Container Trade Outlook Deteriorating

We do not expect 2008 to be a good year for container shipping. Look for red ink on shipping companies' financial accounts in the third and fourth quarters.

World ocean container trade activity is increasingly reflecting the slowdown in economies other than the already-weak US economy. The deterioration in the economies of some of the developed countries in Europe and Asia has accelerated, causing IHS Global Insight to revise downwards our near-term forecasts of ocean container trade. The downward revision is from already-weak trade volumes forecast for 2008 and 2009. We have been concerned with the growing number of economic indicators for the European Union that point to a greater loss of consumer confidence than had been previously anticipated. Indicators now suggest that the EU is headed towards recession. Industrial production in the Eurozone fell 1.9% in May, according to recent Eurostat data, the sharpest drop since 1992. In Germany, the government is warning that the economy could contract by as much as 1.5%, while both Italy and Greece have seen industrial production slump 6.2%.

Our new forecast reflects downward revisions in the drivers of the traffic on the three east-west trade lanes, namely the transpacific, the transatlantic, and the Far East-Europe trades.

The monthly freight flow forecasts of US ports also reflect the continued weakness in US container imports. The revisions to the forecasts for US trade lanes are minor, reflecting that our prior forecast was mostly in line with developments to date.

We now forecast that US containerized imports will decline 8.2% in 2008, which is slightly more pessimistic than our previous projection of a 7.1% decline. This revision is based mostly on a deteriorating outlook for imports through the Gulf ports. On the positive side, we have increased the 2008 US export growth forecast from 17.7% to 22.6%. Major US export destinations for which we revised our forecasts significantly upwards include Brazil, India, Indonesia, Malaysia, and South Korea. We expect, however, that export expansion will slow in the second half due to the worsening production prospects in Europe and the appreciation of the US dollar.

On the European trade routes, our suspicion in the last forecast that Far East-to-Europe trade was in imminent danger of a sharp drop was confirmed by data released by the Far East Freight Conference (FEFC). The figures supported our pessimism and, despite having been the leading forecaster suggesting that this trade was in decline as early as November 2007, our new, intensive review of conditions has resulted in further revisions to the outlook.

It is clear the European countries are not de-coupled from the US economy, and Europe's consumers have reduced expenditures as a consequence of the housing financial crisis and rising inflation, especially oil and other primary and agricultural commodities. The European Central Bank and the Bank of England, unlike the US Federal Reserve, decided to combat inflation as the worse of the two evils. A slowdown in economic activity was permitted in an attempt to fight inflation. Interest rates have remained relatively high.

In Far East-to-Europe trade, we clearly see a dramatic year-to-date slowdown in growth when compared with 2007.

We believe the annual growth rate will be no more than 2% in 2008, with some further downside risk remaining. For the Mediterranean/Black Sea, trade growth will likely drop to less than 4%. We also believe that 2009 will remain weak, as the recessionary tendencies will be slow to work themselves through towards recovery.

Our forecast for the eastbound trade has remained very similar in aggregate terms to what it was in the June forecast. We have made some changes to individual Far East country figures, however, to reflect the actual volumes being lifted. The growth rates remain relatively weak.

With new container vessel deliveries coming at a time when both the transpacific and the Far East-to-Europe trades are weak, we believe the pressures on freight rates will be downwards if the steamship lines cannot continue to manage their capacity. We have already seen declining spot rates from the Far East, and the normal peak season surcharges are not being brought in due to weak volumes. The ability to add to vessel strings is substantially down from last year, when vessels were shifted from the transpacific to the Far East Europe trade lane, which has now resulted in overcapacity and utilization that has dropped well below the 90% level. At least two steamship lines have shifted capacity into temporary lay-up by skipping a voyage. This is equivalent to a 63-day lay-up.

Paul Bingham is managing director of IHS Global Insight's Trade and Transportation Group.

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