Riding the Silk Rooster

China Merchants has a knack for catching themes. China Merchants Holdings has been a decently managed company in the China context, holding decent port assets. But investors, mainland and foreign, always seem to get taken away by some idea of golden returns. In the late ‘00s there was all this fanfare about its Vietnam investment with billions of HK$ market cap added pretty much on the back of the concept. 

Having Shanghai Port Group shares take off in the late ‘00s also helped propel the shares into the stratosphere for a while, as owning a stake in a Shanghai listed company offered investors participation in China rallies. 

Yet, we know what happened to plans for Vietnam development. It was a total dud due to massive overbuilding of port assets. China Merchants let the project die quietly after a few permutations. Sri Lanka port expansion also was not without its controversies.

Ultimately Shanghai Port after 2008 turned out to be a little less exciting for 5 years or more – Until September 2014. Since then shares have doubled.  This is one reason why shares of HK China Merchants Holdings perked up recently. But there is also the fanfare of China going big in global infrastructure as a result of a “new” Economic Silk Road initiative, which was laid out in NDRC in late March 2015 in a paper entitled Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road.

COSCO Pacific has not had it so easy since the late ‘00s. It hasn’t been able to recover from the perception of being a passive patsy for the poorly run COSCO parent and having a few more passive port investments as well as a boring container leasing business (which it sold parts thereof more than once).  But, in its defense, it has always maintained 1) good disclosure, and 2) a good dividend distribution.

Port and infrastructure companies are certainly companies to look at as beneficiaries of the “new” economic silk road.

***

The Silk Road Economic Belt theme and policy statement out this time (see official China announcements and speeches) is different than the 20 year old “through train concept” for Asia to Europe via Central Asia (and not the money and share trading conduit between China and HK…). This was the old version for new trade growth avenues.

Over the last few years China has been backing a number of global infrastructure themes, from ports in Suez and Sri Lanka, to potentially theme parks in Cambodia, and ultimately to road and rail buildouts in SE Asia and new military bases and drilling rigs in disputed waters in the South Pacific. 

China now is wrapping this in a comprehensive plan, seeking to show that the growth in the international strategic footprint is about increasing RMB transactions, and ultimately participating in a Chinese Economic Sphere that will even come with its on multilateral bank, which many countries are now warming up to. 

It is a total package, marketed as global business expansion but also comprising a significant geo-political element with military sideshows.  Move over Pax Americana. Here comes the Silk Rooster. It makes perfect sense. And it is not new. It is simply more front burner due to new focus from Xin Jinping.

China Merchants didn’t just invest in a new global footprint ports last month. It’s been growing around the world for a decade or more, as have Shanghai Port and COSCO/ COSCO Pacific. 

What’s more China didn’t just start building military bases in the middle of the South Pacific. It’s been laying down asphalt and train tracks in Laos for awhile. And if it can find financing that is supported by multilateral agencies, like its new Asia Infrastructure Bank, it will be building theme parks/property projects and roads, rail networks, ports, canals across the globe. 

And a new surprise for some may be how substantial its influence in Thailand has become. The PLA and connected Communist Party members have been buying up and producing from jade, precious stones and metals mines in SE Asia for a long time. And one could not have done this without support from the authorities and the military. Recently CITIC (ultimately PLA linked) raised more funding for its re-capitalization from parties including Japanese trading houses and Thai Chinese. The Japanese are another key constituent of Thailand’s industrial base. From a Chinese perspective it is even more important to box in Japan’s influence around the Malacca Straits. 

In some cases, China may have picked the wrong horse, such as Noble Group, which likely expanded too rapidly into commodity asset bases in places such as Brazil toward the top of the commodity cycle. And China has so far missed the boat on acquiring logistics companies rather than simply buying more container ships, bulk vessels and tankers. But it will figure it out.

Because China needs global expansion to replace stagnating China growth, China will pour a lot of resources overseas. And its large state owned companies will benefit immensely. For the moment these companies often don’t get the right cultural mix on international infrastructure projects, and they tend to go into projects in massive waves with too many Chinese workers, while leaving many behind along with support infrastructures. But this is 1) on purpose and 2) may get better regulated in future. 

Imagine 50,000 workers descending on a small economy. The backlashes will eventually force some redirections. But at the same time China will have built a new mainland Chinese diaspora far larger than ex-Communist Party members who fled China with potentially as much as a trillion dollars.

Many countries, not just SE Asia, Japan or the US need to figure out how to integrate into China’s new global political economy. On the one hand investors can participate and benefit, while keeping tight leashes on credit policies. On the other hand, sovereign nations need to quantify and de-limit Chinese incursions into their national territory.

Author: Charles de Trenck / Publisher: SCMO

The Panama Canal: a brief history

Reproduced from Smits, K. (2013). Cross Culture Work: Practices of Collaboration in the Panama Canal Expansion Program. Delft: Next Generation Infrastructures Foundation by courtesy of Karen Smits

Panama. Bordering with Costa Rica and Colombia, Panama connects Central America with South America (see Picture 1). Due to the geographic location of the Isthmus of Panama, the country has long been coveted as a place where the Atlantic and Pacific oceans should meet, and, with the Panama Canal, they finally do.

Before starting this blog series about cross-cultural collaboration in projects, for which I will use examples from the Panama Canal Expansion Program, I’d like to give you a brief insight into the history of the waterway.

Picture 1: Think Panama - Source: Flickr

History of the Panama Canal

In 1513, when Vasco Nuñez de Balboa discovered the Southern Sea (later known as the Pacific Ocean) and realized how close this ocean is to the Atlantic Ocean, the history of the Panama Canal began. From that moment onwards there had been talks about a shortcut through Central America, but it required certain advances in engineering, among other things, to actually construct this alternate route.

Three hundred years later discussions about where a canal ought to go developed into a choice between Nicaragua and Panama. While the debate continued, Colombia allowed a group of entrepreneurs from the United States of America to build a railroad across their province Panama. After their experiences in Panama, however, the railroad builders argued for another location for the canal as, for them,

““Panama was the worst place possible to send men to build anything” [1]”

Despite these experiences, an international congress that convened in Paris in May 1879 voted for a sea level canal in Panama. Known as ‘The Great Engineer’, the world-famous Suez Canal engineer Ferdinand de Lesseps took command of the initiative to build a sea level canal in Panama.

The French Attempt

The work in Panama was an immensely larger and more baffling task than Lesseps had performed at the Suez Canal [1]. Different than in Egypt, the climate in Panama was not only hot but with humidity reaching 98 percent at times, suffocating. While digging at Suez had been through a flat level dessert, in Panama the workers encountered mostly hard rock and clay.

Another important difference between Egypt and Panama was the rainfall, in Suez it rained about nine inches a year, while rainfall in Panama was measured in feet ; ten feet or more on the Caribbean slope and five to six feet in Panama City [1]. Due to the heavy rainfall, digging proved to be much more difficult in Panama, and the threat of diseases was very high. Panama appeared to be the most difficult place to construct a canal: the canal builders had to deal with thick jungles full of snakes, mosquitoes that carried malaria or yellow fever, deep swamps, and a heavy mountain range [2].

De Lesseps and his crew spent eight and a half years fighting against the jungle, a battle they lost. An earthquake, fires, floods, the continuous epidemic of yellow fever, a huge amount of corruption and, on top of this, insufficient funds and unfortunate engineering decisions converged into a tragic ending of the French attempt [1-3]. In 1889, De Lessep’s venture fell: more than a billion francs -about US$287 million- had been spent, accidents and diseases had claimed twenty thousand lives and the project organization Compangie Universelle du Canal Interocéanique de Panama went bankrupt [1, 3].

A lesson learned from the French undertaking was that the construction of a canal went beyond the capacity of any purely private enterprise, it had to be a national undertaking, and the United States of America appeared to be the one nation ready to mount such and effort [1].

The American Victory

When Theodore Roosevelt became the President of the United States of Americain 1901, he was determined that a canal was the vital, indispensable path to a global future for the United States [1, 4]. For both commercial as well as military vessels it would significantly improve shipping time, lower shipping costs, and avoid passing through the often-dangerous weather at the tip of South America.

Furthermore, a two-ocean navy would not be necessary when the two coasts would be connected. A canal would demonstrate American power to the world and enhance the nation’s identity as a supreme authority [3]. Despite intensive lobbying and heavy discussions about where this canal had to be built, in Nicaragua or Panama, President Roosevelt finally decided it had to be Panama [1, 3].

There was just one obstacle: Panama was a small province of Colombia and the Colombian constitution prohibited any sovereignty to give away any part of the country, which is exactly what Roosevelt had in mind. He was lucky though. A group of Panamanian elites had plotted a revolution for years, and they were eager to receive United States’ protection to support Panama’s independence [3]. On November 3rd, 1903, a coup gave birth to the Republic of Panama.

Soon after this bloodless revolution Panama and the United States signed the Hay-Bunau-Varilla treaty. This agreement evoked a whirlwind of controversy as it gave astonishing rights to the United States, while it eliminated any independence of the Republic of Panama [1, 3]. The treaty granted the United States effective sovereignty over the ‘Canal Zone’, a ten-mile wide swath that stretched clear across the isthmus and cut the country in two. It gave the United States the right to purchase or control any land or building regarded necessary for the construction of the canal and allowed the United States to intervene anywhere in the republic to restore public order “in case the Republic of Panama should not be, in the judgment of the United States, able to maintain such order” [3]. Later, this treaty became a contentious diplomatic issue between Panama and the United States.

Picture 2: National Museum of American History - Source: Flickr

The Panama Canal construction project attracted people from all over the world. It promised the return of prosperity surpassing the French era and there was no doubt it would be completed [1].

Labor agents targeted the Caribbean islands for workers and attracted at least twenty thousand Barbadians and an almost equal amount of West Indians to travel to Panama and sign a contract with the government of the United States [3]. Although the project drew mostly migrants from this region, thousands of others from Mexico, Costa Rica, Colombia, Peru, India, China and Europe also packed their suitcases for the Canal Zone. Even higher numbers of people from the United States were attracted by the prestigious job for the federal government, the adventure and good payment.

Under supervision of army doctor Colonel William Gorgas doctors and sanitary inspectors fought yellow fever and malaria; all streets in Panama were cleaned, pools were drained and waterways oiled to get rid of the disease-carrying mosquitos [2]. As conditions in the isthmus improved, after 1906, more American women packed their bags for Panama so they might work as nurses, secretaries or provide a home for their husbands [3]. Acting as a global magnet, the canal project drew families away from their home countries and set in motion extensive changes concerning migration, labor supply and the allocation of economic wealth and social status.

The construction of the Panama Canal officially took ten years, from May 1904 to August 1914, and overlapped with the tenure of three chief engineers. The first engineer, named John Wallace, only stayed on for the first chaotic year in the isthmus. John Stevens, the second engineer, played a key contribution by pleading for a lock rather than a sea-level canal. He remained on the job for two years. The final engineer, George Washington Goethals, oversaw most of the construction of the Panama Canal and stayed on the job until completion of the project [1-3].

With newer and bigger machinery, like the steam shovel, an enormous international workforce and a solution to fight malaria and yellow fever, the United States constructed the Panama Canal with its three locks (one 1-chamber and one 2-chamber lock at the Pacific side and one 3-chamber lock at the Atlantic side): Gatún, Pedro Miguel and Miraflores, each named after the village where it was built [5]. The design and construction of the locks was the most spectacular aspect of the project [3]. An artificial lake, Gatun Lake, was created so that ships could pass the canal at 26 meters above sea level, through the narrow Gaillard Cut.

The costs of the project had been more than four times what constructing Suez Canal had cost and were enormous for those days; no other construction effort in the history of the United States paid such a price in dollar or in human life [1]. This project took more than 5.000 human lives and totaled $352.000.000 in expenditures, which, taken together with the French expenditure summed up to a cost of $639.000.000 [1]. Six months ahead of schedule, and with a final price that was actually $23.000.000 below what was estimated in 1907, the construction of the Panama Canal was finished [1].

In 1914, nearly 34 years after the first shovel hit the ground, its gates opened for the first vessels to pass [1-3]. This moment was a symbol to Americans, and to the rest of the world, letting them know that the United States had firmly established itself as the most powerful nation on earth.

Ownership of the Canal

After August 15, 1914, when the canal was officially inaugurated with the passage of steamship Ancón (see picture 3), the supervision of the waterway remained under American administration. The opening ceremony celebrated America’s triumph and the capstone project characterizing Panama. It also signaled the beginning of an almost 100-year relationship between Panama and the United States, ranging from intervention and repression to reconciliation and cooperation [6]. Although Panamanians initially embraced the canal construction and hoped to benefit from the American effort, their resentment grew over the years as the promised fruits of the alliance proved sour [3].

Picture 3: William Friar - Source: Flickr

In the decades after the opening of the waterway, tensions between Panama and the United States were often stormy and colored by deep conflicts and violence. Fostered by racial differences, notions of honor, respectability and civilization, the relationship between the countries and their citizens was highly problematic [3]. Frequently, the United States sent troops into the country to suppress protests and, on the other side, the Panamanian police aggressively stood up against canal employees [6]. These frictions illustrated the complex and tense relationship between Panamanians and Americans.

Elite Panamanians perceived the presence of the United States and the canal as necessary, expecting it to be a path to modernity and civilization, yet instead of welfare, the project brought Americans who behaved disorderly and uncivilized [3]. More and more Panamanians claimed a revision of the original terms of the Hay-Bunau-Varilla treaty, and the steady growth of dissatisfaction and frustration, as it reached its limit, was made known in numerous uprisings and demonstrations [3, 6, 7].

Following the riots in 1964, Panama gained sympathy from around the world for more authority over the canal, which became a turning point in the relations between the United States and Panama [3]. Negotiations between the two countries took until 1977, when a new treaty about the Panama Canal was signed. Agreed by Panama’s President Omar Torrijos and U.S. President Jimmy Carter, new treaties promised an end to the United States controlling the waterway, declared the permanent right of the United States to defend the neutrality of the canal, but prohibited the United States from interference in internal affairs in the Republic of Panama [3, 6, 8]. Particularly, the first treaty mandated the elimination of the Canal Zone as of October 1, 1979, and agreed that the United States would run the administration of the canal until December 31, 1999 [3, 6].

Significant changes were implemented: a new organization, the Panama Canal Commission, was established, with a board of five American and four Panamanians members, and as of 1990, a Panamanian would fill the position of Administrator. Furthermore, the treaty called for more skilled Panamanians, as they would gradually play a greater role in the organization, and it prescribed that Panama would receive a higher amount of canal revenue [6]. The second treaty set out the Canal’s permanent neutrality and both countries’ right to defend it [6, 7]. Hence, much of what constituted the special relationship between the United States and Panama no longer existed after 1999, and for the first time in 158 years (since the construction of the railroad), the American military was absent in Panama [9].

At the end of the 1980s, after nine years of dictatorship under military governor Manuel Noriega and despite the agreements, the United States invaded Panama. President George H.W. Bush had realized he could not control Noriega, which seemed problematic now that, following the Torrijos-Carter Treaties, the countries were moving towards a joint administration of the canal [3]. After large and bloody attacks on Panama City, Noriega surrendered on January 3, 1990 [6]. Immediately after the invasion, President Bush declared that he aimed at safeguarding the American citizens in Panama, combating drug trafficking, protecting the integrity of the treaties and the Panama Canal, as the waterway was still under protection of the United States [3, 6].

Panama’s road to recovery began. By means of close cooperation and extensive planning among American and Panamanian members of the Panama Canal Commission, working as one team with one mission, the countries worked towards a “seamless transition” of the canal [9]. In the years towards the transition date, strong criticism regarding Panama’s capability to run the organization of the canal was put forward in American media. Indicating doubt about the local ability it was said that the Panamanians would “dance on the canal’s waters during carnival” and were “never able to run the organization successfully” (Fieldnotes, July 2009).

Disregarding such critiques, the United States and Panama intensively collaborated to handover the canal to Panama. At the end of this process, more than seventy percent of all professionals and managers were Panamanian, as the government of Panama had made provisions for some Americans and other foreign nationals to stay employed with the canal [9]. The canal’s Administrator has been a Panamanian since 1990 and he continued in this role under the new Panama Canal Authority (ACP).

On December 31, 1999, ownership of the Panama Canal was officially transferred from the United States to Panama. A festive public ceremony was held at the Administration Building to mark the start of a new era for the waterway. From this date onwards, the ACP became exclusively in charge of the operation, administration, management, maintenance, protection and innovation of the Panama Canal.

The autonomous agency of the government of Panama oversees the Canal’s activities and services related to legal and constitutional regulations in force so that the Canal may operate in a secure, continued, efficient and profitable manner [8]. Meanwhile, the United States remains in close relation with Panama. Their collaboration is nowadays characterized by extensive counter-narcotic cooperation, support to promote Panama’s economic, political and social development, and plans for a bilateral free trade agreement [10].

References

1. 1.    McCullough, D., The Path Between the Seas: The Creation of the Panama Canal, 1870-19141977, New York: Simon and Schuster.
2. 2.    Parker, M., Panama Fever: The epic story of the building of the Panama Canal2009, New York: Anchor Books.
3. 3.    Greene, J., The Canal Builders: Making American's empire at the Panama Canal2009, New York: Penguin Books.
4. 4.    Ives, S., TV Documentary on the Panama Canal, in American Experience2010, PBS: USA.
5. 5.    Del R. Martínez, M., Canal locks: boat lifters, in The Panama Post2009: Panama.
6. 6.    Harding, R.C., The history of Panama2006, Westport: Greenwood Press.
7. 7.    Llacer, F.J.M., Panama Canal Management. Marine Policy, 2005. 29: p. 25-37.
8. 8.    ACP. Autoridad del Canal de Panamá. 2009March 2009]; Available from: http://www.pancanal.com.
9. 9.    Gillespie Jr., C.A., et al., Panama Canal Transition: The Final Implementation, 1999, The Atlantic Counsil of the United States: Washington, D.C.
10. 10.    Sullivan, M.P., Panama: Political and Economic Conditions and U.S. Relations, 2011, Congressional Research Service.

Author: Karen Smits / Publisher: SCMO

The Panama Canal Expansion Program - Why?

The locks are the narrowest points of the Panama Canal and form, both in the flow of the amount of vessels per hour as in the size of the vessels, the bottleneck for its capacity. In 2006, the Panama Canal Authority (Autoridad del canal de Panamá, further abbreviated as ACP) therefore published the Proposal for Expansion of the Panama Canal: Third Set of Locks Project. This document neatly describes the background of the Expansion Program.

It elaborates on the history of the plan to further develop the Panama Canal, and states that since the 1930’s, all studies about the widening of the canal agreed that the most effective and efficient alternative to enhance Canal capacity would be the construction of a third set of locks. Lock chambers with bigger dimensions than those of the locks built in 1914 were perceived as the most valuable point for development. In 1939, the United States started the construction of a new set of locks that would allow the transit of larger vessels and warships.

Due to the outbreak of World War II they had to cease the construction works. Personnel of the United States in Panama had to join the army and most construction equipment was assigned to military tasks [1]. By the end of the war, the United States had lost its interest in expanding the waterway. Its fleet was now so vast that the canal’s original purpose -avoiding the support of a two-ocean navy- had been outgrown [2]. Although much use was made for ferrying men and materials for the Korean and Vietnam wars, the Panama Canal had no major upgrades. In the 1980s, according to the proposal document, Panama, Japan and the United States formed a commission that again studied possibilities to further develop the Panama Canal, and again decided that an extra set of locks would be the most appropriate alternative for increasing the Canal’s capacity.

The expansion of the waterway is estimated at a cost of US$ 5.2 billion and expects to generate approximately 40.000 new jobs during the construction of the third set of locks [1]. The proposal for the Expansion of the Panama Canal (2006) portrays four objectives for expanding the Canal’s capacity:

1. Achieve long-term sustainability and growth for the Canal’s contributions to the society of Panama through payments to the National Treasury;
2. Maintain the Canal’s competitiveness and its added value as a maritime route;
3. Increase the Canal’s capacity to capture the growing tonnage demand with the appropriate service level; and,
4. Make the Canal a more productive, safe and efficient work environment.

This document formed the foundation for a national referendum and marked the start of ACP’s campaign to vote for the expansion of the Panama Canal. Opposition to the project mostly voiced its opinion through various radio programs, videos, and websites. The website El Centro Informativo Panamá 3000 (The Information Center Panama 3000) led by Roberto Méndez, a Professor of Economics at the University of Panama, published four reasons to reject the proposal:

1. Negative outcomes for the economy
2. Lack of confidence in the government and the ACP
3. Health and education should be national priorities,
4. Destruction of the environmental and social security

In an interview Professor Mendez concluded that, based on his economic and financial analysis, the Expansion Program makes no sense, and might even be a bad development for the country [4]. Martin Rosales, who studied the conflicts between the Panama Canal Expansion Program and the local communities for his Ph.D. thesis, agreed with this counter argument. He concluded that the ACP denied the complexity and contradictions of the expansion project and underscored that a monopolized decision-making process limited the space for counter rationalities [5]. Despite strong objections from various parties, the intense governmental campaign in favor of canal expansion could not be overruled.

On October 22, 2006, the majority of the voters, 76.8%, voted in favor of the Panama Canal Expansion Program [6, 7]. Although more than sixty percent of the total voters did not participate in the national referendum [5], this outcome gave the ACP a green light for the Expansion Program.

Why did I choose the Panama Canal Expansion Program as a case study?

In search for a case that would allow me to study the practices of collaboration in an infrastructural project organization, I started with an online search. Since I had adopted an interpretive approach and the ethnographic research methodology in particular, only a small number of cases could be studied. One mega project would be sufficient, as it consists of various separate research cases and can deliver an overwhelming set of data. However, the mega project should be under construction during the fieldwork period, between July 2009 and July 2010.

I did not aim to study practices of collaboration in retrospect nor was it my intention to study a project that had not passed its kick-off date yet. Furthermore, I searched for projects that a) contained international partners, b) I could obtain access to and c) allowed a longitudinal study suitable for the research budget. Ten mega projects ended on a short list (see Table 1).

#	Name	Project Description	Location
1.	Galileo	Development of an European navigation satellite	Noordwijk, Netherlands
2.	North/South Line	Construction a new metro line in Amsterdam.	Amsterdam, Netherlands
3.	Maasvlakte 2	A land reclamation project to construct a new port adjoining the Maasvlakte.	Rotterdam, Netherlands
4.	NUON Energy Station	Construction of a new energy station.	Groningen, Netherlands
5.	Caofeidian New Coastal City	Development of an ecological coastal city in Northern China	Caofeidian, China
6.	Panama Canal Expansion Program	Expansion of the current Panama Canal with the building of a new set of locks.	Panama City, Panama
7.	Fehmarn Bridge	Construction of a bridge over the Fehmarn Belt to connect Germany and Denmark	Germany - Denmark
8.	Palm Islands	Construction of the three largest artificial islands in the world.	Dubai, United Arab Emirates
9.	Sheringham Shoal	Construction of the UK’s fourth largest off shore wind farm.	Norfolk, United Kingdom
10.	Export Gateway	Deepening the navigation channel to the Port of Melbourne	Melbourne, Australia

Table 3.1: Short-list of mega projects

To further the selection of the research case, three principles were taken into account. The first principle was the location of the mega project. My supervisors and I had discussed the possibilities to study a project outside of the Netherlands and I was open to that opportunity. Following Hodgon & Muzio [10], we preferred projects outside of Anglo-Saxon economies, and in a region where mega projects had been insufficiently explored in the literature. Due to this principle, the projects in the Netherlands as well as those executed and studied in the UK, Scandinavia and Australia were erased from the short list.

The second principle in the selection process was of a more practical concern; the spoken language in the mega project should be one that I master or could quickly acquire. Conducting an ethnographic study in an environment where one does not understand the local language well enough to capture verbal communication, such as informal conversations, makes the process of gathering data extremely complicated. As a result, the mega project in China was deleted from the short list.

The third principle involved accessibility and acceptability. Ethnographic studies require that, at least in principle, the researcher is granted access to all actors, meetings and documents. Furthermore, it is important that the researcher can be accepted in the society under study and is allowed to move around freely in the daily project environment. As we could not guarantee this would be the case in Dubai, mainly because we had no contacts there, that project was also erased from the short list.

One of my academic supervisors did have strong connections contact with the Dutch Ministry of Public Works and Water Management (Rijkwaterstaat, further abbreviated as RWS), a company that has a knowledge-sharing relationship with the Autoridád del Canal de Panamá (Panama Canal Authority, further abbreviated as ACP). I visited my supervisor’s contact at RWS and received contact details from his connections working in the Panama Canal Expansion Program. An extensive email exchange on the research topic and the practicalities around this study finally resulted in green light to conduct my research at the Panama Canal Expansion Program. Also, I remained in contact with RWS as they included me in their knowledge-exchange program with the ACP[1].

The Panama Canal Expansion Program met all three principles for the selection of the research case: the project is located outside of the Netherlands and based in an area (Central America) where only few mega projects have been conducted or studied before. The project language is English and my, at the start of the fieldwork, intermediate level of Spanish would be convenient in the Spanish speaking Panamanian society. The ACP had granted access to its actors and documents, and agreed to provide me with a workstation and other facilities needed.

References

1.         ACP. Proposal for the Expansion of the Panama Canal: Third Set of Locks Project. 2006March 2009]; Available from: http://www.pancanal.com/eng/plan/documentos/propuesta/acp-expansion-proposal.pdf.

2.         Parker, M., Panama Fever: The epic story of the building of the Panama Canal. 2009, New York: Anchor Books.

3.         Méndez, R.N. Cuatro razones para decir "no" a la ampliación. 2006November, 2011]; Available from: http://cip3000.tripod.com/zIFax/xIFax18/index.html.

4.         Noriegaville, Panama Canal Expansion: A senseless project, in Available at ACP Library. 2006: ACP Library.

5.         Rosales, M.R., The Panama Canal Expansion Project: Transit Maritime Mega Project Development, Reactions, and Alternatives from Affected People. 2007, University of Florida.

6.         ACP. Autoridad del Canal de Panamá. 2009March 2009]; Available from: http://www.pancanal.com.

7.         Jaén Suárez, O., Diez años de administración panameña del Canal. 2011, Panamá: Autoridad de Canal de Panamá.

8.         Alverca, J. Panama Canal Expansion Program: Overview. 2012.

9.         ACP, Panama Canal Expansion Program Brochure. 2010, Autoridad del Canal de Panamá: Panamá.

10.       Hodgson, D. and D. Muzio, Prospects for professionalism in project management, in The Oxford Handbook of Project Management, P.W.G. Morris, J.K. Pinto, and J. Söderlund, Editors. 2011, Oxford University Press: Oxford. p. 105-130.

[1] Besides their support for obtaining access in project organization, RWS was not involved in the research nor did RWS play a financial role in this study.

Author: Karen Smits / Publisher: SCMO

What Hong Kong must do to stay competitive in the maritime sector code

Hong Kong’s maritime industry extends significantly beyond the purely physical movement of cargo at ports.  Steeped in a rich history of international trade, it is home to a vibrant community of shipowners, shipmanagers and number of other maritime service providers along the value chain. Hong Kong’s International Maritime Centre (IMC) is also a major contributor to direct economic output as well as to other sectors of the economy – particularly import/export, wholesale and retail trades.

But, as we have witnessed, neighbouring cities have made substantial developments in their maritime hubs and this has and continues to pose a threat to Hong Kong’s vital IMC.   Most notably, Singapore and Shanghai have enhanced their service offer and have been very aggressive in contesting for and attracting maritime companies throughout the past decade.

To compete and expand its IMC, Hong Kong needs to take wise decisions and appropriate actions which focus on both supply and demand.  A critical mass of commercial principals (such as shipowners, ship management companies etc.) must be sustained in order to generate sufficient demand for services, while comprehensive support must be available to supply their needs.

But – how do we get there?

BMT recently completed a study on behalf of the Hong Kong Transport and Housing Bureau (HKTHB), which – combining rigorous analysis with stakeholder participation – set to define achievable objectives for enhancing Hong Kong’s IMC.  A well-planned development roadmap would enable Hong Kong to retain a sizable maritime service cluster, and remain the place from which maritime services are sought by the local and international shipping industry.

Careful attention has been paid to understanding the constraints and opportunities facing Hong Kong, both from industry and government perspectives. In particular, implementation issues have received careful attention during the formulation of recommendations.

Let’s look at the broad strokes of this study through a series of diagrams and charts:

Methodology

Benchmarking

Current Position vs Where we want to be (and can be, realistically)

Opportunities & Threats….

Hong Kong's “contestable” maritime cluster and service areas are weakening. If no action is taken, there will be a negative impact on Hong Kong's strengths and competitiveness…

Creating the Strategy: Structured approach, clearly defined goals

Revisiting the Target Scenario

• Local: many commercial principals - ship managers, owners, operators and traders; enhance high value-added services - ship finance, insurance, law and arbitration.
• Regional / National: the preferred location of global (and in particular Mainland) commercial principals sourcing intermediary services.
• Global: differentiate as ‘springboard’ that facilitates Mainland shipping companies to operate internationally, and foreign companies to expand into the Mainland market.

A Roadmap to get there

BMT put forth a total of 24 recommended initiatives under 4 themes; relating to policy and people issues. Read more on the recommendations on this link.

Author: Richard Colwill - BMT Asia Pacific / Publisher: SCMO

Visiting the Panama Canal

Wow! The massive and large entrance of the Centro de Visitantes de Miraflores (Miraflores Visitors Center) blows me away (see picture 1).

Seen from far away, this grotesque building marks the importance of the Panama Canal for Panama. I have been in Panama for two days now and I have seen ships passing through the country as if they are big trucks driving slowly on a jungle road. Just like any other tourist in Panama, I visit the museum that is built around the Panama Canal locks and located close to the city: Miraflores Locks.

Picture 1: Source - Karen Smits

Long, steep stairs, or an escalator, lead towards the entrance of the building where the ticket officer charges me eight Balboa (or US dollar, these currencies are equal) for a full entrance ticket for foreigners. Upon entrance of the building a cold air gives me goose bumps while the security guard guides me through a detector and checks my purse. A guide is waiting for me, or so it seems, to explain the route in the museum. With a thick American accent she urges me to go to the observation deck immediately, because a ship is passing through the locks right now. I can see the rest of the museum, four exhibitions and a documentary, later.

Following her advice, and many other tourists, I take an elevator up to the fourth floor. When I step outside, a blanket of moist air embraces me. The temperature and humidity are high. The sun is burning on my face. The observation deck is filled with people, all leaning over the banisters to see as much as possible of the canal and the ship passing through. The view is incredible. The Panama Canal is right in front of me. I can see the Pacific entrance to the canal on my left hand side and on my right hand side, far away, I recognize the Pedro Miguel Locks. In front of me, and in between two water lanes, and odd looking, seemingly small, white building reveals that these locks were built in 1913. Constructed such a long time ago; it still appears to be in perfect state!

Through speakers I hear the voice of a guide named ‘Kennedy’, giving information about the ship that is passing through the lock gates at the moment. I notice he speaks in American English first and then pronounces the same information in Spanish. The vessel entering the locks at the moment is called Petrel Arrow Naussau and carries the flag of the Bahamas (see picture 2). The cargo ship came from the Atlantic Ocean and is passing through the canal to reach the Pacific Ocean.

Picture 2: Source - Sangrin

While the boat enters the second lock gate, Kennedy explains that, with an average of 35 to 40 vessels a day, it is mostly container vessels that pass through the Panama Canal. “Apart from the administrative process beforehand, a transit through the Panama Canal takes about 8 to 10 hours,” he states. Kennedy needs to interrupt his story to announce that a documentary video will be shown in English in a few minutes, if you have a full entrance pass, you can go to the theater on the ground floor. Like most tourists on the observation deck, I decide to stay.

Quickly, Kennedy continues by informing that, with each vessel passage approximately 52 gallons (that’s about 197 liters) of fresh water goes in the ocean. This water comes from three different lakes that store Panama’s rainwater. None of the water is recycled, because during the nine months of the rainy season sufficient water remains in the lakes to operate the Canal year-round.

The vessel is connected to what Kennedy calls ‘mules’, little locomotives. “These are not here to pull the ship, just to make sure it is centered,” assures Kennedy. He also explains that each locomotive weighs about fifty tons, costs about 2 million US dollars, runs on electricity and is designed by the Mitsubishi company. Kennedy gives further detailed information, but my attention is drawn to the operation of the locks. The lock releases its water and the vessel slowly moves further down in the lock. It is a funny sight: it seems like the vessel disappears in the ground. When the boat is at the lowest level, a bell rings to signal that the lock gates will be opened. Gradually, both doors open. They look very heavy and strong, which they must be if they can hold 52 gallons of water and carry the weight of a full cargo ship. Using its own power, the vessel moves to the next lock gate, where, applying the same routine, the ship is lowered to ocean level and released to continue his journey in the Pacific Ocean.

While Petrel Arrow Nassau leaves this highly traveled waterway behind, I’m still standing on the observation deck. Amazed by all there is to see: the waters of the Panama Canal, the hundred year old locks that still function perfectly and the immense size of the vessel, I can only imagine how many people are directly connected with the operations of the Panama Canal on a daily basis. Also, it strikes me that English and Spanish are strongly interwoven in the Panama Canal. The guide spoke in English before translating his text to Spanish, Panama’s mother tongue, all signs were both in English and in Spanish and the American currency and measurement units were used to indicate an amount or size. Of course, this is a tourist location in Panama, but American heritage is highly visible. Now the water lanes are empty, I notice that construction is going on at the other side of the canal: the Panama Canal is going to be expanded! (Fieldnotes, July 2009)

This fragment, derived from my research journal, marks the beginning of the fieldwork period for my Ph.D study on cross-cultural collaboration in mega projects. A visit to the Miraflores Locks is a must-see when in Panama, and for me it was the first introduction to what was going to be my daily workplace for the year to come. Today, I use this fragment to introduce another undertaking: a series of blog about how cross-cultural collaboration came about in the Panama Canal Expansion Program. In the blog I will, similar to the passage portrayed about, use fragments from observations and quotes from interviews to portray the everyday work life of project participants.

For an entire year, from July 2009 to July 2010, I was present in the daily operations of the Panama Canal Expansion Program. This period marks the first year of collaboration in the Third Set of Locks Project, the specific part of the Expansion Program under study. I had the opportunity to gather the data for this study by observing numerous work activities, interviewing many employees and participating in a wide variety of events. The aim of the research was to understand how actors make sense of collaboration when operating in a culturally complex project organization.

In this blog I will shed light on the practices of collaboration that occur when actors with a multiplicity of cultural backgrounds, interests and experiences come together and interact. Besides that this is entertaining, I hope it inspires you to focus on intercultural collaboration at work.

Author: Karen Smits / Publisher: SCMO

Ship-to-ship transfer – whether reasonable to refuse permission

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

The parties entered into a voyage charter of the Falkonera, a VLCC, on BPVOY4 with amendments, which included:

"Charterers shall have the option of transferring the whole or part of the cargo … to or from any other vessel including, but not limited to, an ocean-going vessel, barge and/or lighter …

if charterers require a ship-to-ship transfer operation or lightening by lightering barges to be performed then all tankers and/or lightering barges to be used in the transhipment shall be subject to prior approval of owners, which not to be unreasonably withheld, and all relevant certificates must be valid"

The Falkonera loaded oil in Yemen. Charterers asked owners to approve STS transfers into three vessels (Kythira, Front Queen and Front Ace). Kythira was smaller than Falkonera, while Front Queen and Front Ace were both VLCCs, the same size as Falkonera. Owners approved transfer to Kythira, but refused to allow transfer from the Falkonera into either the Front Queen or the Front Ace, in spite of a number of efforts to deal with owners' safety concerns. Charterers then proposed an alternative vessel, True, and eventually permission for discharge into True was given, and the cargo was transferred into True and Kythira.

Charterers claimed that implementing the plan of bringing in the True involved significant delay and increased cost which were for owners' account. They argued that owners had unreasonably refused permission for the proposed STS transfers, as their opposition was based on aversion to any VLCC-VLCC transfer, rather than to the characteristics of a particular vessel.

Charterers' claim succeeded, and owners appealed:

Held:
 
The appeal was dismissed.
 
1     It was for charterers to prove that owners had acted unreasonably. In order to entitle owners to withold approval it was not necessary that their conduct was correct or their conclusions right. They would only be in breach if no reasonable shipowner could have regarded their concerns as sufficient reason to decline approval.

2     The right to transfer was "to … any other vessel", including a VLCC. The fact that transfer VLCC to VLCC could be regarded as non-standard was not of itself reasonable ground for refusal. Owners were taken to have agreed in the contract to have accepted such risks as were inevitably attendant on a VLCC-VLCC transfer. It was necessary for there to be some other basis on which the withholding of approval could be said to be unreasonable.

3     The issue was not whether owners were satisfied with the planning of the STS transfer, but whether there was some characteristic of the receiving vessel which meant that the STS would be unsafe.

4     The judge's conclusion was one of fact, reached after extensive consideration of expert evidence. He had applied the correct legal test.

(Falkonera Shipping v Arcadia Energy [ 2014 ] EWCA Civ 713)

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

LNG time charter on Shelltime 4 – meaning of injurious cargo

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

In an LNG time charter based on Shelltime 4, a clause provided: "No acids, explosives or cargoes injurious to the vessel shall be shipped".

G (the charterers) loaded a cargo of LNG onto the vessel in the United States. M (the owners) alleged that the cargo was injurious to the vessel because it contained debris, in particular metal particles, which had contaminated the vessel's cargo pumps and tanks, causing abrasion, rust and risk of electrical short and pump failure, and that consequently major repairs to the vessel were required after it was dry-docked.

G disputed that the cargo was injurious. There was no previous authority on the meaning of "injurious" cargoes.

Held:

M's claim failed.

1     In order to be "injurious", cargo had to either cause physical damage to the vessel or have a tendency or propensity to cause damage.

2     The evidence about the loading of the cargo justified the inference that some small particles had passed through the mesh filters in the manifolds before they clogged on two occasions, and that some of the particles, maybe as many as one-third of them, were metallic. However, no more could be inferred: the evidence did not establish that larger particles were loaded in any significant number, and it provided no basis for inferring how much particulate debris was loaded. The evidence did not support M's reasoning that the bulk of the debris found in the tanks was from the loading, nor did it establish M's case that debris from the loading created a risk of damage to the vessel. Some of the debris found in the vessel's tanks after it was dry-docked was debris from the loading, but M had not proved that much of it was shipped by G at the loading terminal. It was more likely that the greater part of it was from elsewhere.

3     On the facts, owners had failed to prove that the charterers had shipped a cargo which was injurious to the vessel, or that metallic particles in the cargo had created potential dangers to the vessel.

(American Overseas Marine v Golar Commodities [ 2014 ] EWHC 1347 (COMM))

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Trip time charter – whether vessel off-hire during detention

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

A vessel was chartered by NYK to Cargill for a time charter trip. Cargill sub-chartered to Sigma. The cargo was a shipment sold by Transclear to IBG. (Transclear were a sub-charterer, but it was not clear whether this was from Sigma or from an intermediate charterer.)

A dispute concerning unpaid demurrage arose between Transclear and IBG and Transclear had the vessel arrested. Cargill withheld hire for the period of the arrest, relying on clause 49 of the charterparty:

"Should the vessel be captured or seizured [sic] or detained or arrested by any authority or by any legal process during the currency of this Charter Party, the payment of hire shall be suspended until the time of her release, unless such capture or seizure or detention or arrest is occasioned by any personal act or omission or default of the Charterers or their agents."

The arbitral tribunal held that Cargill were entitled to put the vessel off hire. On appeal Field J held that Cargill were not so entitled. Cargill appealed.

 Held:

The appeal was dismissed. Cargill were not entitled to put the vessel off hire, as the arrest had been "occasioned by any personal act or omission or default of the Charterers or their agents".

1     The word "agents" in clause 49 was not limited to agents strictly so called. Delegates of Cargill could be its agents for the purposes of the clause, irrespective of the precise contractual relationship existing between the delegate and the party above him in the contractual chain. The word “agents” was accordingly capable of extending to sub-charterers, sub-sub-charterers and receivers.

2     The acts or omissions or defaults in question were not restricted to those occurring "in the course of the performance by the delegate of the delegated task".

3     The general scheme of clause 49 was that the vessel would be off-hire where the relevant matters were either on NYK's side of the line or were the acts or omissions of third parties (eg government authorities) unconnected to either NYK or Cargill.

4     However, the dispute between Transclear and IBG clearly fell on Cargill's side of the line. The dispute arose out of Cargill's trading arrangements. The result was that hire continued to run over the relevant period (subject to questions of causation). The acts or omissions of both Transclear and IBG led to that result.

(The Global Santosh [ 2014 ] 2 Lloyd's Rep 103)

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Bill of lading – clause paramount – agreement for limitation figure

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

Cargo was shipped under a bill of lading for carriage from Belgium to the Yemen. It included the following clause:

"Paramount Clause

The Hague Rules contained in the International Convention for the Unification of certain rules relating to Bills of Lading, dated Brussels 25 August 1924 as enacted in the country of shipment shall apply to this contract. When no such enactment is in force in the country of shipment, the corresponding legislation of the country of destination shall apply, but in respect of shipments to which no such enactments are compulsorily applicable, the terms of the said Convention shall apply.”

A dispute arose, and it was subsequently agreed that the claim would be subject to English law and jurisdiction. The principal point at issue was the figure of package limitation which was applicable. The Hague-Visby Rules had mandatory application by virtue of Carriage of Goods by Sea Act 1971. However, the claimants argued that by contractually adopting (by a clause paramount) the Hague Rules the parties had contracted out of the Hague-Visby package limitation figure in favour of the claimants.

Held:

The Hague-Visby Rules limitation figure applied.

1     The Hague-Visby Rules have been enacted in Belgium. The judge held that he was bound by The Happy Ranger to hold that the Hague-Visby Rules were not to be regarded as the "Hague Rules … as enacted in the country of shipment", as there were important differences between the two codes.

2     The Yemen has not enacted either the Hague or Hague-Visby Rules, so the opening words of the second sentence of the clause paramount did not apply. Accordingly, the last phrase of the second sentence applied, and the clause paramount took effect as a contractual agreement that the Hague Rules would apply.

3     However, the Hague-Visby Rules had mandatory application. Art IV(5)(g) of those Rules permits agreements which increase the carrier's liability above that laid down by the Rules. The judge rejected the view expressed in Voyage Charters that Art IV(5)(g) only permits the use of a formula if there are no circumstances in which it could produce a figure lower than that specified by Art IV(5)(a) of the Rules. The judge held that an Art IV(5)(a) agreement would only be invalid to the extent that in any particular case it in fact produced a limit lower than that permitted by the Rules.

4     However, the judge did not accept that the parties had made any such agreement in this case. Had the parties thought about the clause paramount, they would have understood that the Hague Rules would not apply at all because Belgium is a Hague-Visby Rules State. They would have viewed the clause paramount as surplusage, which could be ignored.

5     If (contrary to the judge's conclusion) the Hague Rules limit applied, then the limit was £100 per package or unit gold value. This refers to the gold value of £100 sterling, not its nominal or paper value, so that the applicable limitation figure is the value of 732.238 grams of fine gold (The Rosa S). The judge held that the time at which this gold value is to be converted into national currency is the date of delivery (or, in the case of loss, the date when the goods ought to have been delivered), and not the date of judgment.

(Yemgas FZCO v Superior Pescadores [ 2014 ] EWHC 971 (Comm))

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Foreign insolvency – whether termination of contract of affreightment prevented

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

F, a party to a contract of affreightment which was expressly subject to English law, had an express right to terminate the contract on the insolvency of the other party, P (a Korean company). P entered into an insolvency process in Korea, and that process was recognised by an order of the English Court as a "foreign main proceeding under the Cross-Border Insolvency Regulations 2006 ("the CBIR").

F terminated the contract of affreightment under its express contractual right. The administrator of P applied to the English Court for an order that F should not exercise its right to terminate.

Held:

The application was rejected by Morgan J.

1     The Court's power under CBIR to order a stay of "the commencement or continuation of individual actions or individual proceedings" did not apply. The service of a notice terminating the contract was not the commencement or continuation of an individual action or individual proceeding.

2     

The Court had power under CBIR to grant "any appropriate relief". However:
2.1     that did not give the Court power to order that F should not terminate the contract. The Court's power was limited to relief which would be available to the court when dealing with a domestic insolvency.

2.2     Even if the court had such a power, the judge would not have exercised it. It was appropriate for the Companies Court to apply English law and to give effect to the parties' choice of English law.

(Fibria v Pan Ocean [ 2014 ] EWHC 2124 (Ch))

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Sale of contaminated sunflower seed oil – measure of damages

Article published on July 2014 in Stephenson Harwood Shipping Bulletin and reproduced by courtesy of Stephenson Harwood

A FOSFA tribunal considered a claim by Saipol as FOB buyers for contamination of sunflower seed oil. The sale contract was for 3,000 MT sunflower seed oil, which was shipped as part of a total cargo of 16,600 MT. Saipol were buyers of all the cargo from 5 different sellers. Before shipment all 5 consignments had been commingled. On discharge it was discovered that the entire cargo was contaminated.

The buyers claimed the difference in value between sound and contaminated cargo, and also consequential losses. Their claim against Saipol related to all 16,600 MT on the basis that each seller was in breach of contract, and each seller had contributed to the contamination of the whole; accordingly each seller was liable for the whole of the losses. The tribunal held:

1     There being no special circumstances, the applicable measure of damages was that laid down in Sale of Goods Act, s 53(3). Buyers were entitled only to the difference between goods as warranted and their actual value.

2     Sellers' liability extended only to the 3,000 MT.

Buyers appealed.

Held:

The appeal was allowed:
1     The tribunal had proceeded on the basis that the only potentially applicable measures were s 53(3) and s 54. The correct starting point was s 53(2). Under 53(2) there can be, depending upon the facts, a claim for consequential losses on the basis that they will arise in the usual course of things.

2     The tribunal had given no proper reasons for rejecting the contention as to joint contribution in breach of contract relating to the contaminated cargo as a whole.

The matter would be remitted to the tribunal to consider, applying the law as it should have been applied.

(Saipol v Inerco Trade [ 2014 ] EWHC 2211)

Authors: Michael Bundock, Senior Associate and professional support lawyer with Stephenson Harwood & Joanne Champkins, Associate specialising in marine insurance with Stephenson Harwood / Publisher: SCMO

Transport Weekly

Published on 15 March 2013 in "I am an Analyst" and reproduced by courtesy of Charles de Trenck

BDI 880 +6%: The BPIY continues at rebound levels of mid-12 and is up about 3% on the week (slope of rebound is slowing), with long term concerns on China coal and ore inventories remaining.  Reference ore prices came off quite a bit this week. Comments going around recently were that China is not going to buy ore at recent peaks. Moreover steel inventories are pretty chunky even if ore levels are down … A question would be the new run rate needed for inventories, which does not have to be at previous averages, and given lower growth trajectory for China…. Keeping a quick track on the dollar index, it is up about 3.6% YTD. Strong dollar is usually negative for shipping/commodities… only that shipping is so down at this point I would not hold this relationship key, except for its general impact to the commodities world… TANKERS behaving better… some are cautioning to keep an eye out for news on Suez Canal and Egypt

Investment stance: Gold shares still getting killed. I have stayed long dollar long US, but most things I have held that are China-related has been weak, ex anti-pollution themes. My health, anti-pollution focus brings me to flagging [XXXX] and how fast (after being ignored since IPO) it has gotten on the map. Macro wise (like GLNG after the Japan earthquake), it makes sense to look for names that can play the theme on China Cleanup. For me it has been Platinum. But I think clean engines… clean-up equipment companies all fit into a China eco-friendly theme that will be around for a very long time

MAIN APPROACH UPDATE

My approach has remained the same throughout – be conservative in a highly volatile sector.  

Shipping, Logistics, Ports for me have always been about staying in tune with the pulse of world trade. On the whole, I don’t pay attention to WTO statements, national GDP data, senior management statements, rate hike announcements, etc. I believe in running real time series and cross-referencing what their inter-relationships are saying.

When is a correlation important? When could it breakdown? What is the raw volume data looking like? What time of the year is it? What’s our visibility like right now? Where is the value? In what currency or value marker terms? I have believed gold has been a more true marker of value and that it has shown US equities in general to be in the cheaper range, while not discounting the need to own some gold long term to defend against central bank fiat currencies gone wild. At the same time I have seen value in holding more dollars than other FX in recent months even if I always believe we should have a diverse holding of currencies and commodities.

My main support from oversold levels in the last few years has been certain areas of the US property market.

When it comes to shares I have stayed away from focusing on individual stocks “in and of themselves” and preferred to recommend making our own ETFs. Even in a weak market for shipping there has been a way to get exposure. I need companies with track records, reasonable managements and reputations, liquidity, market leadership, defensive exposure to liabilities (despite the Fed, Central Banks and commercial banks (up until 2008-09) telling the whole world to gear up on mind-numbingly low interest rates. I believe currently in long term ETF bundles for:

• Energy/infrastructure: Canada, coal, oil…companies oversold and unloved and generally trading at lower ends of multiples, whether Warren likes them or not…
• Shipping/Logistics/Traders: Market leaders and from levels that were relatively low long term. There are a few good leaders in Europe in this space. There are a couple in the US, and a few in Asia. For corporate governance/ethical reasons, I try to stay away from some companies with bad names (and abusing common sense such as in Ethanol…)
• US Consumer/healthcare: Without supporting big pharma overall, I have looked for defensive yield, good management. I have traded around positions in some of the big heavyweights of US retail/discounters
• Health: For a double dose and core concentration, I am increasing where and when I can clean living focus companies. There are not many listed and they trade at premiums. I have learned that sugar based consumer product and beverage companies are the biggest sells out there. America will have to change!
• Tech: I see this as consumer, and I have looked for bellwethers on sell-offs     

China Rebar Inventories…

Source: Bloomberg  
Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!

What happens to a stock when it’s got the right theme (note the share volumes out of nowhere)

Source: Bloomberg

CONTAINERS/PORTS/LOGISTICS

Data for Asia-Europe remains weak, with 2012 at about -4% (always getting revised…)...Hopefully 2013 can be better, but issues such as how weak the Euro is against the dollar and Italian and other crises could have positive or negative impacts.  My view has been that the dollar is in steady rebound mode. If the dollar continues higher this could make Asia a little less competitive if Asia currencies tend to gravitate around dollar strength. On the flipside and to a less impactful degree for the Asia trade, this could help this could eventually help Europe export more.  In the Transpac, although 2012 growth was not negative, the 2% type growth from Asia to the US was lower than 3-5% growth many of us had expected several months back. … Interestingly, US inventories were reported to be higher. LB and LA ports reported better Feb container port data with LA +17.0% and LB +36.6%. CMA is key driver of LB growth.

Asia Outbound Current Pattern (we’ve been relatively flat in big picture for some time now)

Source: Charles de Trenck
Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions

Question: How often do we get a jump like this in inventories?
(as we had in US this week…is it cause sales about to jump more? Or will volumes have to slow a little more?)

Source: Bloomberg

APL shelves the 53footers: Launched in November 2007, APL's custom-strengthened 53ft ocean capable containers are to be retired from the carrier's South China to Los Angeles service due to poor returns. “The economics just didn't work,” according to APL Americas' CEO, Gene Seroka.  53ft containers are basic to US domestic transportation. The 53 footers have about 60% more capacity than 40 footers Until APL's launch of the hybrids, standard 53ft containers were not strong enough for ocean voyages.

APM Terminals to operate Turkish terminal:  APMT (Maersk) will build and operate the Aegean Gateway Terminal under a 28-year concession, with a $400m and in a phase I 1.5m TEU facility for mid-15 start. Bulk will also be part of operations. The port lies in the petrochemical complex of Petkim in Nemrut Bay, close to Izmir, the second-largest industrial city in Turkey. The initial 1.5m TEU capacity at the new container terminal is about 50% more than the current city port of Izmir at about 700,000 TEU a year. With a depth alongside of 10 m, Alsancak can handle vessels no larger than 2,500 TEU.

CSCL takes a share in APM (Maersk) Belgium terminal: CSCL is taking 24% in Zeebrugge from APM Terminals. The 2-berth terminal handles about 380,000TEU but capacity is for 1m TEU. SIPG has 25% as well. APM soldfor EUR27.2min 2010 the 25% stake.

SITC 94$m in 2012: I wasn’t too happy about the timing of the IPO, though my level of concern was never at the level of Rongsheng or HPH in terms of lack of compunction from company and bankers on IPO process/timing. Another issue was the positioning of the company’s image. That aside profit seemed to please in 2012.  SITC said revenues rose to $1.2bn in 2012 from $1.1bn the year before and given about +15% in volumes. SITC’s revenues from China fell from $489m in 2011 to $439m in 2012. S Korea revenues more than doubledto $131m. Japan was + 2% to $428m. Japan is known for being a killer trade with SITC being a main culprit. In addition China- Japan relations will hold back growth here. SITC’s capacity for the year 2012 amounted to 1.8m TEU, up from 1.5m in 2011, it said. It also expanded its land-based logistics business, revenue climbing to $739.6m, from $673.6m in 2011.

RCL still in red….Horizon still in red: I neglected to mention RCL of Thailand posted a $62.7m loss for 2012. I notice shares rebounded in last couple of days though…Horizon Lines over in the US (that little carrier we spent some time a few years ago flagging for some excesses from Beltway Bandit types over in Washington DC) also reported its 2012 loss at $46.1 m.

Container bonds: China Shipping Group issued, according to reports, two batches of short-term notes worth about Rmb3.5bn ($562.9m) to fund container manufacturing and shipbuilding. Gee, didn’t CSCL just sell a whole bunch of containers to book some needed disposal gains. My head is spinning. The first tranche of the Rmb2.5bn paper, due in six months, pays an interest rate of 3.85%.  The paper is jointly underwritten by China Development Bank and China Everbright Bank. Rmb700m of the new credit will “replenish the working capital of China Shipping Industry.”

BULK/COMMODITIES

Diana disappoints: Diana reported 4Q12 net income of $5m against $20m for the same period last year. Judging by the share reaction investors were not happy. It certainly has been a tough market out there. Vessel operating expenses were +30% (daily vessel op ex +6.8% to $7,128/day) against operational stats showing utilization in 4Q12 at 96.3% against 4Q11 at 99.2% 30 vessels end-12against 24 vessels end-11. TCEs were $17,681 in 4Q12 against $25,714 4Q11.

Also see http://seekingalpha.com/article/1274661-diana-shipping-s-ceo-discusses-q4-2012-results-earnings-call-transcript?part=single

Speaking of Bulk, and rebounds….It is interesting to see Precious Shipping enjoying a little of a rebound

Source: Bloomberg

Is gold price fixing investigation next? According to the Guardian and the WSJ, the London financial sector isbracing for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets. The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation. The CFTC is examining whether prices are derived sufficiently transparently. The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide….

ENVIRONMENT

See comments on Beijing and China pollution front page and China sections….
The cost of compliance – sometimes out of reach: Lloyd’s List makes a good point that new environmental regulations coming into play over coming ears will see owners forced to instal ballast water technologies, and possibly seek to purchase exhaust gas scrubbers and take other fuel efficiency measures… But they may not be able to get the funding to do it! AP Moller Maersk expects rule compliance will cost the shipping industry $20bn a year. ..  Newbuilding loans often come with clauses, or covenants, that dictate vessels must remain fully compliant with all maritime regulations. Owners that struggle with rule compliance, such as the pending ballast water convention, could find banks use this to foreclose on loans rather than provide more capital. …

BNSF to test LNG locomotives: BNSF, a subsidiary of Berkshire Hathaway, is said to be the second-biggest user of diesel in the country, after the US Navy. And now it is working on with the two principal locomotive manufacturers, GE and EMD, under Caterpillar, to develop natural gas engine technology that will be used in a pilot LNG locomotive program. The WSJ ran a big story on BNSF this week. This follows stories back in January raising questions about BNSF monopoly in the Bakkenfields and proposed pipelines debates, in other words the Keystone XL pipeline…

One of Warren’s better investments in recent years
(with some behind the scenes questions on market “influence and pipelines….market dominance issues)

Source: Reuters

TANKERS/SHIPBUILDING

Scorpio more share sales: Scorpio continues to raise funds from investors with a further 29m shares tranche of its common stock at $8.10 per share, a discount of 35 cents. Shares again reacted well post placement. The move aims to raise $235m to fund its acquisitions war chest, to pay for further acquisitions and provide working capital, as well as for general corporate purposes.

DSME going into Jackups: DSME is aiming to build up jackps, to take share away from Keppel and Sembcorp Marine that have about a 70% market share. … The need to diversify and be flexible is paramount given a lackluster pipeline for ships over coming years.

STX OSV to stay listed…: This has been one of the most unexciting takeovers in recent memory. Shares were at lows and they remain at lows. Meanwhile Fincantieri which failed to get much more than 4.9% shares in OSV to add to its 50.7%, will rename STX OSV as Vard

COSCO….oh COSCO, when will you learn

My mother would have said… “COSCO, you couldn’t organize yourself out of a paper bag if you wanted to…”

Months after saying it had some re-organization ideas planned to avert issues such as the Shanghai Stock Exchange placing trading limits on it due to potentially running into a third year of losses, COSCO Holdings ( H and A shares) this week came up with a plan to sell its 100% COSCO Logistics division back to COSCO Beijing. But Bloomberg later in the week quoted that over $4bn could be raised! The timing would be awful, and one might wonder what the company would look like after selling $4bn in assets!

Planned sale of COSCO Logistics with recurring earnings power $100+m range, with long term upside: …Here we go again. This is the division that was injected into COSCO Pacific (49%) to boost assets before IPO of COSCO Holdings, while also earning extra fees for senior directors. Then the 50% was sold back to COSCO Holdings...and now it may get sold back to Parent.  COSCO had bought the other 51% from its parent in 2007 prior to its Shanghai IPO. …Not only is this is a poor band aid, it is also a look-see into a history of asset shuffling.

Event (WSJ summary) HK— China COSCO Holdings plans to sell its logistic unit to its state-controlled parent, China Ocean Shipping (Group) Co., as part of the Chinese shipping giant's efforts to improve its financial results in 2013 and prevent a possible delisting from the Shanghai Stock Exchange.

Initial thoughts (Tuesday): It is not any one transaction, but in the pattern that the full picture of the COSCO Logistics drama can be seen.

Original COSCO Holdings IPO process and valuations… a few long term questions on GROUP as whole here:

• Asset transfers back and forth
• COSCO Logistics continuous transfers between divisions
• Wei Jiafu role
• Add ship asset timing gaffes – the big ones on the ships at wrong prices
• Bulk division massive underperformance (and check those fees please)
• Accountant issues… PWC as accountant for life

…

COSCO Logistics follow on thoughts (Wednesday)

….COSCO Holdings dropped a fair amount (about -5%) on the back of its nonsensical logistics unit planned sellback (according to everyone else, check market response) to its parent to book an intended disposal gain to avoid (or partly cover losses against…) Shanghai Stock Exchange chastisement, and due to its guidelines on loss making companies, etc.  As the week wore on it became clearer that more asset sales may be needed, potentially up to over $4bn (??), according to Bloomberg.

….CIMC also fell in with COSCO Holdings as a stake sale was mentioned in press as a potential strategy by parent. By Wednesday it was the turn of COSCO Pacific to sell off at about -4% on early morning trade.

As to CIMC – I would not off the bat agree that it should start a new business in ship leasing, as per recent reports, since it has no core competence there. … and especially as it is competing against its partial parent, COSCO, …the other being China Merchants….  But if it is going to get cheap money from China Inc, and for container ships mostly built in China, and aim for economy of scale as it appears to be aiming for. …Perhaps there will be a role for it as ship lessor down the road. It is certainly too early to tell now. But as such I am fascinated to see what happens next on this front. Who knows – maybe COSCO will do a sale-charterback of some selected ships to vehicles such as CIMC – and at some point where CIMC could be more independent of COSCO (and that be a good thing).  Who knows?  As observers we need to see if CIMC becomes a ship lessor of scale, and if it gets the portfolio management thing…
As to COSCO Pacific – there was a 1 day delayed effect and selling started on Wednesday rather than Tuesday for the parent, potentially in response to the messed up strategy of the various parents. Who knows…

I continue to ask for mainstream press to take a proper look at the COSCO Group of companies. Even the easy pieces such as the crazy sale of logistics back to Beijing parent can still not be covered in any great depth. The SCMP put one small paragraph on it on day 1, followed by a Bloomberg story on day 2. The WSJ tried to do a better job. But there is still no understanding of the process and failures of the Logistics division, which was first pre COSCO Holdings IPO injected into COSCO Pacific at 49%, etc (I have explained this process before*) ...This division and stakes in it have been transferred back and forth with investors at times paying money for it. Now it is taken away from investors. For all we know the Beijing parent may sell it back to investors again later in another IPO!

For its own merits and failures, one forwarder had this to say about COSCO Logistics upon hearing of its intended sale back to parent:….

“Cosco Logistics? What is it? Sell what? Over the years Cosco has spawned logistics companies like Kenwa, who "jumped ship" joined CSCL as a slot charter semi NVOCC and changed their name to Rich Shipping. Cosco Air had one if the first A licenses for air freight. But had no sales offices anywhere in the world and went from being one of the only master loaders to being one of the only ones not moving any significant cargo. This is an organization that wasted the good years and ends up without a clue.”

*At first the logistics division was an internet concept back in ’99 – ‘00, running off the back of B2B relationships of the Group’s back end, along with legacy businesses accorded COSCO and other China state companies, legacies such as running off printers trade documents for a fee, as well as other captive China business. Ironically this was foisted onto investors first by Sinotrans Logistics, again at wrong valuations (because China was going to have to phase it out, and this was not properly explained to investors by bankers, while syndicate rules by bankers limited what analysts could say in deal research, for instance…). COSCO Logistics got the tail end of this. As COSCO Logistics grew, and as logistics in China grew by leaps and bounds with COSCO underperforming some of this BUT still growing, COSCO got higher valuations for injecting its stake at first in COSCO Pacific, on its way to playing a shell game for investors managed by investment banking franchises that won the COSCO Holdings mandate from COSCO leaders such as Wei Jiafu. What Weijiafu wanted was a big IPO for COSCO Holdings…one which raised lots of money for a company that had been fattened up – so they injected a COSCO Logistics stake first into COSCO Pacific. … Later on COSCO Pacific would sell its COSCO Logistics 49% stake to COSCO Holdings – and now COSCO Holdings is selling its larger COSCO Logistics stake back to its parent.   … WHAT DID SHAREHOLDERS GET FOR THIS 10 YEAR HISTORY OF COSCO LOGISTICS? ….
…

As George Clooney said in one of his films on CBS News early days newscaster Edward Murrow….Goodnight and GoodLuck (http://www.youtube.com/watch?v=kCaBCdJWOyM)

“Anyone who isn’t confused really doesn’t understand the situation.”

— Edward R. Murrow

CHARTS OF THE MONTH … Check out the number of buy ratings here (also look at Sing MRT vs HK MTR)    
SMRT Snapshot of broker ratings

Source: Bloomberg

No love lost for Singapore’s mass transit after it mishaps

Source: Bloomberg

CHINA NOTES

Pollution in China remains one of my key themes. I believe China’s leadership will be defined by what it does here, given that many local and some senior leaders openly allowed for decades the dumping of inordinate waste and unchecked wasteful production all over China. 10 years ago my main complaint was allowing for economic growth to be above what was necessary while allowing antiquated steel, coal, etc capacity to run alongside newer, cleaner production facilities. The list of mistakes is long. China needs to go into full reverse on this.

A couple of years ago, my friends at Environmental Services (Eisal) flagged China Everbright International as being on the right theme, though others have raised concerns on cash flow which must be examined long term….

Taicang strong growth…: Taicang terminal reported a total container 4.01m TEU throughput in 2012, or +39%. So farYTD Taicang is about +18% for Jan-Feb. Suzhou port has focused on Taicang for several years, now with MTL (51%) and COSCO Pacific (39%) as ownershttp://www.tac-gateway.com/eng/index.jsp

Ningbo Port planning Rmb 1bndomestic bond issue: A three-year bond, underwritten by Bank of China International, is the second tranche of a Rmb2bn quota approved by China’s securities regulator in 2010. Ningbo Portraised the first Rmb1bn in April 2012 at a fixed interest rate of 4.7% per annum. Rates of the new issuance will be decided after bookrunning is complete, Ningbo Port said in an exchange filing. …. SIPG.bonds: SIPG will sell 3bn RMB in one-year bonds, according to a statement on the Shanghai Clearing House’s website on 5 March.

Qingdao Port ore terminal:  Qingdao Group has started the operation of its new 400k ton iron ore terminal at Dongjiakou port, SinoShip and others reported. This is one of the largest iron ore terminals in the world with annual capacity of 40 m tons.  Dongjiakou becomes the first Chinese port that could officially have the technical capacity to receive Valemaxes.

Iron Ore: As of March 8, combined iron ore inventories at 30 major Chinese ports declined by 2.98m tons from a week ago to 66.54mtons, the lowest level since mid-January 2010 according to data from mysteel.com. Iron ore stocks decreased to 77.75 m tons at 34 Chinese ports compared with the previous week,  according to the China Securities Journal…. See the steel inventory charts. This has been expected and is a continuing trend. One reason given is that ore prices are on high side and buying would only come in at lower price points. One additional thought, as seen with US oil inventories a few years ago, is with industry deceleration comes a need to seek normalization around new averages as the old averages get thrown out the window.
 
From Caixin

(http://shanghaiist.com/2013/03/12/infographic_chinas_new_super_ministries.php)

Author: Charles de Trenck / Publisher: SCMO

Goldilocks: For Mature Audiences Only

Published by Transport Trackers on 20 March 2012 and reproduced by courtesy of Charles de Trenck

• Global growth is back… or is it?
• The 90s-00s had seen a 10% rate of containerization
• In a real sense the Greenspan Illusion 2002-07 was +2-3%
• Peak distortion was +5%
• Until the ‘00s acceleration containerization centered around 8%
• Recently averages have been closer to 5%
• Our working assumption is long term 7%, short term 4-7%
• Med-case on vessel supply is normalization by 2016
• We are at about 1m TEU of capacity marginalized now
• We also have many quasi-obsolete ships….
• Obsolescence can be down to wrong size ship
• Gap between weak and strong is huge (operational and financial)

Figure 1: Mapping Deviations From Long Term Growth, ’95 – ‘ 12E

Source: Transport Trackers

Containerization: A New Phase of Lower Growth Since 2008…

Goldilocks… For Mature Audiences Only. We’ve been dying to use this title. Growth has decelerated long term. In essence we are in Year 3 of China’s export story deceleration. And yet, the US is now recovering a little better than expected 6 months and Europe has stabilized a little. A recovery US economy has raised a lot of hopes.  But this is not an ordinary recovery by any stretch. Not in terms of economic activity and neither in terms of container shipping.
The bad news for some time has been there are too many ships. The silver lining is that there are too many of the wrong ships out there. But to get to the silver lining we still need the consolidation of the coming years. Keynesian over-spending has not helped, as it has kept demand artificially higher, which may offer false hope to owners of certain vessel types.

Some vessel owners and operators have pointed out that the average useful life of vessels in coming years could fall to 20 years from 25 years. Of course we are not going to get accountants and owners to recognize this. But effectively there are many ship types that could head to the scrap heaps given small nudges. Many ships in the range of 5,000 – 6,000 TEU could be severely marginalized if they consume too much fuel or are owned by financially weak owners. At the moment, according to Alphaliner and others, we are at about 1m TEU of idled vessel capacity. This is against a standing fleet of about 15.5m TEU according to March 2012 Clarkson data.

Here is what the fleet growth looks like long term. The dotted red line is the long term trend. The bold red line is the actual capacity data. The problem was the bold line exceed the long term trend just as demand decelerated globally – meaning the problem is not fully over unless demand really takes off (and more vessels taken out). We may have strong players come out better, and we may have rebounds. But a full cleaning is still needed.

Figure 2: Container Capacity Growth in TEU, 1994-12E

Sources: Clarksons; Transport Trackers

The problem of too many ships is not going away unless 2012-13 sees a very strong economic recovery leading container demand to jump from 4-7% to above 10%. When we overlay demand onto capacity the problem crystalizes.

Figure 3: Long Term Demand vs Supply… and the big gaps, 1995 – 2012E

Sources: Clarksons; CI; Carriers; Transport Trackers

In terms of vessel supply there are too many ships headed for the long-haul trades. We have all known this. However, there is one small positive structuraldevelopment, though there are still too many ships. Recently, most analysts would have said that 10,000+TEU ships were ALL headed for the Asia-Europe trade. But this month MSC deployed a 12,000TEU vessel into the Transpacific, which offers the potential for less ships to flood into the Asia-Europe in this critical 2012-13 period (when there are too many of these ships). However, it is still not expected that there will be a flood of 10,000+ TEU ships flowing into the Transpacific before 2014-16, as most terminals will be able to properly handle these ships.

Nonetheless this is a small positive development.  Back to reality: About 50% of vessels in the orderbook are 10,000+ TEU ships. In terms of the 2012 orderbook, which will still be at least a couple percent above demand there is little that can be done as most ships are close to fully paid. But by 2013-14, we should expect the orderbook to be stretched out into further years. And by 2015-16, we should have been through the difficult period of dealing with marginal tonnage and experience better demand – supply balance. Unless… (play Jaws music here). One significant difference will be the capex gambits will cost more with 10,000+ TEU and 14,000+ TEU ships, narrowing the field of players.

For the immediate future here is a snapshot of the fleet distribution and orderbook, with a focus on seeing (upper pie chart) that there are a lot of 4,000 – 7,500TEU ships (about 40%) in fleet which may have trouble identifying their use, especially if fuel consumption is not good. And then, in the orderbook (lower pie chart), there is a need to focus on about half being 10,000+TEU ships destined for long-hauls.

Figure 4: Types of Ships in the Fleet (10,000+ TEU at 10%..., but…)

Sources: Alphaliners

Figure 5: Types of Ships on Order(…just about half are 10,000+ TEU…so still a problem ‘12-‘13)

Sources: Alphaliners

And here is a snapshot by carriers:

Figure 6: World Fleet and Orderbook Distribution in TEU (Jan/Feb 2012)

Sources: CI; Transport Trackers

It is interesting to see that the top 5 and top 10 generally have larger than average ships on order than the world fleet. On average a ship on order has a profile of 7,275TEU per ship – but 3 of 4 13,000 TEU per ship avg size orders for their OB are in the top 10. CMA, Hapag and Hanjin pop up as having the greatest concentrations of big ships on order. This can mean different things of course, without further analysis, but generally speaking it means that their wagers were in the long haul and Asia-Europe trades. So, who will still feel the need to order more? For delivery when? Will they have the patience to wait for 2015-16?

Demand and Rates

Our view was that the negative volume momentum data was running out in 4Q11 and it was a 50-50 shot as to the base would build higher or stay flat. It depended somewhat on equities and how people felt following a long bout of declining demand growth post the big post crisis rebound. Asia-Europe we expected, and still expect, to be a little weaker than the US. 2012 at the moment should see mid-single digit demand growth long haul, coming up from zero growth experienced into end 2011.

Figure 7: Long Haul Container Demand Growth, Jan ’06 – 1H12E

Sources: FEFC; CTS; JOC; Transport Trackers

For Rates, we agree they have/had to move up, but…. We are in the part coming from the bottom of the cycle where rate increments – “GRIs” – should have some success. However, it is always pretty much about partial, not full implementations. So given that rates in 2011 fell about 9%  across the board while nominal fuel costs rose some 30%, it makes complete sense rates should rebound.

Below is our long term tracking of global rates

Figure 8: Global Average Rates and Long Haul ex-Asia Rates vs Global Demand, in Percent 1980 -2012E

Sources: CI; Carriers;Transport Trackers

Rates out of Asia will rebound faster than global rates, as is the usual pattern. But also higher rates are “merely” recouping the lost ground from higher bunker fuel prices. In fact 380 CST bunker is pretty much at record levels above $730/ton, which is where they were in 2008 when WTI was at $140+ versus current $100+. Of course there has been the Cushing oversupply issue. But also this has meant hedging has not been effective. Brent also was still higher in 2008 peaks than current levels. The issue of bunker costs and vessel efficiency is an entire report by itself. But we would emphasize that players with better fuel utilization ships will do better than those operating legacy ships. At the moment we are looking at bunker usage being about 30% more efficient on newer design vessels. If oil prices stay high this will offer an immense advantage to those positioned with more efficient vessels.

Author: Charles de Trenck / Publisher: SCMO

The Next Phase of Deflation in Container Shipping & Container Box Drivers

Reproduced from a 9 March 2011 article by courtesy of "Transport Trackers"

We are still in the growth deceleration conundrum in the after-party hangover of successive US consumer booms. 2010 was the rebound and 2011 will be a consolidation, with oil price levels dictating whether growth is flat or as high as a few percent. Longer term, the challenge remains for container growth to find a new growth level such as 7%, down from 10% averages of yesteryear – but there is a twist. And this could be the success of growth in new production regions such as inland China, which could direct growth into a new direction.

Wal Mart’s share price, somewhat ironically, has been in a funk since its peak levels in 1999. In a sense the stock took off when investors got the memo on cheap China goods – a bit late in 1997 when they could have gotten it in 1993-94 as China’s manufacturing production really geared up following Deng Xiaoping’s famous dictum “it does not matter what color the cat is…” in the Spring of 1992 – and his tour of South China (where the breadbasket of cheap China goods production originated). Two med-term risks: 1) war, with risks rising and 2) significant increases in domestic US and developed country local goods production (cheaper domestic production).

By 2003, WMT’s share price started to underperform the market overall, and did so until the onset of the financial crisis in 2007. Since then it has traded places back and forth. What is interesting to us is how this company reflected in the biggest way the margin gains that could come from passing on lower prices to US consumers on the back of cheap China goods while earning a spread on high volumes. The volume growth story, from the chart, is best seen from 1996 through to 2005-06, when the boom in furniture for US cheaply financed homes peaked, and when the concept that China goods prices would not fall forever caught on and the US consumer started getting buying fatigue.

Our long-term thesis is that “global capitalism” could receive an injection of new life in a few years from now – after some consolidation shorter term – as new cheap production bases come on line to assist western governments and supply chain margins in their strange targeted mix of goods deflation and assets reflation. The topic is obviously complex. We discuss the supply chain perspective here in looking at containers and container shipping – and the potential for a return to goods deflation.

Wal Mart and Container Trade Volumes from Asia to US – A structural challenge anticipated by the stock substantially in advance?

Source: Transport Trackers

Question: 200m new workers needed in China?

It is easy to churn out general reports summarizing the broad movements and shifts of container box and ship fleets, and to prognosticate on long term container growth and shorter term variances – especially when one takes the recent year to repeat the current trend for the forecast, … which we have often seen done. And we don’t claim to be able to do much better in using crystal balls.

To do much more than look six months forward is highly interpretive and subject to rapid changes in forecasts. Typically we find there are 1) differing stages in a long term cycle where calling a bottom after a sell-off and a correction after a run-up are a little easier to catch; and 2) annual seasonal patterns when it is easier to call the forward few months in the middle of the year than the next year right before the Christmas season. We are currently about two years out of the bottom if we can call spring 2009 the bottom of the 2008 financial crisis. This crisis, having been broader, led to more 1:1 correlations on both corrections and rebounds. In addition, this 1:1 for correlation 2008-10 saw the China ports pattern as much more similar to global trade patterns.

Key Directional Trends 2011(Container risks 2011 already stated. This is a re-statement)

From Henry Boyd, we have gained insights into the consolidation process in container boxes. Henry has taken his analysis further than what we have seen Drewry or CI (Containerization International) do. But Henry, as for all others, still relies on some CI data, especially for long term series. We at Transport Trackers had relied on the CI data for over a decade, supplemented by Drewry, and now also Henry. The series at times do show variances – but the patterns are essentially the same.

*****
Container Box Dynamics

In 2010, approximately 2.75 million TEU were produced.  With adjustments for retirements and containers built for non-commercial maritime use, the world container fleet stood at roughly 24.5 million TEU (about 27m using un-adjusted Drewry series).  With a net increase of the number of vessel slot TEU to 14. 2 - 14.3 m TEU, the box/slot ratio dropped to 1.8:1.0 on Henry Boyd’s count. Alphaliner, which picked up our theme this week as well is working off of a 1.99:1.00 box to slot ratio for 2011. Our relatively less adjusted count for Transport Trackers (which looks closer to some presentations such as those of Alphaliner) showed the generic box/slot ratio stood at 2.1x and about flat on 2009, after coming off from 2.3x in 2008 – with the 2011 ratio at about 2.1x as well. The decade average is about 2.4 -2.5x.

Container TEU Production and Production Utilization, 1995- 2011 (2011 = estimated minimum need)

Source: CI; Drewry; Transport Trackers

Container $/TEU Prices and Daily Long Term Lease Rates… a 20+ year decline reversed in ’09…and a big spike it was

Sources: CI; industry reports; Transport Trackers

The baseline 20’ container price started 2010 at USD $2,000 (few delivered at this price), peaked at $2,820 for September deliveries and settled back to close the year at $ 2,700.00.  The dramatic swing in pricing was caused solely by demand for scarce production as both corten steel and plywood flooring prices stayed stable throughout the year.  These two items alone account for 60% of the 20’ price.  Additionally because refrigerated container production continued through 2009 without interruption, pricing remained stable at the 2009 level through 2010.

The container manufacturing industry started 2010 with an almost non-existent production workforce having furloughed most of its employee base during the 13-14 months the factories were closed from late 2008 through the end of 2009.  This required the manufacturers to recruit and train complete workforces.  Their efforts were further hampered by difficulties in retaining workers who prefer assembling consumer products to working on a heavy industrial shop floor.  As a result, 2010’s production was almost completely based on single shift production.

Once the manufacturing industry’s workforce is re-built to support a two shift environment a full order book annual production capacity should be in the 5.0 to 6.0 million TEU range a substantial increase from where things stood at the end of 2008, a result of production line improvements and expansion during the 2009 hiatus.

The implication of strong pricing and full order book suggest that while 2010 might not go down in the record books as the year with greatest production, it may definitely be the most profitable for the manufacturers (or at least in 1H11 based on momentum).  This has given rise to a number of comments from the purchasing community that the shortage of suitable workers may not be as acute as portrayed by the manufacturers.

Going forward in 2011 the container order book looks strong buoyed by the new vessels that have, and will, enter service.  

There have been claims that 2011 will be a record year for box production, suggesting the manufacturers will be able to fully implement two shift work schedules and get to 4m TEU production levels (2007: approx 4.1m TEU produced).  

We are skeptical this will happen in 2011 for a number of reasons:  

1)    From an engineering perspective, we believe the container manufacturing workforce is too inexperienced.  Multi shift production requires a strong cadre of experienced floor supervisors.  Line workers can be easily, and relatively quickly, trained.  Line foremen need work experience.  With the bulk of the production workforce having less than a year of experience, the pool for supervisory staff looks thin;  
2)    More importantly the manufacturers seem to have learned the lesson of supply and demand, with demand being preferable to oversupply;
3)    Capital raising constraints may still limit smaller players from raising all the money they need, though the big players have had a field day squeezing out the little guys.

Representing a turnaround from recent years, container leasing players moved to dominate purchases and acquired 60% of 2010’s production.  Leasing companies made a wise tactical move in 2010 and purchased production space early in to lock out competitors and customers alike.  With production under contract, the leasing industry was able to successfully pass along not only increases in lease rate attributable to container price changes, but also increase their profit margin.  This is evidenced by the growth in the ICIR (Initial Cash Investment Return - per diem x 365 / asset cost) metric from 12.5% in 1Q10 to 14.3% at year’s end on dry freight equipment for five year operating leases.

Reefer lease rates also remained stable at the 2009 levels in line with unit pricing.
All of the leasing companies were reporting utilization levels in excess of 97% by year’s end.  In a global equipment rental business this means that everything that can possibly work, is working.  While good news for the lessors, this also has an impact on the value of used containers.  Leasing companies are the market leaders in the sale of used equipment, choosing to dispose of equipment before its useful life is over to maximize gain on sale profit and to keep the age of their fleets low.  However, when lease utilizations go up, the available pool of saleable containers goes down and prices go up.

2009 and 2010 suggest to us a number of things.  Firstly, the era of cheap containers is over for now (our TT view is the market comes off from high base during 2011, while the perception of tightness from 2010 lingers...Longer term we expect box demand to increase relative to ship slots again given a low box to slot ranging from 1.8x to 2.1x).

Our thought is that containers have come full circle and are for now at least being built and marketed as transportation equipment, and not as a mechanism to freely export steel and gain hard currency.  With this change in point of view, and clear evidence that the manufacturers finally “get” supply and demand, the days of below cost containers to keep factories running will become a memory for awhile longer (and set us up for a new cycle – a look at long term IRR and lease rate charts from the 1980s must be seen to fully appreciate what hit container yields in the last 20 years!).

While the order book demand will be strong, we find it hard to believe the manufacturers will either be able, or willing, to increase 2011’s production level much beyond 20-25% of the 2010 level, orto 3.3 - 3.5 million TEU (and not 4.0+ m TEU as some have called for).  But 2012 delivery levels can be debated more. We also believe the leasing industry will be on the forefront of purchases again in 2011 as it still positions to get back some of the lost market share from past years.  Again, they will be using their purchase orders as a competitive advantage to block out liner company purchases. We also see lease utilizations staying high through 2011 and in turn propping up used equipment values. High oil prices and consumer demand levels and potential high oil price impact on consumption should be a major point of debate on demand impact for 2H11 into 2012.

Not Surprising Similar $ Cost Shifts, 1980 – 2012E (TT View: price rebound highs in 2010…but where settle is key)

Source: CI; Clarksons; Drewry; Transport Trackers

Final Thoughts on Boxes

There are many who for 18 months have said that container box shortages would only last a short while, and we sided with this view initially in its strict form (ie, boxes are a commodity that are relatively quickly brought back to equilibrium), by mid-10 we had a more modified view which was that the perception of scarcity would create the same effect as a shortage.
We have believed since mid-10 that this shortage mentality would last through much of 2011 – driven by some of the smaller container line players we spoke to. However the issue now to watch is how it lasts as we go in to the peak season, and if it fades faster than expected.
High oil price and lower demand growth in long haul with slightly lower vessel utilizations could take the pressure off box needs short term.

Longer term there is another effect that could come into play, which is a lengthening of the supply chain as more boxes go inland into China. But this will be something to watch further down the road. We still have the aftershocks of 2007-09 to understand shorter term.
In closing the discussion we note a few write ups talking up the shortage of boxes again in the last two weeks – this is strategic mumbo jumbo positioning by the lines first, and a continuing or an attempt at continuation of the recent trend on tight boxes second. Yes – there is still some tightness. But 1) we are farther along in terms of this effect and it is not as severe as in 2010 and 2) we have yet to fully digest higher oil prices due to the current N Africa/Arabia crisis.

Ships and Boxes Looked at Together

BOX TURNS: Partly Logical Given Trade Pattern Shifts … but also Partly Puzzling (the divergence in 2002-05…)
(Initially greater box efficiencies, higher trans-shipment/more double counting…Less boxes inland US….Slow Steaming…But later more boxes inland China?)

Source: CI; Clarksons; Drewry; Transport Trackers

The curve separation between box turns (box trade over standing vessel TEU) and the ratio of standing box fleet to standing vessel TEU during 2002-09 can be partly explained by what happened during this 2004+ period was a tendency for box turns to decline partly due to greater growth on the longer Asia-Europe trade as well as the earlier deceleration in the shorter Transpacific trade. The peak of growth in the Transpacific Eastbound was about +17% in 2004. Asia-Europe peaked in 2006 at about 22% (subject to variances on exact % growth). The trend may also be attributable tolarge volumes of inventory containers that were ‘exported’ as empties in excess of import levels from N. Americaand Europe in this time period.

What gets interesting is when we look at relationships few have looked at before – like the ratio of capex for ships to that of boxes. The alternate ship capex to box capex (dark red line below) and the trendline show the privileging of capex deployment for ships over boxes, which goes hand in hand with less boxes available per vessel TEU slot.

Vessel Capex Got Out of Hand Relative to Boxes for Little While (LT trend also a little out of whack)

Source: CI; Clarksons; Drewry; Transport Trackers

Getting Back to Container Shipping

When we get back to looking at container shipping, using our long term graphs, which admittedly always have to rely on paucity of data in earlier years, we establish a few clear trends:
1)    The increased volatility of capacity, demand and rates in recent years (last seen in 80s), and,
2)    A general long term trend toward rates to react to excess capacity increases and decreases

What we find to be generally the case is we don’t even need to adjust and make assumptions which require constant fine tuning for all the explanations, theories and pattern shifts thrown out there, including most notably the famous case a few year ago of needing to adjust down effective slots more on bigger ships, increased trans-shipment long term, shifts in growth and deceleration in longer haul trades, and most recently slow steaming. Slow steaming, we think, has had the greatest effect in terms of absorbing excess capacity. Yet even with this, the relationships between “excess slots” (capacity growing in excess of demand growth) and $/TEU rates for container lines is still noticeable.

WARNING: Rates do Respond to Visible Excess Capacity (black arrows point to capacity surges; purple arrows to drops)

Source: Transport Trackers    
Note: of course the whipsaw action set up 2008+ given greater volatility… (again we would like to thank Mr Greenspan….)

Long Term TEU Liftings Demand and Vessel TEU Supply, 1981 -2013E

Source: Transport Trackers   

MAD Shipping V1.2 and the Long Term Implications of the Maersk Move….”Please ante up”

These are macro driven pivotal moments we live for. The implications of these forthcoming changes cannot be over-emphasized and will possibly be useful for building and adjusting investment strategies for several years. We have mentioned that ports tend to benefit more from this development, all things equal, as well of course being more defensive historically. But certain equipment makers from yards to crane makers will receive a share of benefits. (When we mention ports we are not supporting one type of port per se, and certainly not S China ports relative to others, for instance. Re the Hutch Ports story, for instance, this case will have its own set of parameters to consider.)

The oil trade: These vessel size and capex developments will be separate from another trend we have seen come back which is the container shipping trading pattern with oil trade, which could show more similarity with airline share fluctuations around oil price moves. The "oil related trade" will have its own life, although the topic is connected at a deeper level in terms of operating costs analysis of course. Higher oil impacts operation costs – and older vessels will face higher costs if oil stays at a higher level.

***

1. Reiterating our more recent 2011 bearish comments on containers, and
2. Based on discussions which brought it all together for us…,
3. But cognizant that some players in addition to or in spite of Maersk could benefit
4. Underscoring that a next wave of mergers or closer alliance could come out of this as well…

It is our hope that many investors and shipping lines will conduct further investigations into the risks of a vessel arms race at this juncture. On the one hand it is compelling to go for the latest toy and reduce unit costs. On the other hand it could lead to a shorter useful life for many vessel types resulting in more wasted capex to throw under the rug of balance sheets.

Bottom line: Maersk with their new 18,000TEU ship (which was flagged as early as Nov 10) have raised the stakes and raised the bar to stay the leader in the game, using a) their economies of scale and b) profits from other divisions as buffers, and indicated their willingness to continue facing huge swings in EBITDA and EBIT from continued turbocharging of the cyclical nature of shipping and container shipping to attempt yet again to squeeze out key competitors. A tough challenge to be sure.

Relative Stay in Game players: The Asian carriers, mainly HK, Taiwan and Chinese will have to follow and will have the benefit of access to cheap capital to chase Maersk with their own capex strategies. ... The Europeans and related will not be so lucky, but will have to chase as much as they can. No surprises here.

Ship owner vs ship operator:  Shipowners who put too many eggs in the 2006-08 part of the capex cycle will face obsolence issues on assets they overpaid and which will exhibit higher operating costs if oil remains high. Shipowners with earlier purchased vessels, depending on acquisition price, will also be impacted. Take a 2005 ship that was valued initially partly with a 7-year or more charter. When the ship comes off charter it will be returning to a different world, one which no longer pays it the same charter rate level.

Ship operators will be affected too – in a similar way that bond holders can be affected by a change in the structure of interest rates between long and short maturities.... or by changes in debt credit ratings. Issues of fleet profile must be considered carefully -- THE QUESTION: How is the current vessel portfolio between owned and long term charters affected in terms of the ongoing run rate of committed capital and operating costs?

The relative winners: key Korean yards on a relative basis and a couple of Chinese yards who can benefit at the margin. Equipment makers and dredging and engineering companies.

Retooling likely vessel deployments: 10,000 TEU ships could become the choice vessel to US West Coast and the 8,500TEU (2014 Panama Canal) to East Coast for premium services (Virginia the only post panamax ready port currently… and funding issues for others to consider). 14,000TEU and 18,000 TEU ships will be the cost winners for Asia Europe. Cascading, the act of shifting a once large ship from long haul into short haul, will be accelerated. But this will face its own issues and problems. The issues will percent of fleets that can shift over what time frame. Some argue that all obsolete ships will be automatically scrapped. Would it be so easy. Unfortunately this will not happen overnight and will be a drag on vessel utilizations and returns before the scrapping decision gets made.

The irony: After over-spending on capex in 2006-08 the liners are faced with the prospect of doing it all over again or face competitive obsolescence. The traditional scavenger strategy will be tried by MSC and others who may seek to emulate this strategy – which could be to make up for not having the lower operating costs by getting cheapships AFTER the loss of value of the newly obsolete models. Who knows, it could be that some of the top 10 lines could be further pushed to merge together. Some of the obvious combinations could come back out of necessity.

Historically we have seen certain favorite shiptypes shift. For instance the early 5000-5500 TEU ships will become more obsolete. The relatively new 6000-6500 TEU ships will face the risk of becoming part of a sandwich class. Ships that cannot be properly cascaded will be the ones facing the bigger discounts – which will then become either scrap or scavenger targets.

The face of Intra-Asia trade will shift yet again. Bigger ships. New needs for smaller ports. Shifting feeder relationships.

The irony here is also that all these operators and the industry in general have all moved from 18-20 year type depreciation schedules toward 25 year type depreciation policies in the last decade or so – and yet here we will be with ships built in 2004 which are or were perfectly good ships which will effectively be deserving of an economic impairment charge …. Which of course will be resisted or denied by auditors, banks, owners, and operators.

Plus ca change… There are still a few rough edges as we work on further updates on long term implications.

The Plan to Bankrupt the Competition and Create a New Vessel Arms Race … MAD Shipping for Short

A new version of “we must remain #1” updated for new technology and new economies of scale was born in late 2010, as we initially followed early reports DSME was readying a new vessel design for Maersk to start delivering in 2013. The new 18,000TEU vessel design was too big to contain and came clean a few weeks ago. The only trade for the vessels was always going to be the Asia-Europe trade, of course. The Transpacific will have to content itself with 8,500TEU and 10,000TEU in the near future. The perversity and beauty of the game is that large liner companies will be forced to match the economies of scale in key East-West trade lanes or not be able to match prices which come from lower slot, fuel and operating costs per TEU slot.

Triple E 400 meters $190m 18,000TEU (a few meters longer and wider, but with square bottom and 23 across the ship carries lot more than 15,000TEU Emma Maersk)

Source: Maersk         Please visithttp://www.maerskline.com/triple-e and   http://www.youtube.com/watch?v=fxFs5LpDsQU

Total World Domination…the Winners and Losers

Source: James Bond, Never Say Never Again

The Triple-E in its push to innovate will feature:

• 20 % less CO2 per container moved than Emma Mærsk, believed to be the most efficient container vessel in operation today and 50 % less CO2 per container moved than the industry average on the Asia–Europe trade lane;
• 35 % less fuel consumed per container than the 13,100 TEU vessels being delivered to other container shipping lines in the next few years;
• Ultra long stroke engine waste heat recovery system captures and reuses energy from the engines’ exhaust gas for extra propulsion with less fuel consumption. Power to engine will be increased 9% (some debate, but some complaints…);
• Hull and propulsion systems are designed to profit from slow steaming, rendering fuel consumption benefits of 20 % at 22.5 knots, 37 % at 20 knots and 50 % at 17.5 knots;
• E class vessels will be documented and mapped in the vessel’s ‘cradle-to-cradle passport’. When the vessel is retired from service, this document will ensure that all materials can be reused, recycled or disposed of;
• $190m vessel implies $10,555/TEU capacity slot cost (and it would be cheaper with less innovation)

 The Slot cost comparisons are pretty clear from a capital deployment per unit of TEU slot capacity. There was spike up in costs/TEU a few years ago. Now there is a double shift down again: The first shift down is lower cost per ship and per TEU slot due to the after effects of the financial crisis and the second shift is from the renewed upsizing bias.

TEU Slot Costs by Vessel Size, 1980 – 2013E ….The difference is about 30%....but that is only half the story

Sources: Clarksons; Market reports; Transport Trackers

What Comes after Maersk's Triple-E Containerships?    

If the Maersk “Triple-E” containership order makes a large slice of the world’s fleet uncompetitive, what will the future threat to the Maersk triple E look like? We can assume very different configuration for containerships in the not very far distant future?

According to recent work by the Norwegian classification society DNV; “the low energy ships of the future will be larger, be made of lighter materials, carry little or no ballast water and be equipped with a host of different measures attempting to minimize fuel consumption and greenhouse gas emissions.”

Their description also includes:

• drag reduction technologies
• hybrid lightweight materials
• multi-propulsor configurations
• and hull design features such as “trapezoidal” hulls

Technologies that were considered too expensive just a few years ago are now becoming cost efficient.

Whilst DNV and other support the LNG option for propulsion, they also promote the concept of the electric ship that they expect will boast this set of ten technologies:

• Parallel hybrid power generation (where the electric motor acts on the drive shaft in parallel with the engine)
• Super-capacitors for higher energy density
• Large lithium batteries
• Fuel cells
• Solar panels
• Flywheels that provide rotational energy
• Retractable wind turbines
• Wave energy collectors
• Cold ironing in port
• Superconducting generators and motors

The electric ship suggestion is in contrast to the claim by classification societies are saying that LNG fuel engines are virtually way that the next wave of low sulphur rules can be met.

By 2015, Sulphur Emission Control Areas (SECAs), which are established in environmentally sensitive areas in Europe and North America, will set the maximum SOx levels at 0.01% versus the current level of 0.1%  LNG would eliminate all SOx and particulate matter, cut NOx by 90% and CO2 by 20%.

To date, the experience of using LNG in ships is limited to ferries and offshore support vessels, but the propulsion system will be extended to coastal and short sea ships, of which a half dozen are now on order. Of note a first small 2,000 dwt capacity vessel with LNG fuel was ordered by an owner who was chasing the potential savings, rather than environmental concerns. The Norwegian NOx fund will provide NOK18m of the additional NOK28m. Built in a Turkish shipyard, once delivered in 2012, the vessel will be supplied weekly by a local LNG bunker station.

There is European money for the gas solution. One Danish owner, Fjordline , has secured EUR9m ($12.4m) in European Union funding to install liquefied natural gas tanks and dual fuel engines on two ferries being built in Poland. The funds, yet to be received, come from the Marco Polo scheme, which falls under Brussels’ Motorways of the Sea program. The Finnish government backed LNG fuel capabilities on a new Viking Line ferry to be built at STX Finland this year. The only other sizeable vessels to be ordered with LNG as a fuel are two ro-ros from Norway’s SeaCargo. Again, the additional building expense has been supported by the Norwegian NOx fund.

There has, as yet, been no commercial order for a gas-powered vessel in northern Europe in which the owner has not tapped into some form of financial aid to build the vessel.
There was some speculation that Maersk’s Triple E ships would be LNG fuelled but the containership segment is far away from the day of an LNGbecause the industry is stuck in a chicken and egg situation. The fuel suppliers won’t provide the ready supply of fuel until the fleet is there to buy the fuel and the owners won’t buy LNG fuelled vessels until the fuel supply is there.

The solution from DNV is that container ships should be built today with the capacity to retrofit with LNG storage tanks so that when the world has an LNG bunker network, then the ships can be refitted quickly.

DNV has also unveiled “a new crude oil tanker concept that is fuelled by liquefied natural gas, has a hull shape that removes the need for ballast water and will almost eliminate local air pollution.” There are some parties holding out hope for scrubbers to solve the sulphur problem.

Wärtsilä, one of the marine industry’s leading ship power solutions providers, has signed a turnkey contract with Containerships Ltd Oy to retrofit a Wärtsilä fresh water scrubber onto a small containership. This is Wärtsilä’s first commercial marine scrubber project for a main engine. The scrubber will be delivered to the customer in August 2011. The conversion will enable the vessel to meet future sulphur oxides (SOx) emission requirements in Sulphur Emission Control Areas.

In addition to LNG, there is a serious consideration for LPG because it does not require the low-temperature storage technology, thereby doing away with some of the problems peculiar to LNG engines.

The low sulphur rules will create new challenges for shipping, not to mention the burden that shipping will have to bear from the surge in oil prices.  We are also aware that shipping is squarely in the cross hairs as a politically easy target due to its green house gas (GHG) footprint.

Appendix – China Ports Snapshots

China Vs World ‘000 TEU and Greater China as % of World, 1993 - 2010

Source: Transport Trackers

Where’s the Growth? 1997 – 2010 Indexed Container Moves at China Ports 1997 = 100

Source: Transport Trackers

Authors: Charles de Trenck/Matthew Flynn/Henry Boyd / Publisher: SCMO

Reality of the New Import Ocean Supply Chain Import Security Filing

Published in 2009 in TranzAct and reproduced by courtesy of Albert Saphir

On January 26, 2010, the Importer Security Filing (ISF) Rule, commonly referred to as 10+2, will become effective. This will change to a mandatory rule with the U.S. Custom Border Protection (CBP) imposing fines.

The ISF ­ 10+2 Rule

On January 26, 2010 the Importer Security Filing (10+2) rule will be mandatory for all imported shipments into the United States. Given the magnitude of fines, potential liabilities and issues associated with imported inventory, it is important to understand the impact that this program can have on your company. We strongly recommend that your company invests in and prepares for this initiative.

Let's take a look at what you can expect. The CBP (U.S. Customs and Border Protection) will commence enforcing this new advanced electronic data requirement as of January 26, 2010 with severe penalties of US$5,000 (up to US$10,000 per ISF) for each for late filing, missing filing, or inaccurate filing. (Keep in mind that you are talking potentially about a filing for each container that you ship.) These penalties will be levied directly on the importer of record and mitigation, reduction of penalty amount is going to be very limited compared to traditional mitigation guidelines and practices of the past when dealing with CBP penalties.

While many shippers are focused on the findings, they are overlooking what may very well be the most punitive part of this program. It may take several months and possibly even a year or more for the CBP to levy their penalties. So if there is a mistake, or inaccurate filing, that could be easily corrected, this error could result in penalties for a tremendous number of containers.

Aside from the huge potential liability and its impact on your financial statements, here is something else that should really grab your attention: The ISF’s do not liquidate, so their risk remains “open” for up to six years as each ISF is secured with a bond which is considered a contract and thus contract law applies. In other words, future ISF penalties could be issued against an importer for ocean imports that happened six years ago (after 1/26/2010 of course), a huge record keeping dilemma! So just imagine a scenario under which CBP finds errors or consistent late filings for recent ISF’s. They could now go back six years and for sure find lots more. And you guessed right: Many more penalties will come your way. It may actually make an IRS audit look like a benevolent experience.

So what are your ISF financial exposures?

Some of you may now be asking just how significant the penalties and fines could be. Let's assume that your company has 1000 ocean shipments on an annual basis.

•    Penalties

If only 5% of them will have a single ISF exception, your annual penalty exposure could be as high as $500,000! And if this happens in later years and CBP deems that you have a material deficiency and elects to go back, the penalties become greater. And this ignores the amount of time your company is going to have to spend pulling down documentation to contest the CBP proceedings.

•    Bond amounts and bond fees

This is a wild card for now, but we are recommending that our customers evaluate their bond coverage. Do you believe your regular continuous bond of US$50,000 or US$100,000 (basically calculated to cover your estimated annual duty liability toward CBP) will suffice in the long run?

Let's go back and look at the import example. Hypothetically, your six-year ISF liability “on paper” is going to be at minimum, many millions of dollars! Do you think your US$100,000 will be sufficient for long? And if we take it one step further, we think many shippers have been lulled into a false sense of complacency. After all, how many penalties have you received for your 1,000 import shipments over the past year? Probably none or very few. What is particularly vexing now is the fact that your specific risk factor for ISF penalties is of course unknown. If we assume the low 5% from above, you are now going to have 50 penalties a year to sort out. Thus the sureties will most likely increase the continuous bond fee/ rate on top of potential higher bond amounts!

•    External ISF filing fees

For better or worse, a lot of companies have outsourced the ISF filing to their customs broker thus resulting in additional fees. The truth is that while these companies could be an ISF self-filer - and would in fact be better off being a self filer, they choose to incur the additional US$25,000 to US$50,000 expense in their annual expense budget.

•    Internal ISF data management cost

If you are a bit intimidated by the rules associated with importing containers, you may be interested to know that many companies do 99% of the work themselves to collect, assemble and validate the data required by their external filer. With the use of a global trade management tool (which accommodates ISF filings almost automatically), they could become self filer's. But we have seen several companies try to do it on their own with a homegrown system that can easily double, triple or even quadruple the above external ISF filing fee estimate and add a substantial burden to the additional internal cost to comply with ISF.

•    Other external ISF cost factors

As previously noted, companies tend to focus on the penalties. What they also need to consider are transit time delays that could disrupt their supply chains and result in additional inventory cost. These delays could be caused by issues such as both onshore and in-transit to absorb issues with delays, demurrage at foreign ports (if you detect an error and do not want to face an ISF penalty), or demurrage and CBP intensive examination costs for those shipments arriving without an ISF on record.

What can you do?

If you've read this far then you know that 2010 will be a year full of new challenges in managing the global supply chain. The good news is that 2010 will also provide unique opportunities for those bold enough to embrace change and think outside the traditional box. And for some companies the ISF issue is a way to implement new ideas, achieve better automation, and actually improve service quality while creating real value for their customers and employees alike.

There are many advantageous ways to reduce:

•     Your potential financial exposure
•     Your ISF expenses (an 80% reduction of the aforementioned cost is not impossible)
•     Risk of disruptions in the supply chain

Overall your company can create a better import process and actually turn the ISF challenge into a competitive advantage.

If you're looking for some inspiration, consider what Crate & Barrel has achieved with their ISF initiative. Crate & Barrel completely redesigned their import ocean supply chain during 2009 due to the new ISF requirement which went into effect on 1/26/2009. While many importers just sat on the sidelines and chose to take a risk by relying on a “Band-Aid” for a quick fix solution, Crate&Barrel took a very different approach to the challenge presented.

They commenced on their visionary and strategic ISF compliance program in late 2008 and achieved great results - considerable cost increase avoidance plus much improved supply chain visibility during 2009 and going forward into 2010. As you look at the data you can understand, this was a challenging assignment: 7,500 annual FEUs (forty foot equivalent containers), over 30 countries of origin, over 600 active import vendors, 3 steamship lines and 12 forwarders/ NVOs. But their willingness to invest in order to improve their import supply chain process and achieve complete compliance with this new CBP mandate has put them far ahead of most other U.S. importers. They are ready for a successful 2010 and beyond.

Experience has proven that if you understand the issues and invest in people, technology and continued process improvement you can be successful. And this is true with the ISF requirement.

Conclusion

ISF self-filing is only best practice out there and must begin with the importer completely analyzing and re-designing their import supply chain around this new requirement to determine what the best choices are. This can include “unified entry filing” (combined ISF and customs entry in one shot) through your customs broker, ISF filing by your foreign freight forwarder/ NVOCC, or even ISF filing by your foreign supplier.

Need one more reason why you should be proactive in addressing the whole area of shipment security? There is another initiative/ challenging regulatory item that shippers will have to plan for in 2010: The TSA “Certified Cargo Screening” (CCSP) program. It requires that as of August 1, 2010, 100% of all air cargo going onto a passenger aircraft needs to be screened at a piece level. This will require major changes for everyone in the air freight supply chain, and it is a big jump from the current 50% screening level. Expect potential lengthy delays as airfreight is queuing for screening and additional cost as this is an unfunded mandate from Congress, and thus all cost must be borne by the user of air freight services.

ISF FAQ

What information do importers need to file?

Importers must submit eight pieces of data no later than 24 hours before landing:

1. Seller (name/ address)
2. Buyer (name/ address)
3. Importer of Record Number/ FTZ Applicant ID Number (IRS, EIN, SSN, or CBP assigned number)
4. Consignee Number(s) (same as above, plus name/address unless the consignee is also the Importer of Record)
5. Manufacturer (or supplier)
6. Ship to party (name/ address)
7. Country of origin
8. Commodity HTSUS number (to the 6-digit level)

Two additional pieces of data must be submitted no later than 24 hours prior to arrival:

9. Container stuffing location
10. Consolidator (name/ address)

What information do carriers need to file?

Carriers are responsible for providing two final elements:
1. Vessel stow plan (must be submitted no later than 48 hours after the ship’s departure)
2. Container Status Message (CSM) Data (must be submitted within 24 hours of creation or receipt)

What if I don’t have this information or I choose not to file?

If an importer doesn’t file or submits information that is inaccurate, incomplete, or late, CBP may charge US$5,000 per violation. CBP may also withhold the release or transfer of cargo, refuse to grant permits, mark orders as “Do Not Load,” conduct additional cargo inspections, and, in some cases, seize cargo.

Author: Albert Saphir / Publisher: SCMO

Big Steel, Price Swings of Yesteryear… and Dominance Role Reversals

Reproduced from a 19 April 2010 article by courtesy of "Transport Trackers"

Given the recent stories on steel and price hikes we took a quick look sample historical reactions to price hikes. In April 1962, John F. Kennedy panicked after US steel companies proposed to raise steel prices $6/ton, as the proposed rises threatened his economic program. He went on TV, after earlier planning a multi-pronged campaign against Big Steel, to denounce the steel companies price change decision (“in ruthless disregard…” Please refer to http://www.youtube.com/watch?v=x‐sIYl5C4mY). ...

If one thinks about it, a ton of steel was $20 ‐ $40 in the 1920s while an ounce of gold was fixed at $20.67/oz before the Fed appeared to get a present from Roosevelt in 1933 through the re‐fixing of gold at $35/oz. Steel per ton could loosely be put at $600 ‐ 800/ton today against about $1,100/oz for gold. Just an observation: Steel is up by a factor of about 20x in a century; gold is up by a factor of about 40x... We are not experts in steel and commodities, simply interested bystanders wanting to know more about many of the products going on ships, and their drivers.

Margins for the US steel industry were estimated, in an article of the day citing AP Business News, 10 April 1963, at about 4% net profit margin in 1962, down 15% from 1963. In comparison, US steel in 2009 had a negative EBIT margin over 15%, though this had come after a five‐year streak of EBIT margins averaging just under 10% prior to 2009.

Kennedy’s 1962 frontal assault on Big Steel led US steel companies to drop prices even below levels they had tried to raise them from (the attack coming when margins were 4%). By 1963, a number of papers came out on economic effects in the steel industry, with none other than Townsend’s Greenspan (remember Greenspan’s consultancy firm?) preparing a paper for the Society National Bank of Cleveland, among other papers, showing that US GDP between 1955‐62 increased 20% in real terms but that the steel industry, one of the centerpieces of the US economy at the time, was slowing in real terms, given only a 5% expansion during the period.

The article citing Greenspan (an analyst at Wellington submitted to the Financial Analysts Journal for November 1963) went on to speak of the US loss of market share to foreign producers. … In other articles we saw talk of 2.5 – 3.5% wage increase complaints from steel bosses. But overall, we got the feeling from most discussions that a lot of people walked around assuming flat costs, especially raw materials sourcing. Another thing people/ organizations did, as seen in many articles of the time available for viewing today via Google, is repeat verbatim press blurbs, so quite often price rise announcements simply stated the quantum of rise with no reference to base price (ie, it’s difficult to get one’s bearing on price points).   … From reading articles from the 1920s on steel, on comparatively more turbulent times for steel prices than the late 50’s and early 60s, the price of steel had about doubled between pre‐ and post‐ WWI from about $20/ton to about $40/ton.

We had noted in recent weeks, some research reacting to iron ore price increases without appropriately adjusting for cost increases 1 . We still think more work needs to be done on this front, but some, among others, have flagged the impact of higher spot iron ore and quarterly contracting for some of the mills that historically relied more on annual contracting. Margin squeezes and demand patterns after price rises appear important questions/topics...

1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.

We have sourced stories from market reports and every effort is made to reflect news items fairly and accurately. However we can make no warranties of any kind as to the contents of reports and we shall not be held liable for damages. Our views represent our current opinions with respect to available data and information. Transport Trackers ©is a subscription‐based service for paid clients, therefore re‐transmission of our reports is not permitted. For more information please contact us atsales@transport‐trackers.com or charles@transport‐trackers.com.
 
So what’s changed in 50‐100 years of looking at price data and relationship?

Short answer: Not much, and everything. Today, repeating of press blurbs and sensationalism in headlines is perhaps still based on similar practices as in past. There are a lot more moving parts, to be sure. In the past, we could go years without a price change in an input. Later (in 60s, 70s??), some of that price stickiness was even down to command economy features, even in the US economy…Back then you’d get a US president dedicating speeches against price rises. Today we have infinite price changes of inputs and outputs, issues of over‐demand out of China, cheap capital from central banks, and…2The politics of steel perhaps haven’t changed as much as one would think, though. The politics were bad in the 1960s… and they are bad now.

What’s changed the most, in our view, is the order of things not just turning upside down (which Hegel or Marx would have understood/liked), but steel (and oil, etc) geopolitics are going in multiple directions at the same time.

In the heyday of the rise of the US as a superpower, it was about US dominance taking over from the British, etc. Everyone “knew their place...” 3The new good guys (US) were producing and dominating the market for key outputs. Sourcing contracts were in place and it was done more efficiently than the new bad guys (USSR) were doing it. Today, China (which was briefly aligned with the then bad guys) is producing more, if not most, efficiently, yet. And now it is sourcing at spot rather than on contract from developed and developing countries alike.

US Hot Rolled Midwest Avg $/ton, 1980 – Current (Monthly Series)

Source: Bloomberg

Notes

1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.

2Thisremindsus   of   a   versionof   “Stay”  mostnicelyupdatedby   JacksonBrownebackin   the‘70s…  (today…  “wegottruckerson   CB…”) from http://www.youtube.com/watch?v=jtuvXrTz8DY (1978 performance linked here)

3 …Until we got thinks like the Leontief Paradox… This takes us back to the Leontief Paradox on Heckscher Olin theorem problems, which was based on Leontief in 1954 (quite early on …) finding that the US, the most capital‐abundant country in the world, exported labor‐intensive commodities and imported capital‐intensive commodities in contradiction to the Heckscher‐Ohlin, which held that “a capital‐abundant country will export the capital‐intensive good, while the labor‐abundant country will export the labor‐intensive good.”

Author: Charles de Trenck / Publisher: SCMO

So you want to be an Intra-Asia Trade player?

Reproduced from a 12 March 2010 article by courtesy of "Transport Trackers"

Container veteran Niels K Balling contributed this think piece on Intra-Asia containers. We leave his title in place as it reminds us of the song by the Byrds, and later sung by Patti Smith (So You Wanna Be a Rock and Roll Star). Mr Balling notes, in passing, that the intra-Asia market is so big and complex that trying to boil it down in this fashion perhaps does not do it justice, so he apologizes in advance...

The Southeast Asia/North Asia countries comprising the core Intra-Asia market have become the largest container trade in the world, by far (despite some over-counting a few years back in a now infamous looking at the market by a well-known report we refer to sometimes). We exclude the Asia/Australia and Asia/India and Middle East trades as they are independent trades served by independent assets.

Key issues:

Total REAL profit pool of the core Intra-Asia trade is destined to remain miniscule

Only niche operators will be able to cover the cost of dedicated capital deployed to this theatre

Roughly 1/3rd of the trade volume is handled by main line operators on trunk routes

Rest evenly split between dedicated major services, feeder services, niche operations and domestic protected trades

The Main Line Operators (MLOs) provide negative marginal pricing to offset equipment positioning needs they have anyhow, and to build container terminal volumes that generates lower total terminal handling cost. In other words sunk cost discounted to zero (or less), combined with marginal pricing for growth purposes to achieve lower variable cost. That's not entirely crazy as the volume gain often will generate more value through terminal handling discounts than the real Yield of Intra-Asia cargo. And the discount may apply to the TOTAL volume thus leveraging the discounted Intra-Asia business to great effect.

Any dedicated operator (as some of the traditional Intra-Asia shipping companies will tell you) can never recover the cost of normal operations against such network economics.

Next come feeder (about 15% of Intra-Asia volumes) and the quasi feeder operations. The latter comprises about 55% of dedicated Intra-Asia services. These are services deployed for combined Intra-Asia trade and MLO network purposes. The feeder and quasi feeder operations work on the same discounted cost basis.

The only reason for existence of 3rd party feeder operators is that they can do it cheaper than the main line operators despite the latter counting on their own sunk cost. How can the 3rd party operators survive? In most cases it comes down to lower asset and capital costs - for as long as it lasts.

In other words on a net, net basis a relatively large part of the major Intra-Asia trades are served based on dedicated shipping services to their operational scope without any hope of rate or cost differentiation against the main line operators' network economics. They cannot bring specific financial value to the table that can support a dedicated operation. And they die – and get reborn – regularly.

Overall Intra-Asia has a negative profit pool due to the sunk cost approach by main line operators. That's a great trade facilitator and may continue to support rapid volume expansion of Intra-Asia container volumes.

But where's the money for the shipping investors?

There's a lot of money available in this profit pool. If one knows where to look. There are several niche opportunities as well as classic arbitration windows available.

The niches are fairly obvious, especially within the Refrigerated foodstuff area. This is becoming an interesting niche because of slow steaming by main line operators. Certain products, like bananas, are highly transit-time sensitive and need fast, reliable transport. The arbitrage opportunities are however an even more interesting and growth opportunity generating.

The Intra-Asia trade to a large extent is an outgrowth of the coastal economic development within Asia. Part of the success of Asia is that logistics costs were always low. This is no more a given. Redistribution within Asia is becoming more costly, though sea represents the cheaper option and contributes to reducing costs. Just think of haulage cost in Japan to outlier areas. Or Taiwan, Korea cost for trucking to other consumer areas. And/ but... China is now joining the game.

The Intra-Asia trade regionally is essentially similar to domestic haulage in the US and Europe.

There are no major green issues yet except Japan, where basic economics already make it very compelling to distribute to say Southern Japan via China by ship rather than paying huge costs over road and ferry via Tokyo or Kobe. In other words, use shipping to avoid domestic land based transport.

Intra-Asia will continue to provide growing opportunities for transport arbitrage opportunities, for new entrants. And Intra-Asia transport costs will continue to remain low based on intelligent MLOs going beyond normal yield management to leverage their network for ever better marginal cost throughout their global operations.

For both types of operators Intra-Asia will continue to expand in value.

For new entrants the advice is that deep understanding of their market of choice will make the difference between survival and quick demise.

Author: Niels K Balling / Publisher: SCMO

How Inflation Hits Asia’s Traders

Reproduced from a 2008 article published in the <em>Far Eastern Economic Review</em> <em>(now deceased</em>) — Reproduced by courtesy of <em>Charles De Trenck</em> — At the time, Mr. De Trenck was head of Asia transport research at Citigroup and had been following shipping since the mid-1990s.

A piece I wrote for the <em>Far Eastern Economic Review</em> last year (“Shattering Shipping Myths,” June 2007) might have seemed overly pessimistic at the time. I sketched out a scenario where demand for manufactured goods from Asia and China fell off steeply as a result of a property bust in the United States, as food andenergy costs rose further. Events have unfolded faster than I expected, largely because shipping demand in Europe slowed quickly and there was a sharp decline in U.S. inbound volume. The one bright spot has been a healthy rebound in U.S. exports.

Shipping, as ever, is a window into global trade and the global economy. Looking deeper into the global container industry can today elicit a better understanding of shifting trade patterns, rising production costs and declining consumer demand. And in comprehending the current slowdown in Asian exports and in global trade in general, we should now be looking at the slackening pace of economic activity and its impact in terms of how far along we are on the downward slope, and more importantly, how might growth trajectories shift us further down or back up.

Right now, we should be close — a matter of months perhaps — to a bottom in terms of export deceleration from Asia to the U.S. As for the European side of the equation, we are perhaps another six to 12 months away from a bottoming of export growth rates. Yet there are likely to be some notable differences from previous downturns. In?ation — coming after a long period of low interest rates — combined with China and commodity booms and a shifting role for the dollarare all part of this potent cocktail.

Using the economic slowdowns of the 1970s and 1980s for comparison is not straightforward given that global supply chains for manufactured goods were still relatively embryonic back then. Even so there is much to learn from what happened to bulk and tankers after the 1970s boom. What we should try to track is the difference between trade growth by volume and value, focusing on the ?ows of manufactured goods. Today, containerized trade transports far higher amounts of high-tech goods, as well as steel parts and agricultural commodities than was the case 20 years ago. With container trade tracking, we can look at both container port performances and vessel transport growth in order to better triangulate patterns.

China’s container port volume growth is slowing more than nominal trade statistics indicate. Total port volumes grew 17% in May and 15% in April, this level representing a signi?cant slowdown from the 23% levels one year ago. Shanghai, Shenzhen, Hong Kong and Qingdao have all seen overall volumes signi?cantlybelow the current average. Trade export values in dollars grew 28% in May and 22% in April (versus averages of around 28% one year ago). The difference represents a decline of about four percentage points.

China container ports have seen volume growth rates shift down from percentages in the mid-20s range to percentages in the mid to high-teens (when we exclude Hong Kong), representing a decline of about seven percentage points. The change in differential is at least a few percent, with the issue of the yuan only indirectly related. When we adjust to include Hong Kong in the calculation,  which we must do at some stage given that Hong Kong still handles substantial chunks of China trade, up to 10 percentage points of growth are lost in the differential between value and volume.

Since 2007, trade volumes on container ships out of Asia have slowed to low single digit growth, but the value of trade relative to the volume of trade — the rise of prices in the system — has shifted up. The Asia export value data taken against container export volume growth, shows a distinct pattern: The value of goods’ exports is increasing faster than the volume of goods. The China export data, which of course represents the single largest component of Asia exports, shows the trend even more clearly.

The China trade and Asia container data for May give a clear warning that the value-volume differential is growing rapidly in 2008. This is starting to look a little like inflation with Chinese characteristics — which takes us back to the potent in?ation cocktail of low real rates and high commodities prices brewing in recent years.

That China volume growth would slow down somewhat was expected. And yet everyone has continued to think of China as the world’s workshop for cheap goods without realizing that volumes can lose out to higher prices. China’s input costs have shot up as have transport costs, of which one-third are fuel costs, while developed country demandin volume terms is shifting down more rapidly than can be seen using conventional terms such as store sales. Could it be that in?ation as glossed over with cpi-adjusted statistics is the wrong measure to use? Our tracking of the value-to-volume gap tells us instinctively this has been one of the built-in problems in tracking trade for years. It did not matter when volumes and values were similar. But it matters now.

The markets recently learned the U.S. consumer has shifted down demand, especially in volume terms. No doubt the U.S. consumer will stage rebounds in demand, especially if oil prices come back below some magic number such as $100. But what if the American consumer is forced to dispense with his or her disposable consumer society behavior for a couple more years because the pocketbook has shrunk and goods are structurally higher in price?

Inflation that has progressed from commodities to ?nished goods — higher steel prices to higher ship prices, to higher prices of Chinese goods — should work in reverse once demand slows. But not before bringing down average volume demand growth rates further. Until 2007, long-term growth of volumes from Asia to the U.S. was about 10%, with 2007 itself already coming at zero. The current run rate for 2008 is looking to be minus 2% if we stop decelerating in the ?rst half of 2008. To put that in perspective, long-term global containerized trade has runningaround 9% to 10% , with the U.S. driving the largest portion of that growth until 2006 and 2007, and Europe taking over in 2007.

Now the picture we are getting in 2008 is worse than expected in volume terms. Into the U.S., growth not only has slowed into ?at or negative year-on-year growth for a few months, but we are now down for the last 12 months on average. We have to go back to 1995 and 1996 to ?nd the same kind of volume slowdown. And Europe inbound container volume, which has seen long-term growth closer to 15% and about 19% in 2007, has also decelerated rapidly and is now running at the 10% level in 2008, and even that level is thanks to some continued pocketsof strength in the newer markets of Eastern Europe. The areas of weakness encompass most of old Europe.

To make matters worse, new ships are increasing the supply of shipping capacity. Demand in volume terms has decelerated about 10 percentage points on the key Asia-export trade lanes, while the more expensive recently ordered ships (regardless of operation speeds) will only be coming on line faster in the coming two to three years.

In?ation is still on the rise. Input, production and transport costs have all gone up. The question is when and how prices might fall as excess capacity forces shippers to compete for scarce customers. For the moment, we can’t assume cost pressures will ease soon. Thus we can’t assume demand volumes are finished declining — though we can speculate as to a potential deceleration in declines. As demand declines, there will be great opportunities to lower transport costs, and also to identify investment opportunities once lower growth gets priced in. But Asia needs to face the fact the run rate of demand is shifting down and that we don’t know just yet how this story will end.

Author: Charles De Trenck / Publisher: SCMO