The container shipping disaster

There used to be a time when container shipping grew at annual rates of 10 % or more. That time seems like a distant memory, yet we were still living in that world as recently as last summer. Investors, convinced that the good times would never end, ordered new container vessels like never before. As a consequence, new deliveries scheduled for 2009 will amount to 15 % of the current world container fleet.

That's right:

Shipping volumes are plummeting, yet capacity goes up by 15 %.

As a result, there are three things you definitely don't want to be right now:

1. A shipyard building standard commercial vessels

2. A container shipping line
(or more broadly speaking: owner of container ships)

3. A bank specializing in shipping finance

German money is heavily involved in 2. (Hapag-Lloyd comes to mind, plus loads of private money, much of it due to tax breaks intended to benefit the German shipping industry) and 3. (HSH Nordbank comes to mind, see previous post)

Germany is also a major player when it comes to building container ships, though China and Korea are more heavily exposed.

According to the FTD, the world's ship-yards still have an order-book worth 540 bn $ (all kinds of commercial vessels, not just container shipping). It's unclear how much of this can be cancelled. What is clear is that very little of it has so far been paid.

To illustrate the extent of the gloom 'n doom about to descend on the industry, here are some facts and numbers:

- Current freight-rates are somewhat below variable costs. In other words, it's hard for a shipowner to cover the running costs of his ships. He earns zero to cover depreciation and financing costs

- 11 % of the worldwide container fleet have already been idled as of late February. Industry observers estimate this percentage will double in the mid-term

- Much of the rest of the fleet is sailing half-full, at reduced speed (to save fuel), and taking detours (going around Cape of Good Hope to save Suez canal charges, for instance)

- Container throughput at China's ports has dropped 17 % yoy in February (and China is supposed to be the world's most dynamic economy)

Of course it's unlikely that shipping traffic will continue to fall at such a steep rate. But there is absolutely no indication that it will resume growing in the forseeable future.

And even when economic recovery finally comes, why would European and American imports from Asia resume growing at 5-10 % p.a., if their economies are growing at best 1-3 %? Just because there used to be huge growth rates in the past doesn't mean a trend can't come to its end. There's such a thing as a saturation point. And not to forget: Fuel charges will also start rising again if/when the world economy stages a convincing recovery.

To conclude, here are a few snippets regarding Neptune Orient Lines, a major Singapore-based shipping line (and yet another gem in Temasek's fabulous investment portfolio):

- NOK suffered a year-on-year volume drop of 35 % during the first six weeks of 2009. Revenue per container also went down 12 %, so total revenues dropped 43 %

- NOL has balance-sheet equity of 2.5 bn $. Yet its market value has dropped to less than 1 bn $ (a 70 % drop yoy)

- NOL has "property, plant and equipment" (presumably ships as well as port facilities) of 3.6 bn $. Depreciation charges alone are nearly 300 m $ per year.

- NOL has "non-cancellable operating lease commitments" of 6.1 bn $: No matter if they have paying customers or not, they will have to fork out 6.1 bn $ over the next few years.

Anybody want to buy some shares?