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U.S.-bound boxes piling up in Asia as shipping lines avoid adding ships

U.S.-bound boxes piling up in Asia
as shipping lines avoid adding ships

South Korea's biggest port, overwhelmed with empty containers a year ago, is now dealing with shipping lines that have more cargo than they can carry.
Surging shipments of furniture, electronics and clothes to the U.S. and Europe, coupled with capacity cuts by shipping lines, has caused as much as 15 percent of containers to be delayed in Busan this year, often by more than a week, according to Park Jong Ho, assistant general manager at Busan International Container Terminal Co.
"With the economy recovering, we have been seeing a lot of containers that didn't make it out on time because there wasn't enough space on ships," he said.
A capacity crunch on transpacific routes has disrupted deliveries of Asian and U.S. exports, prompting a probe by U.S. regulators. Container lines have cut trips and imposed higher rates on customers, or shippers, after slumping trade and an excess supply of vessels caused industrywide losses of about US$20 billion last year, according to Drewry Shipping Consultants Ltd.
"There is seething anger in the shipper community over the way rates have been raised," said Bjorn Van Jensen, who manages more than 100,000 container shipments a year as logistics head at appliance-maker Electrolux AB.
"Carriers see a tight supply situation and they are looking to get rates back up."
Container traffic
Container shipments at Busan, the world's fifth-busiest port, rose 21 percent in the first two months, rebounding from the slump last year that forced Park to lease extra space to help store more than 31,000 empty boxes. In the U.S., retail container traffic will likely rise 13 percent this month and by 17 percent in the first half as shops restock, according to the Washington-based National Retail Federation.
That's caused rates for ad hoc shipments on Asia-U.S. routes to jump about 50 percent this year to around US$2,100 per forty-foot box, according to Johnson Leung, a Hong Kong-based analyst at Tufton Oceanic Ltd., the world's largest shipping hedge-fund group.
"The volume is surprisingly high," he said. "Still, rates were at low levels at the beginning of this year, and shipping lines have to increase them to break even."
U.S. customers have also contributed to the disruptions and higher rates by cutting inventories to two-year lows and placing more rush orders on concerns about holding stock.
"The trend now is that orders are always made from Europe and the U.S. very rapidly and at the very last minute," said Ken Lee, a general manager in the sea-freight unit at Hong Kong- based Vinflair Shipping Ltd.
The U.S. Federal Maritime Commission last month began a "fact-finding investigation" into shipping capacity because of U.S. importers and exporters' struggles to find space.
Temporary trend
Lines haven't added more vessels on transpacific routes, citing concerns about the sustainability of demand. The jobless rate in the U.S. remains near 10 percent. Building permits, a sign of future construction, also fell 1.6 percent last month after a 4.7 percent drop in January.
"We have seen no reason to add extra ships as the trend is temporary," said A.P. Moeller-Maersk A/S CEO Nils Smedegaard Andersen. "With the problems this industry has had, I think we're all be very cautious before sending new ships into service."
Maersk expects a "modest" 2010 profit following its first loss in six decades last year. Industrywide, container lines may pare loses to about US$7 billion this year, according to Drewry.
Annual contracts
The surge in shipments coincides with annual contract negotiations between lines and customers. Maersk and Mediterranean Shipping Co., the world's two largest container lines, and 13 others are seeking an extra US$800 per cargo box on Asia-U.S. west coast routes. That's about a 50 percent increase, according to Leung.
"If we can get an agreement for that kind of rate increase, then a lot of the shipping companies will become profitable," said Kim Young Min, chief executive officer of Hanjin Shipping Co. and chairman of the Transpacific Stabilization Agreement, or TSA, whose 15 members carry almost 90 percent of Asia-U.S. boxes.
Lines in the group, which has limited U.S. antitrust protection, are already imposing a US$400 per container "emergency revenue charge" to pare losses on contracts agreed last year during the worst of the trade slump. Rates fell by as much as half in those deals, according to the TSA. The charge will be discontinued when the new contracts start around May.
Hardened gamblers
Customers have to accept additional levies or lines won't carry their cargo, Stockholm-based Electrolux's Jensen said. That's causing "enormous uncertainty" as shippers don't know whether additional levies will follow, he said.
"I don't know anybody who thrives on this kind of volatility except hardened gamblers," he said. Even so, "shippers understand that rates have to come back up" as the lines' losses are unsustainable, he said.
New ship deliveries may disrupt lines' efforts to raise rates this year as shipyards hand over vessels ordered before the trade slump began. Shipbuilders hold container-vessel orders with a combined capacity equal to about 33 percent of the existing global fleet, according to data compiled by Bloomberg.
"New capacity entering service this year could weigh on rates," said Jay Ryu, a Hong Kong-based analyst at Mirae Asset Securities Co. "This isn't really a recovery because lines have reduced capacity and manipulated the market."
Amid last year's slump, lines mothballed more than 500 ships worldwide to pare capacity. They also began operating vessels at slower speeds, which cuts fuel usage and reduces the total amount of cargo each ship can haul per month.
Such steps are likely to continue because of the oversupply of ships, said Tung Chee Chen, chairman of Orient Overseas (International) Ltd., Hong Kong's biggest container line.
"We learnt a very bitter lesson last year," he said about the industry. "We will all be more careful and disciplined in managing our tonnage this year."