Drewry report warns against overinvestment in Far East/Europe trade
Excessive capacity in the next two years could hamper growth in the booming Far East-Europe trade, warned Drewry Shipping Consultants in a report on the global container market released Wednesday.
'Drewry's unique head-haul east/west trades supply/demand index forecast for 2009 denotes an expected weakening of the balance of the core trades at that time,' Drewry said in a statement. 'The industry should be wary of underlying economic factors which may undermine the balance even further by 2010 when the first of the new 10,000-TEU ships are deployed in the Far East/Europe trade.'
More specifically, the editor of the Annual Container Market Review and Forecast 2007-2008, said it's dangerous for carriers to place all their eggs in one basket.
'By the time many of these vessels are delivered in 2010 and 2011, the Far East/Europe boom would have had to last for five to six years and to continue to do so while the new ships bed in,' said Drewry's Neil Dekker. 'With the inherent weakness displayed by the transatlantic and transpacific trades now and in the short to mid-term at least, this is a great deal of pressure for one trade lane to bear — and this is not even factoring in the huge trade imbalances which are increasing year-on-year.'
A panel of carrier executives stressed at a conference in Hong Kong in early September that overcapacity was not a concern since practical capacity would be nowhere near nominal capacity, which most analysts use to forecast supply-demand.
But at the same conference, Jim Lam, executive director at Morgan Stanley Asia, said he wondered whether carriers would overindulge in the booming Asia/Europe trade in the next couple of years.
'Will carriers move smaller vessels from the transpacific to Asia/Europe in the slack season?' Lam said. 'Will they be tempted by the big profit margins in Asia/Europe, or will they dry-dock vessels?'
Dekker said carriers should not be tempted to overinvest in the Far East/Europe trade and instead focus on resurrecting profits in the flat transpacific and transatlantic ones.
'The industry should remain concerned that the transpacific and transatlantic trades are not performing well,' he said. 'Current weaknesses in the U.S. economy serve as a warning that double-digit demand growth in the transpacific trade is not permanent. Ocean carriers need to remain wary of their costs and the management of the cascading of big ships from the main east/west trades to the smaller north/south trades. Additionally, both the ILWU (International Longshore and Warehouse Union) and transpacific shipper contract negotiations in 2008 will be crucial in determining the health of many of the major global players looking forward.'
Despite the warnings, Drewry said, 'at present, the liner industry is optimistic on the back of very buoyant demand growth in the Far East to Europe and Mediterranean head-haul trades. This has helped to fuel the recent investment surge in super post-Panamax vessels. The 20-percent-plus head-haul trade growth in evidence for the first half of 2007 has led to a significant firming of freight rates, and has contributed to an improved profitability performance for many ocean carriers. The report outlines how there are no real signs that the situation will change in the short-term.'