Container Ship Trade - Assignment Example

 Container ship trade outlook An overview of how container ship trade is faring in these tough times and what the future might look like Table of Contents Abstract 1 Introduction 2 The crisis – in proper perspective 3 Some thought on how the crisis can be resolved 5 Conclusion 6 References 7 Abstract The global shipping industry is facing an unprecedented downturn due to the economic slump that has pervaded almost all the economies of the world. Suddenly everybody, it seems, has become acutely aware of the virtues of thrift and world trade that is driven by demand has come to an almost standstill. Shipping companies, especially container shipping that depends almost entirely on consumer demand; in one stroke is finding no buyers and the long queues of trailer trucks that were there till a few months ago have disappeared into thin air. But as long as the world exists, international trade in goods will exist. So, container shipping is bound to come out of its present sorry state but the recovery will be a long and often painful affair. Introduction Till the other day, shipping lines were throbbing with heavy traffic carrying electronic items and textiles from China to United States of America and the entire Europe. But consumer demand sharply declined as credit lines went dry and shipping companies discovered to their dismay that demand for containers that was sky-high only a short while ago nosedived with the situation becoming so grim that a large number of ships had to leave Chinese ports without a full load of cargo. As an obvious economic consequence, ships carrying iron ore and other equally sought after minerals from the mines in South America towards China also experienced a slump in demand as the latter did no longer require such huge quantities natural resources to manufacture goods that were in such high demand in western world a short while ago. As a result of this overall decline in demand not only are the ships plying with less than full load of cargo but also quite a few of them are lying idle. Container ships and bulk carriers parked off the coast of Singapore: Roughly 450 container ships are now idle worldwide as a result of the crisis – about 10 percent of the global fleet.[Jun09] The crisis – in proper perspective In an article published in Spiegel Online International; authors Jung, Schulz and Wagner had painted a realistic picture of the crisis facing the container shipping industry by studying the case of Hapag-Lloyd – the 160-year-old, deeply traditional shipping company that is widely considered to be one of the most efficient and genuinely world-class shipping companies. It might be worthwhile to mention at this stage that approximately 1,644 of the 4,619 container ships worldwide are German-owned and Hapag-Lloyd happens to be one of the biggest owners of container ships among all German shipping companies. This company lost €222 million in the first quarter of the current year, and it will need a financial infusion of roughly €1.75 billion to stay afloat over the next one and half years. This perhaps makes it quite apparent how deeply entangled this company has become in a financial quagmire that, quite honestly, was in many ways beyond it to control. According to Ulrich Kranich, executive board member in charge of global operations of Hapag-Lloyd, the main reason for such woeful financial situation is a dreadfully low tonnage charge that shipping companies are now getting for their services. On an average, shipping companies are now getting only $500 for transporting a container from Asia to Europe from a high point of $1500 that they used to charge per container only a year and a few months ago. For Hapag-Lloyd, the rate of $500 per container is still $300 short of its breakeven rate. Thus it is no wonder that the company has plunged into such a serious financial crisis. Just to put things in sharper focus, the authors have stated that the shipping costs have reached such low levels that it would still be profitable for Spanish farmers to ship their tomatoes to China for conversion into tomato puree and ship them back to Europe for sale in supermarkets. Another example could very well be of Dutch tulips that might be transported to New Zealand and transported back to Europe in the form of full grown plants ready to be sold in European markets. The other more unsettling issue is that transportation costs very often hardly affect the economic calculations of importers and exporters because they are so low as to have no realistic impact on the total cost breakup of a good that is traded across continents. Just to get an idea of the real situation the following details might be of some use. It costs $10 to ship a TV set from Asia to Europe, while shipping a vacuum cleaner costs $1 and a bottle of beer 1¢. So, any attempt at lowering or raising the transportation cost of containers from one continent to the other to affect the demand for transportation is bound to have no impact at all. Thus, ship owning companies have no other option but to wait for the demand for internationally traded goods, especially consumer goods, to pick up. To be fair with Hapag-Llloyd it must be mentioned that Maersk lost $373 million and South Korea’s Hanjin also lost $110 million in the first quarter. Singapore’s NOL too posted a loss of $245 million during the same period. But unlike Hapag-Lloyd, these companies have the support of either their governments or financially stable corporations. As a desperate measure to stay afloat, Hapag-Lloyd has started to drastically reduce the number of ships it leases and other shipping companies have also followed suit.[Jun09] [Sch081] Greece is another leader in shipping industry owning one fifth of the world’s fleet and it is really feeling the heat of the downturn as shipping industry provides 7% of the country’s GDP. Greek ships that used to crisscross international seas and oceans with their holds full of container cargo have now become much less busy with an eerie calm having descended in and around the once bustling port of Piraeus. Giorgos Gratsos, president of the Hellenic Shipping Federation and owner of Standard Bulk Transport echoed the sentiment of all ship owners across the world when he stated that freight rates are at their lowest since 1985 and it is becoming for most of the shipping companies to barely breakeven. The current credit crunch and nervousness among bankers has only made the matters worse with hardly any banker willing to take the risk of lending to shipping industry. Matters have come to such a head that many ship owners have been parking their ships in safe anchorage with only a few watchmen on board rather than operate in such gloomy times and run up huge losses. That the downturn has been really steep is made clear by the dismal fact that ships that used to earn $50,000 a day during the last quarter of 2008 were earning only $9,000 a day by February, 2009. Things were worse for those companies that had gone on a buying spree and added to their existing tonnage in an attempt to make the most of the buoyant shipping market that was there till the second quarter of 2008. Now they have been saddled with practically non-performing assets that carried huge burdens of interest. Though crude oil, gas and petrol (more commonly known as the wet market) transportation rates have not dropped that much, the dry bulk market consisting of grain, steel and coal have taken a sound beating with the container sector being battered the hardest.[Ten09] Some thought on how the crisis can be resolved Shipping industry is basically cyclical in nature and considering the huge investments that are necessary to keep a shipping company afloat, one possible alternative means to survive these hard times is to opt for mutually beneficial mergers and acquisitions between smaller companies so that a larger entity can be created which would be more capable of weathering financial storms such as the one raging now. Banks have to come forward and offer credit to both shipping companies and producers so that effective demand is increased and in some really acute cases radical restructuring of balance sheet is necessary with slashing out non-performing assets and removing those having a high interest burden. Shipping companies have been traditionally family held companies with hardly any transparency in governance or accounting. This has to be altered and professionalism and corporatization must be ushered in if these companies wish to survive this onslaught. ‘Gut feeling’ of those high up in the family should no longer be the guiding principle of management, rather scientific techniques of financial management must be rigorously introduced to prevent risky and oftentimes utterly senseless speculation that abound in shipping industry.[Jah091] Conclusion There is simply no doubt in the minds of all the stakeholders of shipping industry that this is probably the darkest time that the industry has ever faced. The situation is much worse than what had happened in 1980s when numerous large dry bulk vessels had to be parked side by side staring from the port of Piraeus right up to the island of Salamina for lack of charters. But it is equally true that shipping industry, more particularly, container shipping will bounce back from this gloom much sooner than experts might have predicted. This is so because, signs of economic upturn are already apparent as the beneficial effects of governmental financial intervention are now beginning to bear fruit. As consumer demand picks up so will the demand for container traffic and one would not be surprised if the industry manages to restore its previous health within the next twenty four months. References Jun09: , (Jung, Schulz and Wagner 2009), Sch081: , (Schulz 2008), Ten09: , (TendersInfo 2009), Jah091: , (Jahanguiri 2009), Read More