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Shipping Lines Steer Through a Sea of Losses

Ocean carriers face too much competition in a sluggish global economy. Debt burden from vessel shopping binge adds to trouble.

November 18, 2002|Marla Dickerson | Times Staff Writer

Labor negotiations at the West Coast ports have been a bare-knuckles brawl. But the ocean carriers' worst enemy may be themselves, not 10,500 swaggering dockworkers.

The global shipping industry is in financial straits, thanks in part to a glut of new ships ordered during the economic boom. Freight rates have tumbled. Carriers are bleeding red ink. Yet shipping lines continue to add gigantic vessels to their fleets as part of an arms race to grab market share.

In a year when cargo on the Asia-North America trade lanes has hit record levels, major transpacific carriers are projected to lose a combined $2 billion in 2002. Losses on other global trade routes are mounting as well.

"The state of the industry can be summed up in one word: 'dismal,' " said John Gurrad, vice president of business planning for Mitsui O.S.K. Lines, a Japanese carrier whose net income plunged 60% in the first half of its fiscal year ending in September.

In theory, shipping lines should be riding high on a wave of globalization. Ocean carriers deliver a service so vital to the U.S. and world economies that President Bush stepped in to reopen West Coast ports last month, ending a 10-day management lockout. What's more, steamship companies enjoy an exemption from U.S. antitrust law, which allows them to discuss pricing and set rate targets on their American routes.

But the confederacy of ocean carriers has proven even leakier than the OPEC cartel.

Instead of standing firm on rate hikes and holding the line on new ships, they tend to undercut each other when the going gets tough, industry experts say. Burdened with too much debt and too many players chasing too few shipping containers in a sluggish global economy, the industry is facing troubles that extend well beyond the squabble at the West Coast ports.

"It's not a healthy industry, and it hasn't been for some time," said London-based analyst John Fossey of Drewry Shipping Consultants. "We're looking at a relatively low freight rate environment for at least the next couple of years."

Ocean shipping is a cyclical business that rises and falls with the global economy. Still, many of the industry's troubles are of its own making.

For starters, the world simply has too many carriers. Hundreds of small fry serve niche markets around the globe, with dozens of bigger players duking it out on the major trade routes linking the United States, Asia and Europe. Barriers to entry are low. Competition is fierce. Companies that exit the business rarely take their vessels with them.

"If a steamship line goes belly up, those ships don't sink," said port consultant Peter Vandermat, vice president of Oakland-based JWD Group. "A competitor picks them up for 25 cents on the dollar, paints a different symbol on the stack and on we go. There is just as much capacity as before."

And it's growing. International trade accelerated in the late 1990s, particularly on Pacific routes linking Asia and the United States. Among the factors driving the trend: a booming U.S. economy, China's rise as a manufacturing powerhouse and its neighbors' eagerness to export their way out of the Asian economic crisis.

Giddy over the surging cargo volume and enticed by bargain prices from shipbuilders, ocean carriers rushed to order new vessels. Many of those orders were for leviathan "post-Panamax" ships, so named because they're too wide to fit through the Panama Canal. The largest are capable of carrying upward of 7,000 20-foot shipping containers, known as "20-foot equivalent units" or TEUs in industry parlance.

Bigger ships have helped add to the industry's capacity, which has been growing faster than cargo volume for several years. The disparity only got worse during last year's economic downturn. London-based trade publication Containersation International projects that in 2002 alone, the capacity of the world fleet will grow by nearly 14% to 6.1 million TEUs, while demand has grown only 4%.

"There is a huge supply-and-demand imbalance," said managing editor Matthew Beddow. "They ordered too many ships."

Stormy market conditions sunk South Korean carrier Cho Yang Shipping Co. last year, and industry watchers are predicting more casualties. But consolidation hasn't come as quickly as many had expected.

The United States lost two of its major flagship carriers in the late 1990s. One was Oakland-based APL Ltd., which merged with Singapore-based Neptune Orient Lines. The other was Sea-Land Service Inc. of Charlotte, N.C., which was acquired by Maersk Line, a division of the Danish conglomerate A.P. Moller.

But other countries haven't been so willing to surrender their flags.

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