Shipping Industry Sees Signs of Slowing

Crammed inside a big metal box, Charlie Woo’s toys make their way from Asia to his downtown Los Angeles warehouse. Lately, the trip has become less expensive for containers of miniature tea sets, remote-control cars and super-size squirt guns.

Woo, owner of Megatoys, says that shipping rates have dropped and that he is saving $50 to $100 for each cargo container he fills. That might not sound like much, but Woo uses 2,000 of the 40-foot containers a year, so that amounts to at least $100,000 in annual savings, he said.

Woo is benefiting from a slowdown in the furious growth pace of international trade, combined with a building spree of ever-larger ships.

“If their ships are full and their business expands, they want to raise the rates,” Woo said. “I think the ships are not completely full, and the competition to fill them is fierce.”

Woo’s rate cut -- repeated in ports around the globe -- signals choppy waters for the shipping business. The industry had enjoyed five years of rising freight rates. Now, the world’s largest shipping line is warning of lower earnings, and maritime experts say economic head winds could bring even more of a cool-down.

“The deluge hasn’t hit yet, but we will see more and more vacant space on these ships,” said Mark Page, director of research for Drewry Shipping Consultants of London.

By some measurements, the blistering growth has already begun to lag.

In both 2003 and 2004, dubbed “the super cycle” by Drewry, worldwide trade grew by 14%. The growth rate slowed to 11.5% in 2005 and is expected to drop to less than 10% in 2006 and about 9% in 2007, Page said.

Piers Global Intelligence Solutions, a private data service that tracks imports and exports based on shipping documents, has predicted U.S. import growth of 9% this year and 7% in 2007 and U.S. export growth of 10% in 2006 and 9% in 2007.

In L.A. and Long Beach, the nation’s busiest container port complex, there is no hint of a slowdown. The neighboring ports are predicted to handle the equivalent of 15.6 million 20-foot containers in 2006. That represents an increase of nearly 11% from last year’s record pace, which was up 8% from the year before. Twenty-foot containers are the standard gauge for containers of varying size.

But several factors are weighing on the industry, even in Southern California, which handles 43% of the nation’s container trade.

Chief among them is the growing evidence of economic cooling in the U.S. and other countries, coupled with rising prices and interest rates. Signs of inflation, particularly red-hot energy costs, led Federal Reserve Chairman Ben S. Bernanke on Monday to pronounce the price trends “unwelcome” and the U.S. economy “in a period of transition.”

With more money going to gasoline and other basics, less cash might be available for other things, including the imported products that arrive by the shipload each day.

“Consumers will have less spendable income,” said Guy Fox, a Yorba Linda shipping consultant. “They might take the SUV on a family vacation, but they won’t buy the new high-definition television. People will put up with what they have, and that will have a domino effect on the whole economy.”

Another factor that could slow shipping growth is that many U.S. and European manufacturers already have moved their manufacturing overseas, bringing a moderating in new outsourcing, said Page of Drewry Shipping Consultants.

At the same time, worldwide containership capacity will grow 14% this year and 11% in 2007, Page predicted.

The world’s shipyards delivered 2,045 commercial vessels in 2005, according to London-based Lloyd’s Register, with a combined total of 29 million compensated gross tons, a standard measure of ship capacity. But they also took orders for an additional 2,480 ships with a combined capacity of 39.6 million gross tons. More than one-fourth, according to Drewry, were containerships.

“For some time now, we have been receiving far too much in the way of ships and in very large ships in particular. Now, we are looking at three years to 3 1/2 years of overcapacity,” Page said.

And the new vessels are getting bigger. Two years ago, the largest containership carried the equivalent of about 8,000 20-foot cargo boxes. Now, shipbuilders are working on vessels capable of carrying 10,000 such containers.

The world’s largest shipping company is feeling the pinch.

In March, Copenhagen-based A.P. Moller-Maersk warned that earnings would fall “considerably” because of a sharp decline in rates. That sparked a round of stock downgrades by investment companies, including UBS, which in a May 31 report to investors said, “With capacity increasing on average by up to 15% through ‘06-’08, and demand running at 10%, we believe it is very early in the current shipping downturn.”

Those assumptions aren’t shared by the Transpacific Stabilization Agreement, a group of 11 major container shipping lines that carry more than 70% of the boxed cargo that moves between Asia and the U.S. Its executive director, Albert A. Pierce, said in a statement that trade growth was likely to slow as China focused more on public infrastructure spending and its own rising domestic demand, but he added that ocean carriers expected a gradual slowing of cargo growth, not a steep drop.

Niels Erich, a spokesman for the shipping group, said talk of a slowdown was overblown because so many U.S. manufacturers relied on China.

“In the past three years,” he said, “there has been a shift in the transpacific market. Now, it is less a trade lane than it is a supply chain corridor. China ... is a supplier to the U.S. now.”

Robert Sappio, senior vice president of transpacific trade for American President Lines, said predictions had been wrong before, such as in 2004, when experts failed to foresee that year’s explosive trade growth.

Sappio said that APL ships from Asia to the East Coast were full and that those to the West Coast were running at about 90% of capacity. But APL’s Pacific fleet runs against the industry grain, relying on vessels that carry about 5,500 20-foot containers.

Still, some shipping lines are dropping freight rates as they position themselves to ensure they can fill their bigger ships.

“Typically, people were paying $2,000 to move a container from Hong Kong to Los Angeles last year. Now, it’s down to about $1,800 to $1,900,” said Kelby Woodard, a principal at Minnesota-based Trade Innovations Inc., a consulting company for importers and customs administrators.

Isaac Larian, chief executive of toy maker MGA Entertainment, said he was saving more than enough per container this year to offset the $100 surcharge per box for moving his products out of the ports during peak hours.

The maker of Bratz dolls said competition among shipping companies also had improved performance.

“We’re not just ahead financially. We are also getting containers quickly,” Larian said. “Now, it is more efficient and cheaper.”