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RUEATRS/DEPT OF TREASURY WASH DC
RUEKJCS/SECDEF WASHDC 0014

UNCLAS SECTION 01 OF 03 GUANGZHOU 000643 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, INR/EAP, EEB/TRA/OTP AND EEB/TRA/AN 
DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT, KGLATZ 
LONDON FOR U.S. IMO REP 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN ETRD EIND PGOV
SUBJECT: Container Shipping Industry Sees Slow Recovery Ahead 
 
Ref A) 08 Beijing 4679, B) Shanghai 111, C) Guangzhou 218, D) 
Guangzhou 009 
 
GUANGZHOU 00000643  001.2 OF 003 
 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM 
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE 
POSTED ON THE INTERNET. 
 
¶1. (U) SUMMARY: The global container shipping industry hit rock 
bottom in 2009 and is slowly climbing out of the trough, according 
to industry experts attending the 3rd Annual Trans-Pacific Maritime 
Asia Conference in Shenzhen in late October.  Executives of shipping 
lines and major retailers pointed out how falling demand and 
overcapacity had contributed to the industry's decline.  Experts 
provided mixed forecasts on the future of container shipping, 
arguing that in order to pull the industry out of the current 
crisis, companies must discipline themselves and perhaps even take 
drastic measures like bankruptcy and consolidation to ensure the 
industry's survival.  However, conference participants were 
generally optimistic when looking at the future of the China market. 
END SUMMARY. 
 
--------------------- 
An Industry in Crisis 
--------------------- 
 
¶2. (SBU) "Shipping has never seen a crisis like this before," said 
Electrolux executive Bjorn Jensen, one of the keynote speakers at 
the 3rd Annual Trans-Pacific Maritime Asia Conference.  The world's 
top 18 carriers have incurred collective losses in the first half of 
2009 of US$8.6 billion.  As an industry, the carriers will lose over 
US$20 billion in 2009, he forecasted.  Neil Dekker of Drewry, a 
major shipping consulting firm, commented that freight rates 
globally had hit record lows as both spot and contract rates 
experienced large declines.  Assessing the Asia-U.S. market, he 
reported that the first and second quarters of 2009 had seen 
year-on-year volume declines of 20% and 18%, respectively.  Hong 
Kong to Los Angeles spot market rates fell 29.2% year-on-year, while 
Hong Kong to New York-New Jersey rates dropped 32.0% year-on-year. 
There was no peak season to speak of in 2009, said Dekker, despite 
expectations for "improved" performance for the second half of the 
year.  For the Asia- Europe market, there has been some demand 
recovery since mid-July.  However, some of this is attributable to 
inventory recovery in European warehouses, suggesting that the trend 
is only temporary. 
 
¶3. (SBU) The Pacific route has been hit particularly hard, said 
Maersk Shipping executive Eddie Derlich in a separate meeting with 
ConGenOff held before the conference.  Besides volumes being at an 
all-time low, rates on the Pacific route were down 35% over the last 
year and a half.  He disclosed that Maersk had lost as much as 
US$500 million in the first three quarters of 2009, and added that 
smaller companies are likely facing a much worse situation. 
 
------------------------- 
Overcapacity Here to Stay 
------------------------- 
 
¶4. (SBU) One of the biggest challenges facing the shipping industry 
is overcapacity.  Ten percent of the global fleet sits idle, said 
C.L. Ting of Orient Overseas Container Line (OOCL) during his 
presentation, and more ships are scheduled for delivery over the 
next five years.  Carriers have begun taking steps to modify the 
over-supply problem, according to Drewry's Dekker.  Because it is 
technically very difficult to cancel a shipbuilding order, there 
have been relatively few cancellations so far, he said.  However, 
companies are negotiating delayed deliveries and order conversions. 
For example, Israeli-based shipping company ZIM negotiated the delay 
of nine 12,600 TEU (twenty-foot equivalent unit) new builds to 
2012-2015.  Chilean liner CSAV reportedly converted an order for 
four 12,500 TEU vessels into five 8,000 TEU ones.  Dekker predicted 
 
GUANGZHOU 00000643  002.2 OF 003 
 
 
that approximately 40% of vessel orders would be delayed, and about 
22.5% of the orders may be cancelled, expecting cancellations to 
increase in 2010-2011. 
 
¶5. (SBU) While ship lay ups are an alternative, Dekker argued that 
any lay ups would only be temporary and would not remove the 
capacity from the long-term supply.  Dekker said that a more viable 
option was vessel scrapping, which would relieve overcapacity 
somewhat.  Shipping lines Evergreen and Mediterranean Shipping 
Company (MSC) have committed to major scrapping programs, said 
Dekker, who estimated that global scrapping of 316,000 TEU for this 
year will take out 2% of overall capacity based on the current 
fleet.  He concluded that the new build market is dead and will 
remain so for the next few years.  In sum, Dekker said that the 
massive capacity overburden on the shipping industry is here to 
stay, and adjustment efforts can only "ease the pain" for carriers. 
Furthermore, because of this overcapacity, freight rates will remain 
low even if the market does come back, explained another shipping 
executive. 
 
----------------------------- 
Analysts Give Mixed Forecasts 
----------------------------- 
 
¶6. (SBU) Industry analysts offered mixed forecasts about the future 
of container shipping.  Neil Dekker's 2010 forecast warned that any 
volume increase was likely to be mild and any increase in rates 
would likely force volume to decrease.  Although volume has bottomed 
out, the recovery will likely be slow and intermittent.  Freight 
rates will move up from record lows, but not enough for carriers to 
break even, said Dekker.  Overcapacity will be a lingering problem 
until 2014 despite capacity adjustments and anticipated continued 
economic recovery. 
 
¶7. (SBU) Tom Kim of Goldman Sachs, on the other hand, provided a 
more optimistic prediction.  He argued that current signs of an 
economic recovery are good news for the shipping industry.  With the 
recent surge in Asia-Europe spot rates and trans-Pacific rates 
recovering, Kim is optimistic that margins and returns will revert 
to levels prior to the economic downturn by 2011, assuming rates are 
sustainable. 
 
-------------------------- 
Need Discipline to Survive 
-------------------------- 
 
¶8. (SBU) Many of the speakers at the conference agreed that the 
container shipping industry must discipline itself if it wants to 
emerge from the current crisis in one piece.  Both OOCL's Ting and 
Al Benki of OHL, a U.S. logistics provider, emphasized that liners 
must change their mindset about market share and find new strategies 
to survive.  Ting added that it is critical that carriers need to 
better manage capacity to avoid further exacerbating the current 
over supply of idle ships.  The industry will take a few years to 
reach equilibrium, he said. 
 
¶9. (SBU) A number of carriers incurred never-seen-before losses 
during the economic downturn, and yet nobody has gone bankrupt, 
according to Electrolux's Bjorn Jensen in his keynote address. 
Others at the conference supported Jensen's view that bankruptcies 
would be necessary to the industry's recovery.  Several speakers 
commented that shareholders and governments cannot continue bailing 
out companies and that an actual failure of a major line might send 
out the best message to the market. 
 
---------------------- 
Optimistic about China 
---------------------- 
 
¶10. (SBU) Despite some of the pessimism surrounding the future of 
global container shipping, participants at the conference were 
 
GUANGZHOU 00000643  003.2 OF 003 
 
 
optimistic about the China market.  Agility CEO for Greater China 
James Gange pointed to steady growth in China's transport and 
logistics market and China's third-party logistics (3PL) market as 
reasons for his confidence.  With more Chinese companies going 
global and the central government's large investment in development 
projects in the western regions and plans to increase domestic 
demand, he believes that there is great potential in China.  Goldman 
Sach's Tom Kim also looked favorably upon the China market, saying 
that there are many opportunities with Chinese consumers and 
companies.  Showing that China's exports have historically trended 
with the country's electricity production and coal consumption, 
which have surged recently, Kim predicted that exports are on a 
recovery path, a forecast welcomed by many at the conference. 
 
 
GOLDBECK