14 January 2012

Shipping

The Hong Kong-flagged Venture Spirit, a 298,000-dead-weight-tonne crude carrier owned by Wah Kwong Maritime Transport Holdings and built in Japan in 2003, undergoes her first dry docking in the port of Shekou, Guangdong.

January 2012 15

SINKING INTO THE REDThe shipping industry around the globe – including Hong Kong’s – is being battered by excess capacity. Could China, with its large shipbuilding business and growing consumer market, calm the troubled waters? George W. Russell finds out

Photography by Colin Beere and Kees Metselaar

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Shipping

16 January 2012

The sight of the Emma Maersk steaming slowly off the western coast of Lamma Island gives a sense of business-as-usual: the

largest container ship in the world sailing from Hong Kong, one of the most important ports in Asia, to Europe, one of the world’s richest consumer markets.

But all is not well.The 400,000-dead-weight-tonne vessel is

barely laden, reflecting chronic overcapac-ity in the shipping industry. The port of Hong Kong is struggling with high costs, falling throughput and competition from Yantian, Nansha and other Chinese ports. Meanwhile, Europe is in the midst of a debt and cur-rency crisis and its imports from China have plunged. “The shipping industry is mired in debt, despair and overcapacity,” says Jona-than Allum, equity strategist at Mizuho Inter-national in London.

The scale of this downturn is one that ship-ping industry executives haven’t encountered before. “There are two factors that have come together to create a pretty disastrous situa-tion – falling demand from… U.S. and Euro-pean markets and excess capacity in terms of shipping tonnage,” notes Jonathan Downer, a partner with KPMG and a member of the Hong Kong Institute of CPAs.

Shipbuilders, owners, carriers and han-dlers fear this downturn will be more lasting than its predecessors, with capacity problems lingering at least until the end of 2014.

Shipowners are already in despair about the new year. “With charter rates now, in many cases, at below operating costs and a huge reduction in the amount of finance avail-able for shipping, the outlook for 2012 is, on paper, pretty grim,” says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong company that owns nearly 30 tankers, bulk carriers and liquefied petroleum gas transporters.

Turning tideThe oversupply begins in the shipbuilding industry. New vessels are set to flood the dry-bulk market, expanding it by 13 percent against demand of only 8 percent, according to the Hong Kong-based shipbroker SSY. Shipowners went on a buying spree in 2007 and 2008 before the downturn began, and those vessels are only now coming to the market.

Huxley, whose company owns the 298,000-dead-weight-tonne crude carrier Venture Spirit, says the overcapacity prob-lem is daunting.

“While shipping has shown an ability to self-correct in previous downturns, through reducing new ordering, delaying or cancelling ships on order and through scrapping of older ships, absorbing this influx of new ships at a time of recession in the West will be very dif-ficult,” he says.

In addition, ships now cost more to run. “The industry must address the rising oil price, which is four times higher than just 10 years ago,” says Steen Brodsgaard Lund, executive vice president and Asia-Pacific managing director of the Germanischer Lloyd SE line in Shanghai. “Environmental-related surcharges might further push fuel costs up.”

At the end of the chain is dampened de-mand due to the extended recession in the United States and Europe. “Reduced world trade activities, in particular shipments be-tween Europe and Asia and between the U.S. and Asia, have led to rock-bottom freight rates and cut-throat competition among car-riers,” says Frankie Yip, financial controller at Jardine Shipping Services in Hong Kong and an Institute member. “The fixed over-heads and operating costs such as salaries, fuel and rent remain high relative to the drop in revenues.”

China on the horizonAs the rough seas threaten to overwhelm the industry, all eyes are on China, with its vast fleet and rapid development. “Global shipping is incredibly reliant on China,” says Downer. Officials in Beijing have already an-nounced that they will take steps to allevi-ate some of the industry’s distress, but have

revealed few details and shipowners are craving concrete help. “As ever, we look to China in particular where continued  de-mand for iron ore and significant growth in coal and oil demand provide some posi-tives,” Huxley says.

So far, China’s transport minister, Li Shenglin, has pledged to slow deliveries from shipyards by offering credit in ex-change for delays. On the shipping line front, Ma Zehua, the recently appointed president of Cosco, China’s largest shipping line, told China Daily in December 2011 that the company’s rapid expansion of container and bulk-commodity capacity is on hold un-til circumstances improve.

This all comes at a time when China is rebalancing global trade flows. “Long-haul inter-ocean cargoes have been decreasing but intra-Asian trade and transshipment is increasing,” notes Simon Su, chief economist at BMT Asia Pacific, an engineering, science, and technology consultancy in Hong Kong. “It’s a changing landscape.”

The shift of manufacturing and assembly lines from the Pearl River Delta to cheaper areas to the west – especially to the west-ern end of the navigable part of the Yangtze River near Chongqing and Chengdu – has prompted the government to commit more than 200 billion yuan to improving riverine logistics over the next 20 years. “The Yang-tze is already an important shipping route for barge traffic, but the route is growing in importance,” says Downer. “River transport lightens the load on road and is a good, low-cost form of transport.”

Navigating the watersAccountants working in the shipping indus-try are plugging the leaks in their battered fi-nances. Yip at Jardine Shipping Services says Institute members can help. “I think what the accountant can do is to help management by analyzing profitability by trade lane, service and type of cargo, so that nonprofitable ac-tivities can be suspended to reduce losses,” he advises.  Yip adds that the Chinese govern-ment’s  help in boosting manufacturing and consumer spending will lift demand for ship-ments of raw materials.  Promoting research and development will also cut costs in the longer term, say carriers.

China’s transport minister has pledged to slow deliveries from shipyards by offering credit in exchange for delays.

January 2012 17

1. Hong Kong is home to the Kwai Chung Container Terminal, one of the busiest ports in the world.

2. A Hapag-Lloyd container ship readies to dock in Kwai Chung.

3. A worker inspects the propeller on the Venture Spirit.

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Shipping

18 January 2012

“ It appears that big players such as Maersk Line are intent on duking it out this time.”

“Given the fact that fuel costs may account for up to 60 percent of the total operational costs of a fleet, improving the fuel efficiency of vessels and conducting research into potential fuel alternatives must take priority,” says Lund at Germanischer Lloyd. Liquefied natural gas may become viable as a ship fuel in the near future. Lund says his line has completed a conversion project for a product tanker. “She is also the world’s first vessel in service whose main machinery has been converted to burn LNG as fuel. “Fuel efficiency of new vessels can be en-hanced through better design,” Lund adds. “And for existing vessels, the operators can deploy services or tools such as optimizing their trim, planning hull and engine mainte-nance intelligently, and using weather-rout-ing systems.” CFOs might not be able to influence global cyclical trends, but they can plan. “They can help by making sure key refinancing events don’t occur at the bottom of the cycle… and by taking advantage of potential value oppor-tunities in timing major capital expenditure events at times when vendors are keen for the business,” says Downer at KPMG. Another opportunity for CFOs is derivative contracts that help shippers hedge. The Shang-hai Shipping Exchange has taken the lead in

offering derivatives for a number of Chinese domestic routes for dry-bulk carriers. “This al-lows shippers to lock in rates through forward freight agreements, avoiding some of the vola-tility in the market,” says Downer.

Sink or swimWhether China can float the global indus-try out of its trough remains to be seen. This down cycle is also unusual in that large com-

panies are getting aggressive. In previous downturns, carriers reduced frequency of shipments, used smaller vessels or steamed at slower speeds to reduce costs and main-tain rates. Not this time: Maersk Line, one of the largest carriers, has added to capacity by introducing a daily container route between China and Europe. Analysts say the company is using the downturn to weaken competitors. “It appears

that big players such as Maersk Line are intent on duking it out this time around, as opposed to slow steaming and laying up vessels to re-duce supply,” observes Allan Hviid Jensen, founder of Astra Consult, a maritime con-sulting company in Copenhagen. Experts say that the deeper-pocketed shipping lines want to shake up the industry. “They have an interest in seeing smaller players exit the market,” says Lars Jensen, CEO of SeaIntel, a container shipping consulting company also in Copenhagen. “I see a continued fight among the contain-er shipping lines,” Jensen adds. “The major lines will be pushing for further consolidation in the industry and the alliances between the smaller lines might be severely under pres-sure or might be restructured altogether.” Shipping lines may also find it increas-ingly difficult to secure more financing, an-alysts warn. “I hear some lines have played the sell-and-lease-back trick too many times to the point where there is nothing to sell to secure cash,” says Jensen of Astra Consult. Allum at Mizuho says the market forces could be brutal. “Excess capacity inevitably depresses prices, which destroys profits and, ultimately, companies, and thus eventually removes the capacity overhang that caused the problems in the first place.”

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The Skagen Maersk, which frequents the Europe-Asia route, makes a stop in Hong Kong.