Container shippers have bounced back from tough times as surging demand puts firms on a spending spree at shipyards The volatile container shipping industry is back in the fast lane, leading to the inevitable questions about how long this bull cycle will last. What a difference a year makes. Twelve months ago, most global container shipping lines were facing a peak season that at best could limit the damage caused earlier that year by one of the more dismal periods in maritime trade-transport history. This year, emboldened by surging demand and comparative 30 per cent rises in freight rates on the biggest trade lanes, carrier executives are looking at full-year profit records. Line after line posted dramatic interim profit turnarounds - Orient Overseas Container Line (OOCL), Singapore's NOL Group, Japan's K Line and Mitsui OSK, and Maersk Sealand were among many that saw smiles return to the faces of their shareholders. In a snapshot of the industry's strong comparative demand growth in the first half, OOCL saw the volume of cargo it carried expand 13 per cent on the Pacific, 16 per cent between Asia and Europe, 23 per cent on the intra-Asia trades and 27 per cent to Australia. Industry-wide demand helped the lines raise freight-carrying rates on the busiest trade lanes: Asia to Europe grew a comparative 42 per cent to US$1,570 per 20-foot box in the first half, Asia to North America jumped 17 per cent and intra-Asia about 8 per cent. Another raise hit the Asia-Europe trades in July and there is another increase flagged for next month, traditionally the height of the peak season. However, with bank accounts swelling and financial institutions renewing fiscal support for the industry, carriers have turned in droves to Asia's shipyards for bigger vessels, repeating historical practices that have cut short profit cycles. A new record for container vessel ordering was set already this year: the global order books as of August 1 reached 1.06 million teu (20-ft equivalent units) in vessel capacity, easily passing the high-water mark set in 2000. Most of the vessels ordered will not come on stream until 2006, but questions remain. How long will present rate levels, and therefore profitability, hold, given pending supply injections, and what other factors could derail the present euphoria? Niels Kim Balling, who has spent more than a decade watching and working in Asia's container shipping industry, says market trends in either direction tend not to be too durable. 'The shipping sector in general is volatile and very cyclical. When you go through a steep drop, there is always a reaction,' said Mr Balling, who now works as a consultant based in Kuala Lumpur. 'But a positive reaction can only come about if there is support from demand. Can the present upward trend last until 2006? It is very hard to tell,' he said. 'But, historically, it would be very unusual to have that long a growth trend.' Nicholas Sims, OOCL's chief financial officer, is in a growing camp of executives who believe this upswing may last longer than most. He points to the 'unique situation, at least since the 1970s' where all sectors of the shipping industry - bulk, tankers and container - are firing on all cylinders. The bullish results have seen companies fill shipyard delivery dates until late 2006, making projections more predictable for the next few years. 'In the past, there has been a greater potential for the lines to order themselves out of the supply-demand balance that stabilises freight rates at profitable levels,' said Mr Sims. 'With the only substantial variable now on the demand side, forecasters can forecast further forward and with more confidence,' he said. 'And it would appear that annual supply is fixed at projected demand growth for the next few years.' According to Clarkson, a London-based research firm and brokerage, global demand for capacity this year will grow a comparative 9.6 per cent, with supply set to expand 7 per cent. Next year Clarkson projects demand to grow 8.1 per cent and supply 6.5 per cent, setting the table for an upward rate environment and even greater profitability for the carriers. Further forward, Clarkson hedges its bets. 'The supply side is already heavily built up with scheduled additions for 2005 and 2006, so the key further ahead will be whether demand side growth can hold at levels able to absorb additional capacity,' the firm said in its August edition of Container Intelligence Monthly. Many experts feel the obvious key to mid-term demand sustainability is China. Can the Middle Kingdom continue to attract enough foreign capital to meet its maritime infrastructure needs and keep the goods flowing from its factories to western consumers at the current level? The mainland's top 10 container ports averaged a comparative 32 per cent growth in throughput in the first half. But many are at, or near, capacity. Add to that the potential global economic impact of the country's much-needed banking reforms and growing pressure to revalue the yuan, and future trading patterns look less certain. Takashi Saeki, K Line's general manager, says the key to sustained demand growth lies not in the east but in the west. 'You are looking at producing countries. We are looking at consuming countries,' Mr Saeki told CI Online, the internet news site for trade publication Containerisation International. 'Unless consuming patterns [in the United States and Europe] go very wrong, these countries will have to import; they cannot stop consuming.' 'It is the same in Japan. Even through the [economic] crisis here, we are buying more from China,' he said.