Wednesday, May 27, 2009
Slide in trade leaves a glut of capacity
Wednesday, 27 May 2009
As the Eugen Maersk, one of the world’s largest container ships, sits at Tangier Container Terminal, on Morocco’s Mediterranean coast, it is easy to imagine that the world’s transport and logistics industry is in good health. The new port, built in the shadow of the Rif Mountains, is busy and the containers are stacked reasonably high on the vast vessel’s deck.
However, the ship’s bow betrays the problems that have shaken every form of freight transport since the world financial crisis set in last September. The ship, which is on a service from northern Europe to China, is riding high in the water. Nearly all the containers it is carrying back to Asia are empty. Most will wait far longer than they would have two years ago before returning full to Europe.
It is one of many signs of the crisis that has transformed the world’s transport and logistics sectors in the past nine months. The sudden drying-up of credit, including trade finance, and collapsing trade volumes have changed the industry’s concerns completely. Only two years ago, when senior public officials and private business people met in Leipzig for the International Transport Forum, Ron Widdows, of Singapore’s Neptune Orient Lines, warned that the infrastructure of US and other rich-country ports was expanding too slowly to handle breakneck growth in traffic volumes. Container traffic between Asia and Europe was then growing around 20 per cent year on year.
As delegates prepare to meet for this year’s ITF, starting today, the past few months have seen Asia-Europe container volumes drop by about 20 per cent. The trade had grown continuously, despite slowdowns, ever since it started in the late 1960s. US rail volumes are down 17.7 per cent for the year so far, according to the Association of American Railroads, while worldwide air cargo volumes are around 21 to 24 per cent below last year’s levels, according to Iata, the global airline trade association. The picture is replicated across the world, with even Africa’s trade volumes falling after months when the continent was an exception to the sector’s gloom.
The combination of excess capacity and falling demand has caused the rates that many transport operators can charge to slump, by 80 to 90 per cent in some cases. Shippers wanting to send goods from Asia to Europe have sometimes recently been offered a freight rate – the rate the line charges to transport a container – of zero as long as they pay surcharges to cover fuel costs and container handling. In such an environment, costs need to be trimmed fast to conserve cash as shrinking volumes devastate the industry’s finances.
The key question is what trade patterns, and hence what kind of transport and logistics industry, will emerge from the downturn’s other side.
“The mood has changed – everybody is pretty nervous at the moment,” says Jack Short, secretary-general of the International Transport Forum. “We’ve been using figures like 4 per cent decline for the economy, 10 per cent for trade and 20 per cent for transport. The transport sector appears to have had a much sharper downturn.”
The concerns extend to transport providers’ customers, who in many cases are growing worried at the ability of their suppliers to continue transporting their goods. At a conference in London in April, Brett Whitfield, head of global ocean transport for Nestlé, the Swiss food conglomerate, said his company was avoiding some container shipping lines out of fear they could face insolvency.
“Carriers claim current freight rates are not sustainable for them to stay in business,” Mr Whitfield said. “I think they’re definitely not sustainable. The rates we’re currently seeing are actually rather frightening.”
There are similar concerns in the US trucking industry, where rates are also well below those needed to cover full operating costs.
Numerous small trucking companies have gone out of business and YRC Worldwide, one of the largest truckers, has had to renegotiate its loan agreements with its banks after its total tonnage carried in the first quarter fell more than 30 per cent.
In air cargo, according to Warren Tempest, a senior manager at BA World Cargo, part of British Airways, insufficient capacity is being taken out of the market. Much air cargo – 75 per cent of BA World Cargo’s volumes – travels in the bellies of passenger aircraft and passenger traffic has held up better than freight. Yields per tonne have fallen around 20 per cent.
“You have excess of capacity in relation to demand,” Mr Tempest says. “That’s further [put under pressure] by the amount of further capacity out there in the market.”
In his conference presentation, Mr Whitfield also expressed concern about container carriers’ increasing tendency to merge rival services to save costs and fill huge new ships that would otherwise sail half-empty.
Nestlé now sometimes struggles to find two different services on some lanes so that it avoids depending entirely on one service. That is particularly the case for services from the Mediterranean to the US east coast, an important route for the food and confectionery supplier. “We cannot put all our volumes in one ship, so it’s a big problem for us,” he said.
There are general concerns about the robustness of supply chains worlwide, according to Mr Short.
Some bullish industry figures insist that, amid such gloom, now is the time to invest in ports, ships, trains and trucks that will be delivered or completed just as world demand is again straining at restricted capacity.
There are undoubtedly areas where that holds true. Bill Matheson, president of the intermodal division of Schneider National, one of the US’s largest trucking lines, insists it is vital to ensure truckers are trained and retained during the downturn, to avoid the driver shortages that plagued trucking throughout the boom years.
Yet, Mr Short points out, there will also be areas where the remarkable boom following China’s accession to the World Trade Organisation in December 2001 will never be replicated. A leaner, fitter transport and logistics industry is likely to emerge. But it will have some painful adjusting to do.
“The question is whether things will resume on the old path or whether there will be some kind of new path,” Mr Short says. “I would say some of the evidence is that growth will not be so trade-driven in future.”
Source: Financial Times
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