Cablegate: Singapore Shipping Woes Reflect Global Slowdown

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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #1319/01 3530856
ZNR UUUUU ZZH
R 180856Z DEC 08
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 6155
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RULSDMK/MARITIME ADMIN WASHINGTON DC

UNCLAS SECTION 01 OF 03 SINGAPORE 001319

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E.O. 12958: N/A
TAGS: ECON ETRD EWWT SN

SUBJECT: SINGAPORE SHIPPING WOES REFLECT GLOBAL SLOWDOWN

1. (SBU) Summary: As a bellwether of global trade, Singapore's
shipping companies and ports are being hit hard by the global demand
slowdown. Trade flows have dropped in nearly every market, but
Europe and U.S. routes have seen particular declines. Intra-Asia
trade has held up better than other markets this year, but has
fallen off in recent months as well. The decline in trade has
driven freight rates to rock bottom prices, just as substantial new
additional freight capacity is coming online, none of which is
needed. Shipping companies are cutting routes and idling ships to
conserve cash, but industry expects at least one major shipper will
go under before the crisis is over. Singapore's port is still
anticipating positive growth in container traffic for the year, but
looking at a decline in 2009 for the first time in years. End
Summary.

2. (SBU) Singapore shippers are struggling with an unprecedented
drop-off in ocean freight, as the global financial crisis has dealt
a sharp blow to consumer demand for imported products. Ron Widdows,
CEO of Singapore-based Neptune Orient Lines (NOL), told Econoff that
patterns in sea trade were changing faster and more dramatically
than he had seen in his 40 years in the business. Global supply
chains are seizing up, from raw materials in developing countries to
final product delivery in developed countries. Although the
shipping industry has always been cyclical, Widdows said there was
now a transformational change taking place; trade patterns that
usually moved glacially were changing in weeks. Shippers are
bracing for a deep and prolonged downturn.

Routes cut as trade plunges
---------------------------

3. (SBU) Shippers are seeing a serious slowing in trade worldwide,
but particularly to E.U. and U.S. markets. Widdows said container
traffic had begun to slow to Europe in late 2007 and to the United
States early in 2008. However, for the U.S. market at least,
shippers had still been doing a healthy business earlier in the
year, booking full ships 6-8 weeks in advance. Overall volumes for
NOL's container unit, American President Lines (APL), were up 10
percent through the third quarter of 2008 compared to last year.
However, in October container volumes dropped almost overnight,
Widdows said. NOL's volumes were down 12 percent in November
compared to the same month in 2007. Shippers are now estimating a
10-percent contraction in shipping to the United States for the
year. NOL estimates Asia-Europe trade will be a negative two
percent, not as low as the U.S. market, but far short of the
double-digit increases that had been expected and therefore a
relatively heavier blow to shippers.

4. (SBU) Widdows said intra-Asia trade, including the Middle East,
would still show positive growth for the year. Growing domestic
demand in China and India has helped to cushion some of the blow
from declines in the larger markets, but too little to offset the
losses from other markets. Much of intra-Asia trade is in
intermediate products whose final destination will be markets in the
United States, EU or Japan, which is now falling as well as those
markets contract. Widdows said that trade with the Middle East is
still strong as additional apparel production is moving into the
area, with particular strength in Egypt, Jordan and Turkey. Within
East Asia, Bangladesh and Vietnam have seen continued increases in
container traffic as some manufacturing shifts out of China.
Widdows noted that trade with Latin America is still steady, with
food shipments in refrigerated containers growing strongly.

5. (SBU) In reaction to the demand slowdown, APL announced in
October it was cutting routes and reducing capacity on its
Asia-Europe trade by 25 percent and its transpacific trade by 20
percent. APL also cut one intra-Asia route. In November, Maersk
Line, the world's biggest ocean container carrier, cut an
Asia-Europe service, reducing capacity by 10 percent along that
route, and made further changes to its other service networks.
Japanese shipper NYK Line also cut its Asia-Europe capacity by 10
percent.

6. (SBU) To reduce capacity, shippers are "laying up" ships,
dropping anchor and staying idle in port. NOL plans to lay up 20-25
container ships by mid-2009 out of a total 130 ships. Maersk
announced in December it had laid up eight container ships, each
with the capacity to carry 6,500 containers, or twenty-foot
equivalent units (TEU). During the shipping slump that followed the
2001 recession, ships with a total capacity of 180,000 TEUs were
idled, representing approximately 3.2 percent of the fleet; in
Widdows' estimate, in the current crisis approximately 1.7 million
TEUs worth of capacity will need to be idled. Local analysts joke
that soon it will be possible to walk to Indonesia across the decks
of all the ships laid up in the Singapore port.

SINGAPORE 00001319 002 OF 003

7. (SBU) Singapore's port is a prime location to lay up ships as
technical and management staff are nearby, as are repair facilities.
Singapore-based Pacific International Lines said it was not
planning to lay up ships, but would take advantage of the slowdown
to send some carriers into Singapore's drydocks for repairs. APL
said its 14 U.S.-flagged and U.S.-crewed ships used to ferry
military equipment to U.S. forces in Iraq and Afghanistan would not
be among the ships it is laying up. Military shipping remains one
of APL's core industries and is one of its few markets that remains
healthy.

Too many ships, too little freight
----------------------------------

8. (SBU) Shipping's struggle with the contraction in trade volumes
has been compounded by a steep decline in freight rates as ships
chase the remaining trade. The Baltic Dry Index, a measure of dry
bulk cargo rates, has cratered, dropping approximately 94 percent
since its high in May. Container freight rates from Asia to the
U.S. West Coast have dropped from US$1700 to US$1300 for a 40-foot
unit. Base freight rates on Europe-bound routes have dropped by 80
percent to only US$250 to US$300 for a 20-foot container. NOL said
that numerous shipping lines are transporting containers to Europe
for essentially no cost, charging only for fuel and terminal
handling charges just to keep operating. The recent drop in fuel
prices has helped offset some of the drop in freight rates, but fuel
cost is a relatively small part of overall costs for container
shipment.

9. (SBU) Industry attributes the sharp drop in freight rates partly
to the slowdown in trade and concomitant competition for the
remaining business, but also due to overcapacity in ships. Shippers
that had come to expect double-digit annual increases in container
traffic had planned purchases of new ships accordingly. NOL
estimates that approximately one million TEUs of ship capacity came
on line in 2008, with another 5.7 million TEU capacity scheduled for
delivery in the next three years. Altogether the extra capacity
scheduled is equal to approximately 60 percent of the current total
capacity of container shipping. Transportation financers DVB Bank
estimate orders for dry bulk ships stand at 72 percent of the
existing fleet.

10. (SBU) Virtually none of the extra capacity is needed, and the
oversupply will continue to depress freight rates. NOL's Widdows
told Econoff that many of the orders for new ships are not yet
financed and likely only half of what is scheduled for delivery in
2010 will actually be built. However, the 1.7 million TEU capacity
scheduled for 2009 and already being built will be delivered.
Widdows estimated that even with an immediate recovery of trade to
double-digit growth, the oversupply of ship capacity will keep
freight rates at rock bottom prices for the next few years.
Shippers are removing some capacity by scrapping older ships, but
with low prices for steel there is little demand in the scrap
yards.

11. (SBU) Trade financing has also become tighter and put a further
crimp in trade. The evaporation of trust within the credit markets
has meant a greater difficulty in obtaining letters of credit and
other trade financing to complete a trade transaction. Without
advance financing, traders have been unwilling to risk putting goods
on the ocean without certainty a buyer will be on the other side
once it arrives. Singapore exporters say they have not faced
difficulty obtaining financing, but anecdotes abound of cancelled
deliveries in other countries and full containers sitting on docks
waiting for the letters of credit that would allow them to be loaded
onto ships.

Air Cargo Also Plunging
-----------------------

12. (SBU) Air cargo firms have not escaped the slowdown. Singapore
Airlines (SIA) Cargo reported a 12.4-percent contraction in cargo
volumes in November compared to last year, and is cutting capacity
and laying off pilots to adjust. SIA says its cargo load began
dropping off in September in all regions, but particularly in East
Asia and Europe. UPS's local office said caseloads in November had
dropped for the sixth consecutive month. The International Air
Transport Association has forecast that air cargo traffic will drop
five percent in 2009, following a 1.5 percent drop in 2008.

Singapore's Port Still Up, But Traffic Slowing
--------------------------------------------- -

13. (SBU) The Port of Singapore is still shooting for a
five-percent growth in container traffic for the year, but in
November faced its first year-on-year drop in monthly container

SINGAPORE 00001319 003 OF 003

traffic in seven years. The Maritime and Port Authority reported
that 2.29 million TEUs passed through the port in November, down 1.5
percent from the previous year. Mr. LIE Sek Guan, Manager of
Research and Statistics for the Port of Singapore Authority, said
that growth rates had been healthy earlier in the year and the Port
had chalked up ten-percent growth figures for the first three
quarters of 2008. Container traffic to the United States and EU had
been slow since the end of 2007, but Asian traffic has only recently
slowed down. Lie said traffic with Africa and Latin America is
holding steady, but with the decline in commodity prices he expects
those markets to slide as well. Lie predicted negative growth in
the port's container traffic for 2009, a nearly unprecedented
occurrence. Lie noted that even during the Asian Financial Crisis,
global container traffic still grew eight percent.

The Future of Shipping
----------------------

14. (SBU) Shipping analysts expect a consolidation in the shipping
industry as weaker shippers merge with larger players with the deep
pockets to ride out the downturn. NOL's Widdows said the industry's
recovery would require at least one of the larger shipping companies
to go under, although capacity problems would still exist. Widdows
also predicted that the difficulties in the shipping industry could
eventually begin to shorten global supply chains. Although shipping
rates are currently low, congestion in ports is increasing and
deliveries are becoming more uncertain. In the United States, NOL
is seeing greater traffic to the East Coast as importers diversify
away from bringing in shipments solely through the most common West
Coast ports of entry in Los Angeles and Long Beach. In Asia, NOL is
seeing diversification from China to Vietnam and India, and predicts
that manufacturing will shift more to Latin America as well to
shorten supply lines to the United States.
HERBOLD

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