As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

And the global shipping industry is already learning from the storms that ripped through it over the last eighteen months. As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

Although some lines still struggle with high debt, idled ships, and nearly-completed orders for new ships they no longer want, others have used the crisis to shed unwanted subsidiaries, scout for distressed assets and streamline businesses that grew fat in the boom years.

And in general management has used the turmoil to reflect on how best to set sail again. Summing up the attitude of many a storm-weary shipping company management hoping for fairer weather, Akimitsu Ashida, chairman of Japan’s MOL (Mitsui OSK Line), told staff in late April in a spirited call to arms: “I believe that we will not fail to achieve success if we positively address our difficulties and fearlessly meet our challenges. Let us all unite and strive to reach high ground again.”

As global trade slowly recovers, Gianluigi Aponte, chief executive of Mediterranean Shipping, second-largest of the world’s container shipping lines, believes the industry giants will bounce back fastest. “I think that the big operators will all come out very strong, and I think that we will all recover our losses in 2010.”

Pick-up in Europe
Not everybody agrees with so upbeat a forecast. Although the industry is sharply divided over how exactly the rest of the year will work out, the consensus view is that things are definitely looking up. In Europe’s hard-hit container ports, for example, there was a surge in traffic between January and March that not even the optimists predicted.

Singapore-based Neptune Orient Lines, with the fourth-largest container fleet, posted a 60 percent-plus jump in cargo volumes in just the first six weeks over the same month in 2008. As a result it plans to charter another ten ships this year and take ten of its own ships out of mothballs.

In common with others, industry leaders such as Neptune Orient chief executive Ron Widdows attribute the bounce-back to a realisation among retailers and manufacturers alike that it’s time to invest rather than cut back through de-stocking. Thus they are rapidly buying in raw material and products.

Loss-making rates
Whatever the reason, the increase in business has translated rapidly into higher rates. According to industry insiders, the cost to shippers of freighting a 20-foot container from Asia to Europe has more than quadrupled, from $350 to $1,500 after a long period of under-charging to keep fleets afloat. At the lower figure, say sources, most box-carriers were losing money.

For industry leaders such as Widdows, the price hikes have come just in time. Many lines are “no longer burning cash,” he told Bloomberg in an interview in late March. “That’s a wonderful thing compared to last year.”
Another sure sign of the recovery is that companies are putting ships back to work. In just the first quarter of this year, the amount of idle capacity in the container industry fell by 18 percent, according to Paris-based shipping consultancy AXS-Alphaliner.

In beleaguered Greece, battling its public debt crisis, the recovery is particularly good news because of its heavy dependence on shipping. Indeed Navios Maritime Holdings, a company specialising in the acquisition of shipping and logistics assets, has announced it would invest nearly $458m in thirteen ships including product and oil tankers. Main shareholder and chief executive Angeliki Frangou cited “attractive market dynamics” for boosting the fleet.

New orders for Asian yards
Meantime ship-building yards, which in the long run depend on freight volumes for the strength of their order book, are signing new contracts at a rapid rate. In Japan, orders jumped 70 percent in March compared with the same month last year. In 2009 Japan saw a devastating slump in orders to a 17-year low, according to Japan’s Ship Exporters Association.

Similarly China’s yards, which have a disproportionately large share of the more profitable dry-bulk carriers, are claiming a quarter of new orders while South Korea booked a 195 percent jump in newbuilds. Korean giants like Samsung Heavy and Daewoo Shipbuilding are planning for between $8bn-$10bn each in new orders over the full year while rival Hyundai Heavy, which didn’t get one contract in 2009, is already working on a $1.6bn oil platform for Norway. According to the Korean government, its shipbuilders will this year share over half of all new orders of all types of vessels.

The ports were the first sector of the industry to feel the more favourable winds. Shanghai International Port has reported a nearly 40 percent rise in net profits between January and March for its second straight quarter of black ink after a loss-making 2009. The port’s revenue flowed from a 35 percent increase in total cargo. However container traffic – the jewel in the global industry’s crown – rose by only 15.5 percent.

Buoyed by a steady increase in spot prices, a profitable oil and gas industry is doing its bit for shipping’s turnaround. Average shipping rates for a very large crude carrier (VLCC), which can carry over 1.46m barrels, have jumped dramatically. In late April they were running at around $37,500 a day, up from $14,760 in the last three months of 2009.

Repair work needed
The storms have however taken their toll. According to Drewry Shipping Consultants, which covers the global industry, container lines lost about $20bn last year. One of the biggest loss-makers was Denmark’s APM-Maersk, which alone ran up $2.09bn of the total. Other lines such as Hapag-Lloyd, Israel’s Zim and Chile’s CSAV, tenth-biggest container company, required emergency injections of funds.

But every company suffered a battering. China Cosco Holdings’ container fleet reported a 39 percent collapse in sales, pushing the firm to a $1.09bn loss. And Neptune Orient posted losses of $741m, representing an $820m turnaround on 2008. And even that wasn’t a particularly good year because trade slowed in the run-up to the crisis.

As Neptune Orient’s chairman, Cheng Wai Keung, summed it up: “We witnessed a worldwide economic downturn of unprecedented scale.”

The car-carrier sector, which transports new and used vehicles, is another barometer of the industry’s health. In more normal times it is one of the most lucrative businesses but, with US automotive giants GM and Chrysler in taxpayers’ hands and other brands running down existing stocks, the sector fell by a catastrophic 60 percent. Some 100 car-carriers out of a global fleet of 560 vessels were tied up.

To describe the general chaos, MOL chairman Ashida uses a nautical metaphor: “The collapse of Lehman Brothers dramatically slowed our company’s business to one or two knots.”

The ports suffered along with everybody else. Not even the substantial emerging-market business of diversified DP World, the world’s fourth-biggest container terminal operator, could protect it from the storm. Last year it posted a 30 percent fall in profits, down to $370m.

Slow ships
The industry generally gets high marks for being quick to take evasive action when the storms hit. Most companies laid up ships as soon as they could. Others invested in IT systems to handle the ocean-going fleets more cost-effectively. As cargo volumes plummeted, ships deemed surplus to requirements were scrapped and charter vessels returned to their owners.

And many container lines literally slowed down their ships to cut fuel costs in what is known as slow steaming. According to shipping consultancy Det Norske Veritas, which measures the sea-worthiness of ships, even a ten percent reduction in speed can cut fuel consumption by up to 30 percent.

That’s why APL, the container division of Neptune Orient, is running three-quarters of its fleet on reduced speeds.

As well as saving fuel, the strategy also has the merit of reducing capacity because there’s more time between loading and unloading. It also keeps ships out of mothballs because extra vessels are required on standard routes to make up for the slower voyage times.

Although it may seem contradictory that the world’s container fleet is on a go-slow while land-based forms of freight transport are speeding up, the benefits are easily measureable. According to Jay Ryu, an analyst at Hong Kong’s Mirae Asset Securities, slow steaming has saved between two percent to three percent of the industry’s current active fleet from being tied up.

And there’s no immediate prospect of ships’ captains calling for full steam ahead. Until and unless volumes grow back to something like their pre-crisis level, much of the world’s container fleet will be crossing the oceans at less than designed speed. As Neptune Orient chief executive Widdows predicts, “Slow-steaming is going to be with us for a very long time.”

Apart from slow boats to China and elsewhere, one of the most successful crisis strategies was implemented by Japan’s MOL. It was already a highly diversified shipping company through what chairman Ashida describes as a “centipede” system of management that gives the business numerous robust divisions – or “legs” – that support each other through hard times.

However MOL is also structured as a sakaro – that is, like a double-ended boat that can go forwards or backwards according to the prevailing conditions. Surely food for students of management in times of turbulence, sakaro strategy is based on a 1300 year-old wartime tactic. In a clever example of foresight, MOL pushed it through the company five years ago when the shipping market was still booming.

Chairman Ashida told divisional managers to put plans in place for hostile weather such as a sharp decline in cargo volume, higher bunker prices, stronger yen or other setbacks beyond the line’s control. When the crisis hit, MOL was quicker off the mark than most, for instance cutting its fleet by ten percent. Thus MOL was the only one of Japan’s big-three shipping companies to post a profit.

However the setback was so severe, the chairman admits, that MOL has run up against the limits of its sakaro strategy and can’t back up any further. The new recovery plan is known as “Gear up! MOL”. Under this, says Ashida, the line will accelerate “from two to ten knots”.

Idle ships
The $20bn question is how robust is the recovery. CC Tung, chairman of Orient Overseas International remains gloomy. Having posted $401m in losses last year, he fears the big risk lies in bringing idle ships, currently accounting for ten percent of the global container fleet, back into service too quickly.

“An imprudent reintroduction of capacity currently idling or laid up, if mismatched to demand, could see fresh rounds of rate cutting,” he warns.

There’s also a number of new ships in the pipeline, which will only serve to increase capacity beyond demand. As Nils Andersen, chief executive of APM-Maersk, explains, recovery all depends on improvement in the US and western European economies. “Until that happens, I think it’s hard to accept the tough time’s over”, he regrets. Meantime he’s allocated substantial funds to buy distressed assets, of which there are plenty. The industry has taken a severe battering across all sectors and repairs will take time. According to Divay Goel, head of Asia operations at consultants Drewry. “The industry may take at least two to three years to recover to pre-crisis levels.”

The worst may be over but the mid-year negotiations over container rates will answer a lot of questions. The annual contracts are settled from May onwards and, among other negotiations, lines are asking for another $800 per 40-feet container on benchmark US west coast routes. If they get that, it really does look like calmer waters.