HONG KONG: Marine freight rates staged a strong rally over the past quarter, raising hopes that the shipping sector is no longer foundering and floundering. But some operators and analysts believe the sector has yet to recover from the broadside hit it took from last year's financial tsunami.

Seasonal demand ahead of the Christmas and New Year holiday season as well as restocking of inventories drained during the global downturn has triggered a sharp rebound in container freight rates over the past three months.

"We have successfully raised our freight rates in most routes, with rates for the Asia-America route rising by as much as 400-500 US dollars per twenty-foot equivalent unit (TEU) as demand significantly rose in July and August," Zhang Yong-jian, Secretary of the board of China Cosco Holdings Co Ltd, told reporters last week at a briefing for the operational update of the country's biggest container carrier.

The shipper's freight rates for the Asia-America route have risen to around US$1,100 to US$1,200 per TEU from a low of around US$700 earlier this year, he revealed.

Meanwhile, a surge in raw material imports by mainland China after Beijing launched its 4 trillion yuan stimulus package has also prompted a strong rally in dry bulk freight rates over the past several months.

The Baltic Dry Index (BDI), the main gauge that measures marine transportation costs for moving commodities globally, bounced to a high of nearly 4,300 in June from a low of around 700 early this year before tapering off to around 2,200 currently.

The strong rally in freight rates has boosted investors' sentiment about the shipping sector, with aggressive bargain hunting and speculative buying pushing many locally-listed shipping shares sharply higher in the past few months.

However, shipping line operators and market watchers are generally less optimistic about the short- to medium-term prospects for the sector, as the fundamental problem - an oversupply of shipping capacity - still very much exists.

"We still see a challenging operating environment in the second half this year, as the capacity glut is still quite significant," China Cosco's Zhang said of the container shipping sector.

Key marine consulting firms have repeatedly revised downwards their forecasts for global container volume this year.

For example, independent marine adviser Drewry Shipping Consultants projected in its latest research report that global container volume will shrink by 10.3 percent this year after sustaining about 10 percent growth for around six years before the onset of the global financial crisis last year.

To make things worse, global container shipping capacity is projected to grow 10 percent this year, despite the fact that many operators have deferred the delivery of their ship orders for this year to dates beyond 2010.

Neither the operating environment for dry bulk carriers is any better. Demand for dry bulk shipping capacity is expected to post zero growth this year after sustaining single-digit growth for the past several years, while capacity is projected to extend its single-digit pace of growth.

"The sector has been cyclical for the past twenty years, with operators always placing their orders for new ships during the boom phase of every cycle," Kevin Yim, a shipping-sector analyst at Dao Heng Securities Ltd, explained to China Daily.

It usually takes several years for new orders to be delivered. Many new ships ordered during the sector boom in the past several years are now due for delivery, he continued.

"It happens that the latest peak for deliveries coincided with the global downturn, aggravating the slump in freight rates (late last year and early this year)," he said.

And it doesn't stop there. The oversupply problem will very likely stretch over the next several years, marine experts warn.

The order book scheduled for delivery by 2013 is the largest in shipbuilding history, Drewry estimates in its latest annual review for the global shipbuilding industry.

According to Drewry's projection, the new building requirement to satisfy incremental increases in ship demand and the need to replace scrapped ships to 2013 will amount to 97 million compensated gross tons (CGT), while the current order book and scheduled deliveries for this period are double that amount.

"Unless immediate steps are taken to reduce net increases in fleet supply over the next five years, certain sectors face over tonnaging, leading to lower freight rates, increased vessel lay-up and bankruptcy among ship owners," the marine adviser warned.

Rating agency Moody's has warned recently that bank foreclosures look likely in six to 12 months as financially troubled ship owners lurch closer to insolvency.

The firm particularly pointed out that it does not expect Asia Pacific container carriers to fully recover until 2012 because of excess capacity as well as slack demand due to reduced exports from Asia to Europe and America.

However, every cloud has a silver lining. In a positive development in the sector, shipping line operators are now less preoccupied with gaining market share.

China Cosco, for one, has cancelled orders for eight vessels in the first half and may cancel more orders or defer the delivery of others in the second half.

Operators are currently more amenable to the idea of scaling back services through laying up more vessels or scrapping more old ships to tackle the capacity glut, Dao Heng Securities' Yim said.

"I am not too worried about the prospect for the sector, as I believe the market can adjust itself," he said.

The oversupply problem may hopefully be solved through a combination of measures that include outright cancellation, agreed delay in deliveries, order deferment and increased scrapping, he said.

However, given the large capacity glut, it will take great efforts by ship owners, shipyards and financiers to work together to tackle the problem.

(HK Edition 10/07/2009 page4)