Blog March 16, 2017

Can Asia carry the weight of the container industry?

By Nicola Byers

There’s no getting away from it – the current economic climate is “challenging”, to use a very British understatement. 2017 has started off badly and may well get worse before it gets better, especially in the EU and US. This gloomy outlook has created a lot of uncertainty for the tank and container industry, which has been slow to recover from the economic crash of 2008. As we prepare ourselves for tougher times, can we rely on Asia to pull us through?

Recent economic forecasts give reasons for optimism. The Asian Development Bank (ADB), IMF and Organisation for Economic Cooperation and Development (OECD) are bullish on Asia, predicting growth of around 5.3% to 5.7%. This contrasts with the US, where the IMF is only predicting GDP growth of 2.2%, despite Donald Trump’s big talk. Perhaps it wasn’t such a good idea for him to cancel the Trans Pacific Partnership so soon after he took office.

While the Eurozone and the UK are both doing slightly better than the (very pessimistic) forecasts predicted, there is enough uncertainty around Brexit, elections in the Netherlands, France, Germany and possibly Italy, as well as the usual Greek debt crisis for us to remain wary of any talk of Europe leading us to a new era of growth.

If there is hope for 2017, it lies in Asia. It was telling that at the most recent Davos summit, the political leader standing up and making the case for free trade was, for the first time, Xi Jinping, China’s president. This year that country is likely to grow by “only” 6.4%, according to the ADB and OECD. A recent article in the Financial Times reports that an index of export managers’ activity compiled by China’s Customs service rose to 41.5 in January from 32 a year earlier.

How does that translate down to container shipping? There is clearly potential for more containerisation in Asia, but economic growth is not enough, as anyone who used to work at Hanjin Shipping would tell you. It is more complicated than that. Growth did not prevent Hanjin from piling up unsustainable debts. And it hasn’t stopped three Japanese shipping companies – K Line, NYK and NOL – from planning a merger to create scale. The deal creates the world’s sixth biggest container fleet. Other consolidations in the industry have seen CMA CGM take over Neptune Orient lines and the merger of Hapag-Lloyd and UASC. Problems within the container shipping industry are in part structural and the latest round of consolidation is not a magic bullet. Further global action is needed. That has started to happen with the reduction in overcapacity and the return of some sensible pricing on shipping lanes.

But the overcapacity problem hasn’t gone away. VesselsValue, a company that monitors the value of the world’s ships, says 2,028 container ships are currently valued at or below their value as scrap. A recent BBC article charts the journey of a container ship bought for $60m in 2010 and sold for around $5.5million at the start of this year.  Despite this, more ships are going to come into the market in 2017. Total shipping capacity is forecast to grow by an average of 4% a year in 2017 and 2018, on top of existing idle capacity of 7%. More than 150 new ships with the ability to carry more than 10,000 TEUs at a time will be delivered by the end of next year. That moves bigger ships down into the secondary markets, passing the overcapacity problem further down the line. This brings the problems back to Asia, which still has the small matter of a $26tn infrastructure gap, which could mean that it struggles to cope with increased demand for shipping of containers and remains overly dependent on maritime shipping, as opposed to rail routes.

In addition, five new major port projects are set to get underway in Southeast Asia in the next few years. This could allow shipping alliances to switch, driving down prices and reducing profitability. Any shock to Asia’s leading economies could also create problems – during the recent slowdown around Chinese New Year, only deep cuts in capacity kept prices up. If Asia sneezes, the world would catch a cold.

We are set for a volatile, uncertain and, ultimately, transformative period in the shipping industry in general and for containers in particular. What is certain is that Asia will not just be on the sidelines this time – it will be at the centre, driving innovation, finding solutions and leading the responses to new challenges as they emerge.