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Over-capacity could sink shipping industry

Over-capacity could sink shipping industry

By Anthony Hilton, Evening Standard
Published: August 05, 2009, 22:38


Back in June, following the Bimco shipping industry conference in Athens, this column warned of the looming disaster in shipping. Yesterday came news that one of the largest container operators, the German firm Hapag-Lloyd, is desperately seeking £250 million (Dh1.56 billion) of new capital to stave off disaster.

Of all the industries in the world facing problems of over-capacity in the face of declining demand, none is in worse shape than shipping. The motor industry may be on its knees, the airlines flying half empty, and the leisure industry wondering where the next customer is coming from, but shipping has an over-capacity problem worse than anything seen in the last 50 years.


It has only itself to blame - unless you include the bankers who indulged the owners in their orgy of speculation and wishful thinking. In that brief period of ultra-low interest rates and rocketing world trade, freight rates went through the roof. This sparked off a collective loss of reason in the industry, which led to a rush of new ordering, the likes of which the world has never seen. Whereas before, the decision to order a ship was a laboriously thought through process with owners all too aware of their vulnerability - the cyclical nature of the industry and scarcity of finance - this time the new entrants thought it would be different. Shipping to them was just another asset class, a bet on the world economy and an income stream which the financial models said could only go one way.

The result was an over-ordering of all kinds of ships, all to be paid for some time in the future with credit from the limitless pockets of the banks.

Even in containers, where the freight rate boom was far more muted, the collective insanity took hold. Hapag-Lloyd's problem is not just that rates have plunged by 30 per cent or more, it is not just that ships have been going at half speed for months to make voyages last longer and make the 30 per cent of excess capacity less apparent, nor is it even that an estimated 500 container ships are parked round the world standing idle. It is that, on top of all this, those ships which were over-ordered in the boom will soon be coming out of the yards of China and Korea - thanks in large part to soft loans from their governments who want to keep the yards open and operating.

These ships currently on order will add between 30 and 50 per cent to global capacity, at a time when half the existing world fleet is less than five years old and therefore too young to consider scrapping.

And anyway, no one wants to take on the work of scrapping ships in the volumes needed because steel and scrap prices are also on the floor, so there is no money in that either.