rising prices and interest rates. Signs of inflation, particularly red-hot energy costs, led Federal Reserve Chairman Ben S. Bernanke on Monday to pronounce the price trends ‘unwelcome’ and the U.S. economy ‘in a period of recession’. “With more money going to gasoline and other basics,” the article stated, “less cash might be available for other things, including the imported products that arrive by the shipload each day.”

Don’t say we weren’t warned. At San Francisco’s Navis World, back in 2004, Drewry’s Neil Davidson called attention to the operational and commercial limitations that reduce the effectiveness of mega-ships. Mr. Davidson predicted that carriers would have a more difficult time filling these larger vessels, thereby cancelling out the economies of scale these ships are supposed to produce. He also cited the limited number of ports able to service these larger vessels because of harbor depths, and the inability of these vessels to accommodate importers and exporters who prefer more direct, less costly service. “The bigger the ship, the more transshipment and feedering you need, and that costs money,” Mr. Davidson reminded us. [It looks like he knew what he was talking about.]