Shipping industry drowning in financial woes

Until not too long ago, shipping was both the greatest beneficiary and hammering pulse of globalization, moving goods around the world at an ever-increasing pace. The industry has been growing rapidly from year to year, ever since China became the world's factory. In 2008, roughly 500 million standard containers (TEU) were transported on the world's oceans -- twice as many as at the turn of the millennium. Year after year, new and ever more enormous ships were built, ports were expanded and new scheduled service introduced. The cargo capacity of the world's combined container fleet increased from 4 million TEUs in 2000 to 12.5 million today. Many became rich in the boom years, including ship owners, bankers and investors, particularly in Hamburg. In the last decade, the northern German port city became the world's leading center for the financing and operation of new ships. Germans own 35 percent of the container ships in operation worldwide, and close to 60 shipping banks and financiers are headquartered in Hamburg. Hamburg-based Hapag-Lloyd became one of the world's leading shipping line operators.

But now the global financial and economic crisis has stifled the boom in container shipping, and it has happened almost overnight. For the first time in its history, the industry has stopped growing and, in fact, is shrinking. In the first six months of this year alone, the shipping industry declined by close to 16 percent.

The new giant ships are now much too big for the cargos they transport by sea, and often they sail half-empty -- if at all. Billions are being spent to expand ports to handle a boom that no longer exists. Leading shipping line operators are on the verge of bankruptcy, as are shipping banks and charter shipping companies. The industry, once one of the biggest beneficiaries of globalization, now threatens to turn into one of its chief casualties.

This sense of panic is more palpable in Hamburg than almost anywhere else in the world.

Half empty containers

Hapag-Lloyd, consistently recognized in the industry as probably the most efficient among the major shipping line operators, is struggling to fend off bankruptcy. Its case has attracted the nervous attention of ship owners, banks and shipping company executives around the world. If a company like Hapag-Lloyd can't survive, they are asking themselves, who will be the next victim? Although the shipping industry has always gone through cycles, shipping companies now believe that things have changed drastically, and for the worse. "There was never a shortage of cargo in the past," says Ulrich Kranich, the executive board member in charge of global operations. But that's no longer the case today. Because of declines in consumption in the West and production in the East, the global container fleet's enormous cargo capacity can no longer be filled.

Efforts by shipping companies to raise prices have been as desperate as they have been ineffectual. Higher rates have little effect on consumers and producers, because the costs of maritime transport hardly enter into the calculation. It costs $10 to ship a TV set from Asia to Europe, while shipping a vacuum cleaner costs $1 and a bottle of beer 1¢.

The invention of the container made such prices possible in the first place. Nothing has advanced globalization more since the mid-1980s than the boom in these steel boxes. China's rise to global economic power would be inconceivable without containers. In fact, shipping costs are so low today that it is even worthwhile to ship Spanish tomatoes to China for processing into tomato paste, which is then shipped back to Europe.

Fatal domino effect

In the current financial crisis, financially strong shipping companies are fueling the price war even further to gain market share. Hapag-Lloyd appears to have been hit by the biggest crisis in shipping at the worst possible time. Because it was forced to transfer its substantial profits from previous years to its ailing parent company TUI, the Hamburg shipping company was barely able to build any reserves. To help shepherd Germany's leading shipping company through the crisis, the government is now being asked to provide a loan guarantee for up to €1 billion. In principle, the container business is still considered to be extremely profitable. Hapag-Lloyd is also getting rid of ships it leases. Other shipping companies are pursuing the same strategy.

Roughly 1,644 of the 4,619 container ships worldwide are German-owned. Largely unnoticed by the public, about a dozen Hamburg shipping companies, together with Hamburg banks and investment funds, became the world's leading force in the financing and construction of new container ships during the boom years. But instead of operating their own shipping lines, they have chartered out the vessels, often with crews included.

A fatal domino effect now threatens to strike the industry. The shipping line operators can no longer pay for their chartered ships, while the owners of the chartered ships and shipping funds can no longer afford to service their debts to the banks. Many of the banks, in turn, are also in trouble.

In for the long-haul

But the real problems are still ahead for German shipping companies. The 1,550 new ships that were on order in mid-2008 are to be delivered in the next few years. The major Asian shipyards are unwilling to accept cancellations. To reduce loading capacity, ships are already being decommissioned today, and they now lie at anchor, unused, in ports, estuaries and bays around the world. Experts at Drewry estimate that it will take until 2012 before container turnover returns to 2008 levels. As many other ports, Hamburg also has a €750 million expansion program in the works. For years, the city had Europe's fastest-growing port, with turnover tripling within 10 years to almost 10 million containers, and port officials had even predicted that number to increase to 20 million by 2015. But now no one believes those forecasts will materialize. In fact, turnover declined by 25 percent in the first quarter of 2009, and Hamburg's original expansion plans have now been put on hold. "And why, after all," says a Hamburg shipping manager, "should billions be spent for ships that may never arrive?"