World Ocean Container Trade Outlook Deteriorating

Our new forecast reflects downward revisions in the drivers of the traffic on the three east-west trade lanes, namely the transpacific, the transatlantic, and the Far East-Europe trades. This article is a view of our interim thinking in advance of the full world trade commodity flow forecast update now under way and to be released at the end of September 2008. In addition to the macroeconomic indicators pointing to a significant economic slowdown and a sharp drop in consumer demand and industrial output, we have also taken into account transportation industry data that indicates the downturn in these trades. The monthly freight flow forecasts of U.S ports in our Port Tracker also reflect the continued weakness in U.S. container imports. The revisions to the forecasts for U.S. trade lanes are minor, reflecting that our prior forecast was mostly in line with developments to date.

We now forecast that U.S. containerized imports will decline 8.2% in 2008, which is slightly more pessimistic than our previous projection of a 7.1% decline. This revision is based mostly on a deteriorating outlook for imports through the Gulf ports. On the positive side, we have increased the 2008 U.S. export growth forecast from 17.7% to 22.6%. Major U.S. export destinations for which we revised our forecasts significantly upwards include Brazil, India, Indonesia, Malaysia, and South Korea. The year-over-year export growth was even more substantial in the first half of this year at 26.6%. We expect, however, that export expansion will slow in the second half due to the worsening production prospects in Europe and the appreciation of the U.S. dollar.

On the European trade routes, our suspicion in the last forecast that Far East-to-Europe trade was in imminent danger of a sharp drop was confirmed by data released to the media and industry by the Far East Freight Conference (FEFC). The figures supported our pessimism and, despite having been the leading forecaster suggesting that this trade was in decline as early as November 2007, our new, intensive review of conditions has resulted in further revisions to the outlook.

It is clear the European countries are not de-coupled from the U.S. economy, and Europe's consumers have reduced expenditures as a consequence of the housing financial crisis and rising inflation, especially oil and other primary and agricultural commodities. The European Central Bank and the Bank of England, unlike the U.S. Federal Reserve, decided to combat inflation as the worse of the two evils. A slowdown in economic activity was permitted in an attempt to fight inflation. Interest rates have remained relatively high.

In Far East-to-Europe trade, we clearly see a dramatic year-to-date slowdown in growth when compared with 2007. The data suggest that growth for this trade (northwest European continent, United Kingdom, Scandinavia, Baltic states, Russia, and Eastern Europe) will now not reach the level projected in our prior forecast, which was already lower than the previous projection .

We believe the annual growth rate will be no more than 2% in 2008, with some further downside risk remaining. For the Mediterranean/Black Sea, trade growth will likely drop to less than 4%. We also believe that 2009 will remain weak, as the recessionary tendencies will be slow to work themselves through towards recovery.

In the container shipping market, the volume of freight is typically measured in twenty-foot equivalent units (TEUs), which is a unit of measurement equivalent to one 20-foot shipping container. In the case of the actual TEU numbers, the levels of trade associated with the growth rates in the previous table are:

Our forecast for the eastbound trade has remained very similar in aggregate terms to what it was in the June forecast. We have made some changes to individual Far East country figures, however, to reflect the actual volumes being lifted. The growth rates remain relatively weak.

The actual volume of containers moving is about one-third of the headhaul leg.

With new container vessel deliveries coming at a time when both the transpacific and the Far East-to-Europe trades are weak, we believe the pressures on freight rates will be downwards if the steamship lines cannot continue to manage their capacity. We have already seen declining spot rates from the Far East, and the normal peak season surcharges are not being brought in due to weak volumes. The ability to add to vessel strings is substantially down from last year, when vessels were shifted from the transpacific to the Far East Europe trade lane, which has now resulted in overcapacity and utilization that has dropped well below the 90% level. At least two steamship lines have shifted capacity into temporary lay-up by skipping a voyage. This is equivalent to a 63-day lay-up.