How shipping industry adjust over supply to decline in demand?

During 2002-’04 the demand in container trade grew faster than the supply and hence the shipping companies placed new orders. The deliveries of new orders generally take 2-3 years to materialise and from 2006 onwards the industry has been experiencing faster supply growth compared to demand. This over supply resulted in considerable drop in freight rates , especially during 2008 - 2009.

Shipping industry has been hit particularly hard by the reduction in merchandise trade in 2009 resulted by the world economic crisis. Inspite of the downturn in demand, shipping capacity increased as vessels ordered earlier continued to be delivered during the recession period. As far as container trade is concerned, the fleet size is expected to grow further during the next 4 to 5 years, that too , most of the new vessels to be delivered are of 8,000TEU or more capacity.

How do industry adjust this over supply > demand decline crisis ? It has 5 ways to adjust its supply to a declining demand, though most of them are effective only in long run.

1. Stop ordering new tonnage – Compared to the year 2007 (538) and 2008 (213), 2009 saw only 9 new orders for container ships. For tankers new orders in 2009 stood at 153 (against 1,054 in 2007)  and 290 for dry bulks(against 2,060 in2007).

2. Terminate or postpone existing orders – Almost all shipping companies restructured, to the possible  extent, the order book in 2009. Many deliveries were postponed, cancellations were few.

3. Slow-Steaming – means that the speed of the ship is reduced so that it will be necessary to deploy more number of vessels to meet the same demand or to maintain the same frequency. This measure helps to maintain freight rates without laying off vessels and also saves bunker expenses considerably.

4. Temporarily withdrawing existing tonnage from the service – This indeed is another good measure to keep up the demand in a particular trade and to keep the freight rates from further slipping. During 2009-10, around 500 container vessels ( around 12% of the global container carrying capacity) idled at anchorages across the globe.

5. Demolish older vessels – Ship owners sell their older vessels as scrap metals. As the prices of scrap is very low, many ship owners preferred to hold on to their vessel than scrapping. However 2009 witnessed a surge in ship recycling / demolishing, China leading the market (34.5%) , followed by India (30.7%) and Bangladesh (24.8%).

Though drastic capacity reduction deployed on main trade routes, interestingly the fleet reduction was less drastic on major South-South routes, as trade among developing countries were comparatively less affected by the recession. This shows the positive role the developing countries are playing in the global economy recovery.