Hangin’ On

Tan Chor Kee in Singapore writes: “‘When you come to the end of your rope, tie a knot and hang on,’ said Franklin D. Roosevelt. This phrase would have been on the minds of many in the shipping industry at the start of 2009. Indeed, the world of shipping this year was all about ‘hanging on’ and riding out the storm.

“The ‘financial tsunami’ has destroyed the fundamentals required for a healthy growing industry. Consumer confidence and spending evaporated while shippers faced difficulties in securing letters of credit for their shipments. As a result, there was a drastic drop in shipping demand, while newbuilds were being delivered. The demand-supply balance was completely tipped.

“In response carriers resorted to several counter-measures in an attempt to secure their respective positions. In a frenzy to fill the ships, the carriers lost sight of the bottom line with freight rates during the first half of 2009 plunging to an abysmal low of US $ 300 per TEU on most of the long-haul trades, even including trades from Asia and South America.

“The erosion of freight rates was as high as 70 per cent in some trade lanes. The rate war was indeed suicidal as the contribution generated from carrying the cargoes could not even cover the bunker and port costs for running the liner services, let alone the cost of assets. Consequently, most carriers reported huge losses for the first half of 2009. It was estimated that the major carriers collectively lost over US $ 6 billion during this period. Some companies had to rely on equity injections amounting to hundreds of millions of US dollars in order to maintain a healthy cash reserve.

“The carriers soon realized the painful fact that operating the ships at low freight rates was worse than idling the ships. The November report from AXS Alphaliner reflects the idled tonnage at over 500 vessels amounting to 1.413 million TEUs, or 10.9 per cent of the total capacity…

“The next question is: ‘How much longer for full recovery?’ With more than 10 per cent of current capacity idled and new ships scheduled to be delivered during the next few years, we can expect shipping to fully recover with balance in supply and demand only in another 2-4 years’ time.”

By stating that “Consumer confidence and spending evaporated while shippers faced difficulties in securing letters of credit …” causing “… a drastic drop in shipping demand …”, Mr. Kee gets his causes and effects reversed. He seems to think that credit problems caused American consumers to lose their buying power. He is Deputy Managing Director of Pacific International Lines, and though he has yet to realize that unemployment in the US is the underlying cause of the world’s “financial tsunami”, nevertheless he doesn’t hesitate to predict a recovery date.

His earlier predictions, as we all know, called for his company – and every other carrier – to order more ships than they’ll ever need. Ever. And that’s something else he doesn’t realize.

Hold on to that knot!