NOL: Congestion will prolong upward pressure on rates
David Lim, president and chief executive officer of Neptune Orient Lines, APL’s parent company, warned shippers Monday that freight rates will be subject to further increases because of congestion costs and the effect of congestion on the supply and demand balance.
In a broad public speech covering structural aspects of the container shipping industry, Lim said shipping cycles will continue, but this cycle differs from earlier cycles because of landside congestion.
“What we may see in the coming years is a prolonged up-cycle in the shipping industry,” Lim said. This is because congestion on the land side has “reduced throughput capacity,” and made any excess ship capacity “ineffective,” he said.
“These conditions may remain for a while,” Lim predicted. “And so we are likely to see rate recovery actions continue, as costs increase because of congestion.”
Lim’s comments follow moves among industry analysts to revise earlier predictions of a likely shipping industry downturn in about 2006 because port congestion is moderating the expected jump in effective ship capacity.
“Minus the impact of congestion, it is possible that we could have begun to experience some oversupply in some trade lanes this year, and even more next year,” Lim noted.
Global containership capacity is predicted to rise about 12 percent this year and 14 percent in 2006, according to independent forecasts.
Lim said the large orderbook of new ships could lead to oversupply “in a few years’ time if demand falls unexpectedly, or if landward infrastructure catches up and throughput capacity increases.”
“We cannot tell which scenarios will develop,” Lim cautioned.
Like other carrier executives, Lim agrees the downturns of the two previous container shipping cycles were caused by declines in overall demand growth, rather than surges in ship capacity. These downturns were triggered by the Asian financial crises in 1997, and the end of the dot-com era in early 2001.
He disagrees with the view that there will be a long and extended period of stability in the shipping market because of the relentless expansion of China and the globalization of economies. While globalization is driving the expansion of world trade, “there will be rhythms of high and low growth periods,” Lim said.
Lim offered that underlying imbalances in the cargo transport chain could be resolved gradually. A more moderate supply growth would enable supply to come into balance with underlying demand, while infrastructure improvements would “gradually improve throughput and ease congestion over the next few years,” he said.
“In the meantime, the tightness in the shipping industry means that our customers are paying more because of the inefficiency of the global transport chain,” he admitted. “This is not the best we can do for our customers, and much as we would like supply and demand to remain in balance, and freight rates to be stable, we must strive for a more viable and efficient way to achieve such a result in future.”
Several carrier executives, including the Transpacific Stabilization Agreement carrier group, have recently told shippers that congestion delays will likely reoccur this peak season because port and rail capacity problems have not been resolved. But the Hong Kong Shippers’ Council has expressed skepticism about the timing of these warnings, saying carriers are merely trying to justify rate increases by playing down the impact of the fast-growing ship capacity in the market.
Lim praised the U.S. Department of Transportation for reaching out to industry for feedback and suggestions on transport systems. “Just last week, DOT engaged APL and a number of our key customers in a productive discussion to increase cargo throughput,” he reported.