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Cablegate: Container Shipping Industry Sees Slow Recovery Ahead

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RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0643/01 3240913
ZNR UUUUU ZZH
R 200913Z NOV 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1111
INFO RUEHOO/CHINA POSTS COLLECTIVE 0348
RUEHBJ/AMEMBASSY BEIJING 0887
RUEHGH/AMCONSUL SHANGHAI 0279
RUEHCN/AMCONSUL CHENGDU 0280
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RUEHHK/AMCONSUL HONG KONG 0347
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RUEHLO/AMEMBASSY LONDON 0006
RUEHIN/AIT TAIPEI 0254
RUEAIIA/CIA WASHDC 0328
RUEKJCS/DIA WASHDC 0324
RUCPDOC/DEPT OF COMMERCE WASHDC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0017
RUEATRS/DEPT OF TREASURY WASH DC
RUEKJCS/SECDEF WASHDC 0014

UNCLAS SECTION 01 OF 03 GUANGZHOU 000643

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STATE FOR EAP/CM, INR/EAP, EEB/TRA/OTP AND EEB/TRA/AN
DEPT OF TRANSPORTATION PASS TO SMCDERMOTT, JSZABAT, KGLATZ
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E.O. 12958: N/A
TAGS: ECON ELAB EFIN ETRD EIND PGOV
SUBJECT: Container Shipping Industry Sees Slow Recovery Ahead

Ref A) 08 Beijing 4679, B) Shanghai 111, C) Guangzhou 218, D)
Guangzhou 009

GUANGZHOU 00000643 001.2 OF 003


(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
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1. (U) SUMMARY: The global container shipping industry hit rock
bottom in 2009 and is slowly climbing out of the trough, according
to industry experts attending the 3rd Annual Trans-Pacific Maritime
Asia Conference in Shenzhen in late October. Executives of shipping
lines and major retailers pointed out how falling demand and
overcapacity had contributed to the industry's decline. Experts
provided mixed forecasts on the future of container shipping,
arguing that in order to pull the industry out of the current
crisis, companies must discipline themselves and perhaps even take
drastic measures like bankruptcy and consolidation to ensure the
industry's survival. However, conference participants were
generally optimistic when looking at the future of the China market.
END SUMMARY.

---------------------
An Industry in Crisis
---------------------

2. (SBU) "Shipping has never seen a crisis like this before," said
Electrolux executive Bjorn Jensen, one of the keynote speakers at
the 3rd Annual Trans-Pacific Maritime Asia Conference. The world's
top 18 carriers have incurred collective losses in the first half of
2009 of US$8.6 billion. As an industry, the carriers will lose over
US$20 billion in 2009, he forecasted. Neil Dekker of Drewry, a
major shipping consulting firm, commented that freight rates
globally had hit record lows as both spot and contract rates
experienced large declines. Assessing the Asia-U.S. market, he
reported that the first and second quarters of 2009 had seen
year-on-year volume declines of 20% and 18%, respectively. Hong
Kong to Los Angeles spot market rates fell 29.2% year-on-year, while
Hong Kong to New York-New Jersey rates dropped 32.0% year-on-year.
There was no peak season to speak of in 2009, said Dekker, despite
expectations for "improved" performance for the second half of the
year. For the Asia- Europe market, there has been some demand
recovery since mid-July. However, some of this is attributable to
inventory recovery in European warehouses, suggesting that the trend
is only temporary.

3. (SBU) The Pacific route has been hit particularly hard, said
Maersk Shipping executive Eddie Derlich in a separate meeting with
ConGenOff held before the conference. Besides volumes being at an
all-time low, rates on the Pacific route were down 35% over the last
year and a half. He disclosed that Maersk had lost as much as
US$500 million in the first three quarters of 2009, and added that
smaller companies are likely facing a much worse situation.

-------------------------
Overcapacity Here to Stay
-------------------------

4. (SBU) One of the biggest challenges facing the shipping industry
is overcapacity. Ten percent of the global fleet sits idle, said
C.L. Ting of Orient Overseas Container Line (OOCL) during his
presentation, and more ships are scheduled for delivery over the
next five years. Carriers have begun taking steps to modify the
over-supply problem, according to Drewry's Dekker. Because it is
technically very difficult to cancel a shipbuilding order, there
have been relatively few cancellations so far, he said. However,
companies are negotiating delayed deliveries and order conversions.
For example, Israeli-based shipping company ZIM negotiated the delay
of nine 12,600 TEU (twenty-foot equivalent unit) new builds to
2012-2015. Chilean liner CSAV reportedly converted an order for
four 12,500 TEU vessels into five 8,000 TEU ones. Dekker predicted

GUANGZHOU 00000643 002.2 OF 003


that approximately 40% of vessel orders would be delayed, and about
22.5% of the orders may be cancelled, expecting cancellations to
increase in 2010-2011.

5. (SBU) While ship lay ups are an alternative, Dekker argued that
any lay ups would only be temporary and would not remove the
capacity from the long-term supply. Dekker said that a more viable
option was vessel scrapping, which would relieve overcapacity
somewhat. Shipping lines Evergreen and Mediterranean Shipping
Company (MSC) have committed to major scrapping programs, said
Dekker, who estimated that global scrapping of 316,000 TEU for this
year will take out 2% of overall capacity based on the current
fleet. He concluded that the new build market is dead and will
remain so for the next few years. In sum, Dekker said that the
massive capacity overburden on the shipping industry is here to
stay, and adjustment efforts can only "ease the pain" for carriers.
Furthermore, because of this overcapacity, freight rates will remain
low even if the market does come back, explained another shipping
executive.

-----------------------------
Analysts Give Mixed Forecasts
-----------------------------

6. (SBU) Industry analysts offered mixed forecasts about the future
of container shipping. Neil Dekker's 2010 forecast warned that any
volume increase was likely to be mild and any increase in rates
would likely force volume to decrease. Although volume has bottomed
out, the recovery will likely be slow and intermittent. Freight
rates will move up from record lows, but not enough for carriers to
break even, said Dekker. Overcapacity will be a lingering problem
until 2014 despite capacity adjustments and anticipated continued
economic recovery.

7. (SBU) Tom Kim of Goldman Sachs, on the other hand, provided a
more optimistic prediction. He argued that current signs of an
economic recovery are good news for the shipping industry. With the
recent surge in Asia-Europe spot rates and trans-Pacific rates
recovering, Kim is optimistic that margins and returns will revert
to levels prior to the economic downturn by 2011, assuming rates are
sustainable.

--------------------------
Need Discipline to Survive
--------------------------

8. (SBU) Many of the speakers at the conference agreed that the
container shipping industry must discipline itself if it wants to
emerge from the current crisis in one piece. Both OOCL's Ting and
Al Benki of OHL, a U.S. logistics provider, emphasized that liners
must change their mindset about market share and find new strategies
to survive. Ting added that it is critical that carriers need to
better manage capacity to avoid further exacerbating the current
over supply of idle ships. The industry will take a few years to
reach equilibrium, he said.

9. (SBU) A number of carriers incurred never-seen-before losses
during the economic downturn, and yet nobody has gone bankrupt,
according to Electrolux's Bjorn Jensen in his keynote address.
Others at the conference supported Jensen's view that bankruptcies
would be necessary to the industry's recovery. Several speakers
commented that shareholders and governments cannot continue bailing
out companies and that an actual failure of a major line might send
out the best message to the market.

----------------------
Optimistic about China
----------------------

10. (SBU) Despite some of the pessimism surrounding the future of
global container shipping, participants at the conference were

GUANGZHOU 00000643 003.2 OF 003


optimistic about the China market. Agility CEO for Greater China
James Gange pointed to steady growth in China's transport and
logistics market and China's third-party logistics (3PL) market as
reasons for his confidence. With more Chinese companies going
global and the central government's large investment in development
projects in the western regions and plans to increase domestic
demand, he believes that there is great potential in China. Goldman
Sach's Tom Kim also looked favorably upon the China market, saying
that there are many opportunities with Chinese consumers and
companies. Showing that China's exports have historically trended
with the country's electricity production and coal consumption,
which have surged recently, Kim predicted that exports are on a
recovery path, a forecast welcomed by many at the conference.


GOLDBECK

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