Shipping firms feel seasick

With Singapore’s economy recovering one would have thought that its shipping companies would have been sailing into calmer waters.
Not so, as the results of shipping companies has shown that the perfect storm in shipping rates and volumes continues to batter results. Indeed, Singapore’s largest shipping company, Neptune Orient Lines, continued to flounder on even weaker cargo rates.

To June this year cargo rates were down 28.9 per cent year on year and not surprisingly this led the company to report a 38 per cent revenue slump on August 7 which pushed it deep into the red. If there was a silver lining it was that the rate of volume slowdown reduced, albeit marginally, but the reality is shipping volumes in Asia are just not picking up across the board.
Faced with an oversupply of ships, this continues to put pressure on shipping rates. So what’s going on?

Europe the bright spot
In a word, blame America. Spot rates for cargo shipping to the US continued to slide through July and hover near recent lows.
The only positive sign for the industry is that rates for Asia-Europe trade are starting to improve, presumably because the recession is ending quicker in those markets. In July alone the shipping rate for China to Europe bound cargo jumped a welcomed 10 per cent and rates for China to the Mediterranean increased by a more robust 15 per cent.
Still, rates remain well below recent averages.

In 2006 the rate was for Hong Kong to Los Angeles shipping averaged US$2000/FEU.
But by the middle of this year that had slumped to little more than US$800/FEU.
And it is going to get a lot worse, even when the economy recovers. The reason is the number of supermax ships is set to double over the next 24 months.

Too many ships
Currently there are 855 such ships in service, but according to Chris Bartlett, chartering manager at Braemar Seascope, there are a further 700 on order. Almost 200 of these will be launched during the remainder of this year, and a further 198 over the fist six months of next year.
“Even China’s massive appetite for iron ore and coal is not going to offset the rise in shipping capacity.
The rates are still going down and owners are facing huge losses,” he said. Neptune Orient Line’s loss does not come as a surprise given that freight rates and volumes have fallen by 20 per cent and 24 per cent year-to-date, notes OCBC analyst Lee Wen Ching.
But will the tough times continue or will shipping firms such as Neptune Orient and the rest of the shipping corporations catch a break this year?

“While an improvement in global trade in 2H09 may ease some pressure on earnings, Neptune Orient Lines is likely to incur losses for the full year,” said Lee.