Evergreen chairman downplays overbuilding threat

The chairman of Evergreen Marine Corp. Chairman Arnold Wang played down concerns about overbuilding of ultra-large containerships, and predicted that "the development of the container shipping industry will continue along a rising path, based on continuous cargo growth and stable capacity increases."
Speaking at the World Shipping Summit (China) 2007 in Tianjin today, Wang noted that last year container throughput in all Chinese ports reached 80 million TEUs, or around one-fifth of the global volume.
In 2006 China gained a market share of 65 percent in the transpacific eastbound trade, 71 percent with the inclusion of Hong Kong. In the Far East/Europe westbound market, a market share of 63 percent was recorded for exports from China alone and 72 percent with Hong Kong's contribution
Wang cited figures from BRS-Alphaliner forecasting the number of containerships with capacities greater than 10,000 TEUs will grow from four to 152 ships in four years.
"All these gigantic vessels are expected to join the booming Far East/Europe trade," he said, and some might wonder whether an oversupply of tonnage will lead to a market meltdown.
But Wang said the impact of the extra capacity will be dampened by several factors:
Due to loading requirements by overweight, out-of-gauge, or hazardous cargo, a vessel's actual carrying capability will not reach its nominal capacity. He said on a 4,000-TEU vessel, the effective slot space can fall to under 3,00 TEUs when the above-mentioned factors are taken into consideration.
Aging vessels. Wang said one out of every 20 newbuildings will be used to fill the vacuum created by the disposal of aging vessels.
Need for bigger ships in feeder services, which will result in some ships moving off main routes to feeder routes.
Port congestion in the United States and Europe, which will prevent ships from being used optimally.
Longer trade routes, particularly the Far East/Europe route, which requires eight or nine ships compared to four or five on a Far East-to-U.S. West Coast run.
Space sharing by cargo on secondary routes. For example, he noted a large ship moving cargo from the Far East to Europe may also carry cargo bound for the Middle East, or ships moving from the Far East to the U.S. East Coast may also carry cargo bound for South America.
Wang noted that global outsourcing had soaked up much excess capacity in recent years, but that might not be as evident for the rest of the decade.
"There used to be a proportional connection between the growth rates of global economic development and container volume. Under normal circumstances, the increase rate of container cargo is around 2.4 times that of economic growth. But due to the impact of outsourcing trends, the situation has started to change in recent years. The ratio climbed to 2.8 and 3.6 for 2000 and 2003, respectively."
But he noted "in 2004 and 2005, with the outsourcing trends more or less established, the ratio fell to the previous level. According to forecasts by the International Monetary Fund, global economic growth rate will range from 4.2 percent to 4.3 percent during 2006-2010. Based on the cargo multiple of 2.4, global container cargo volumes are expected to increase by 10 percent to 11 percent in the coming years.
"The pointers above indicate that cargo volumes will continue with stable growth while the tonnage supply will increase slower than expected. Therefore, it is believed that the container shipping market will continue to flourish unless the global economy is impacted by unexpected catastrophes," he said.
However, Wang noted the container shipping industry "requires huge investments but only generates slim profits. In the last 10 years, fierce competition has driven the industry's profitability down to micro levels or even into frequent losses."
"Container shipping has become the least lucrative section of the whole logistic chain," he complained.
He noted an American Shipper study that showed even in the 2004, a good year for the industry, the average profit ratio was 10 percent compared to 5 percent for a normal year.
"Given the limited profit margin, carriers' profit outcomes can easily turn negative when freight rates drop by 5 percent or costs increase by the same level," he said.

Source: American Shipper