Vietnam Shipping Report Q4 2009
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Vietnam Shipping Report Q4 2009
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Executive Summary
2009 has been a tough year for the shipping sector - container freight rates have plunged with industry
observers issuing profit warnings for container lines' full-year results. The liquid bulk sector has remained
afloat, as tankers have been used for oil storage purposes. Dry bulk shipping fortunes have fluctuated
from all-time lows, to showing a steady recovery, to dipping once more, as the sector's fortunes have
become increasingly tied to China's raw material needs.
For the Q409 Vietnam Shipping Report we have reviewed our forecast data for total tonnage throughput
and container volumes at the country's ports for 2009, taking into account, where available, the most
recent monthly throughput data. Using one of Vietnam's main ports, the port of Ho Chi Minh City
(Saigon New Port), as an example, BMI has revised its 2009 throughput forecasts for this port. We
believe that for the whole of 2009 the port's total tonnage throughput will fall by 5.15%, y-o-y, with
container throughput set to decline by 4.76%.
As 2009 draws to a close, BMI answers the question of what is next for the Vietnamese shipping sector.
We predict that a steady recovery in the country's ports throughput will begin in 2010. This is based upon
the fact that our Country Risk desk is forecasting Vietnam's total trade to increase by 4.56% in 2010.
Using the Saigon New Port as an example, BMI predicts that tonnage throughput at the port will grow by
5.73%, while container volumes will increase by 5.31% in 2010. This estimate will see the port handling
a total of 20.2mn tonnes and 2.024mn TEUs in 2010.
We have also calculated expected throughput volumes at the port for the rest of the mid term (2011-
2013). For the country's main ports we predict average yearly changes in the total tonnage throughput and
container volumes for the period. This allows us to predict whether or not these changes will enable the
ports to reclaim their pre-downturn levels of tonnage throughput and to reverse ports' 2009 container
decline during our forecast period.
Vietnam's port recovery is reliant on a revival in Vietnam's trade volumes. For the whole of 2009 BMI
expects Vietnam's imports to decline by 15% and its exports to fall by 13%. A gradual recovery is
forecast to begin in 2010, with total trade forecast to grow by 4.56%. Also in this report, BMI predicts
average yearly change in the country's total trade over the rest of the mid term (2011-2013).
BMI does not expect the country's current main trade partners of China, Japan, the US, Singapore, South
Korea, Thailand, Australia and Germany to change dramatically over the mid term.
Vietnam Shipping Report Q4 2009
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SWOT Analysis
Vietnam Shipping SWOT
Strengths
A recovery from the 2009 downturn in throughput volumes at the nation's ports is
expected to begin in 2010, with one of country's main ports, the port of Ho Chi Minh
City (Saigon New Port), expected to recapture its pre-downturn container
throughput level in 2010
Vietnam's location on the South China Sea gives the country access to the main
inter-Asian shipping routes, allowing the country to meet its trading needs
Vietnam's ports feature as ports of call on the Maersk Line, MOL, Hanjin Shipping
and APL services
Weaknesses
The global economic downturn and the contraction in volumes of trade worldwide
are predicted to decrease total tonnage and container throughput by 5.2% and
4.8%, respectively, at the country's main port of Ho Chi Minh City (New Saigon)
Opportunities
Vietnam's Ministry of Transport has plans to invest US$4.5bn in developing the
country's port infrastructure by 2012
Recent port expansions have created direct shipping links with North America and
are attracting major container lines to the country
A gradual recovery in Vietnam's trade volumes forecast to begin in 2010
Threats
The country's total trade is predicted to fall by 14.1% in 2009
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Vietnam Political SWOT
Strengths
The Communist Party government appears committed to market-oriented reforms
necessary to double 2000's GDP per capita by 2010, as targeted. The one-party
system is generally conducive to short-term political stability.
Relations with the US are generally improving, and Washington sees Hanoi as a
potential geopolitical ally in South East Asia.
Weaknesses
Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.
There is increasing (albeit still limited) public dissatisfaction with the leadership's
tight control over political dissent.
Opportunities
The government recognises the threat that corruption poses to its legitimacy, and
has acted to clamp down on graft among party officials.
Vietnam has allowed legislators to become more vocal in criticising government
policies. This is opening up opportunities for more checks and balances within the
one-party system.
Threats
The sharp slowdown in growth expected in 2009 is likely to weigh on public
acceptance of the one-party system, and street demonstrations to protest economic
conditions could easily develop into a full-on challenge of undemocractic rule.
Although strong domestic control will ensure little change to Vietnam's political
scene in the next few years, over the longer term, the one-party-state will probably
be unsustainable.
Relations with China have deteriorated over the past year due to Beijing's more
assertive stance over disputed islands in the South China Sea and domestic
criticism of a large Chinese investment into a bauxite mining project in the central
highlands, which could potentially cause widescale environmental damage.
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Vietnam Economic SWOT
Strengths
Vietnam has been one of the fastest-growing economies in Asia in recent years,
with GDP growth averaging 7.6% annually between 2000 and 2007.
The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 20% in 2004.
Weaknesses
Vietnam still suffers from substantial trade, current account and fiscal deficits,
leaving the economy vulnerable as the global economy enters into recession in
2009. The fiscal picture is clouded by considerable 'off-the-books' spending.
The heavily-managed and weak dong currency reduces incentives to improve
quality of exports, and also serves to keep import costs high, thus contributing to
inflationary pressures.
Opportunities
WTO membership has given Vietnam access to both foreign markets and capital,
while making Vietnamese enterprises stronger through increased competition.
The government will in spite of the current macroeconomic woes, continue to move
forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.
Urbanisation will continue to be a long-term growth driver. The UN forecasts the
urban population to rise from 29% of the population to more than 50% by the early
2040s.
Threats
Inflation and deficit concerns have caused some investors to re-assess their
hitherto upbeat view of Vietnam. If the government focuses too much on stimulating
growth and fails to root out inflationary pressure, it risks prolonging macroeconomic
instability, which could lead to a potential crisis.
Prolonged macroeconomic instability could prompt the authorities to put reforms on
hold, as they struggle to stabilise the economy.
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Vietnam Business Environment SWOT
Strengths
Vietnam has a large, skilled and low-cost workforce, that has made the country
attractive to foreign investors.
Vietnam's location - its proximity to China and South East Asia, and its good sea
links - makes it a good base for foreign companies to export to the rest of Asia, and
beyond.
Weaknesses
Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to
cope with the country's economic growth and links with the outside world.
Vietnam remains one of the world's most corrupt countries. Its score in
Transparency International's 2008 Corruption Perceptions Index was 2.7, placing it
in 20th place in the Asia-Pacific region.
Opportunities
Vietnam is increasingly attracting investment from key Asian economies, such as
Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-
tech skills and knowhow.
Vietnam is pressing ahead with the privatisation of state-owned enterprises and the
liberalisation of the banking sector. This should offer foreign investors new entry
points.
Threats
Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.
Labour unrest remains a lingering threat. A failure by the authorities to boost skills
levels could leave Vietnam a second-rate economy for an indefinite period.
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Sector Overview
Container Market Overview
For the Q409 shipping reports BMI's shipping desk set out to answer the most pressing questions for
companies and individuals involved in the box shipping market. These questions are as follows: Just how
bad will 2009 turn out to be? Are the rate hikes going to work? Will there be container shipping line
failures? What's in store for 2010?
Just How Bad Will 2009 Turn Out To Be?
2009 is expected to witness the worst contraction in trade since the Second World War, with the World
Trade Organisation predicting a decline of approximately 9% for the year. The organisation's economists
are forecasting the contraction to hit the developed world hardest with exports predicted to fall by as
much as 10%. Exports in developing countries are expected to decrease by 2-3%. BMI offers an
overview of the indicators that our in-house shipping desk uses to analyse the container market.
The main bellwether economies of the container shipping sector are China, the US and Europe. China is
the major global producer of manufactured goods such as clothes, footwear, toys and electronic
equipment, which are all shipped via container from China's east-coast ports. The US and Europe are the
main markets for these products, and so are the major destinations for container ships.
To gauge the supply side of the global shipping sector, BMI uses one of its in-house indicators to assess
the current atmosphere. BMI's quarterly textile report forecasts that the export growth of Chinese textiles
and clothes will slow in 2009 to just 7.5%, compared with the sector's 2008 year-on-year (y-o-y) increase
of 20.1%. We forecast that this sector's growth projections will begin to recover in 2010, with a y-o-y
increase of 14.5% estimated. This 2009 decline in export growth will have a negative effect on the global
shipping sector as fewer exports will require fewer ships.
The effect of this decrease in the export of textiles and clothing, as well as other manufactured goods, can
be seen by the decrease in throughput at China's major ports. The South China Morning Post reports that
volumes handled at China's major mainland ports have been declining, with the port of Shanghai's
operator, the Shanghai International Port Group (SIPG), reporting a container throughput fall of 17.8%
in June 2009 y-o-y. This fall shows a deepening trend of decline, as it is steeper than May 2009's 12.4%
decrease.
This decline in China's export of manufactured goods has been brought on by the lack of demand from
the country's major customer, the US. The US economy is in recession, with job losses and a weakened
real estate market. The knock-on effect has been the reduction of the country's buying power, or at least a
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reduction in consumer willingness to spend. The Conference Board's Consumer Confidence Survey,
which is complied by a sample of 5,000 US households, notes that in June 2009 consumer confidence fell
with the index declining to 49.3 (1985 = 100), down from its 54.8 level in May 2009. In a press release
Lynn Franco, the director of the Conference Board consumer Research Center, states that 'after back-to-
back months of strong gains, consumer confidence retreated in June. The decline in the index, caused by a
less favourable assessment of business conditions and employment, continues to imply that economic
conditions, while not as weak as earlier this year, are nonetheless weak. Looking ahead, expectations
continue to suggest less negative conditions in the months ahead, as opposed to strong growth.'
BMI notes that the decline in US consumer confidence can be seen in the fall in the nation's retail sales.
According to data from the US Consensus Bureau, retail sales stood at US$298mn in April 2009 (last
released data) down 10.45% on April 2008's figure of US$332.7mn.
The reduction of demand for consumer products has had a knock-on effect on the shipping sector, which
can be seen through container throughput volumes at the major US container port of Los Angeles.
Container throughput for May 2009 (latest released data) shows that container volumes at the port
declined 16.31% y-o-y to 574,827TEUs, bringing the port's throughput decline for 2009 as a whole to -
16.16%. The main area of decline in the port's container throughput figures was inbound containers
loaded, the volumes of which fell by 18% y-o-y.
The other major bellwether for container shipping demand is the European market. BMI notes that a
number of major European countries that would usually have high consumer demand are currently in
recession, which has dampened confidence. The major consumer markets of the UK, Germany, the
Netherlands, Italy, Spain and Finland are all classed as having entered a recession. The knock-on effect is
less spending power leading to less demand for consumer goods.
The impact upon Europe's shipping sector can be seen through the decline in volumes on Asia-Europe
routes. The European Liner Affairs Association (ELAA) compiles statistics from its members, which are
made up of the 27 main box ship operators (with only MOL and K-Line as absentees). ELAA data for
Q109 show that Asia-Europe trade volumes fell 22% y-o-y. A decline of 25% was recorded for April
2009 (last available data).
Are The Rate Hikes Going To Work?
The 14 members of the Transpacific Stabilisation Agreement (TSA) announced in July 2009 that they
planned to go ahead with the second phase of their rate fight-back by increasing freight rates on 40-foot
equivalent units (FEUs) by US$500. This announcement followed news from Drewry Shipping
Consultants that the average rate for a Hong Kong to Los Angeles sailing has fallen to US$900 per FEU,
compared with a rate of US$2,000 in the same period in 2008. The decision to place a floor on freight
rates could see shipping-line contracts with shippers negotiated two months on (May 2000) from when
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they were first agreed, if original contracts do not provide some form of interim rate adjustment. The
reason for the TSA's decision to increase rates is, according to the association, down to the fact that 'if
current rates were extended over 12 months, it is likely that the trade will encounter significant financial
challenges as well as basic service sustainability issues going forward'. TSA members have also stated
that they will implement a quarterly bunker charge and that they may add a peak-season surcharge if the
market strengthens.
BMI notes that the TSA initiated its rate-hike plan in March 2009, calling a halt to the decline in rates
that had prevailed on Asia-US routes since Q408. The TSA's first step was to end reduced short-term/spot
rates by the end of June 2009. We note that the very nature of the TSA should guarantee a certain amount
of success as the rate hike has been agreed upon and so will be adhered to by the TSA's 14 members,
which are the major players in the Asia-US container shipping sector (Maersk Line and MOL being the
most obvious absentees). BMI notes, however, that reports following the TSA's rate increase
announcement cast doubt on the price hike's success. Lloyd's List quoted NOL as stating that 'the TSA
regularly issues guidelines on freight rates and other issues. However, individual carriers have a
mandatory right of independent action over whether or not to adhere to these guidelines'. NOL cast
further doubt by stating that 'there is no assurance that APL can successfully implement the quantum of
freight rate increase as outlined in the TSA guideline'.
The other major indicator of the state of the container shipping market is the Asia-Europe route. BMI
notes that the success of rate hikes on this route is even more in doubt as there are no liner conferences to
offer rate benchmarks. Liner conferences were banned in the EU's maritime sector in October 2008 when
the block exemption regulation came into force.
BMI notes that container lines are currently trying to push through the second rate hike of the year on this
route, in time for the peak shipping season. Major liners to have declared their intentions to hike rates on
this route to date (July 8 2009) are Maersk Line, CMA CGM, Zim and Hapag-Lloyd. BMI notes that
the success of a rate hike on Asia-Europe routes is heavily reliant on all the major container companies
hiking rates, as lines that hang back in a bid to gain clients by keeping rates at an unsustainable level will
condemn not only themselves but the industry as a whole.
One reported example of a company breaking ranks and not only stalling on raising rates but apparently
cutting them is the Chilean container line Compañía Sudamericana de Vapores (CSAV), with Lloyd's
List quoting an unnamed Chilean freight forwarder as stating that 'they have indeed lowered rates to
levels that others cannot follow.' CSAV denied the reports with the company's director, Victor Pino,
quoted by Lloyd's List as stating that 'if all the companies lift their rates, CSAV will do so as well'. BMI
notes that it takes just one company to keep freight rates at an unsustainably low level to condemn a
freight rate hike to failure.
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BMI also notes that other popular liner conferences on other container shipping routes are following
Asia-US and Asia-Europe operators' examples and are increasing shipping rates. In June 2009 the Asia
Australia Discussion Agreement (AADA), whose members are ANL, CSL, COSCO, Hamburg Sud,
Hanjin, Hyundai Merchant Marine, K-Line, MSC, MOL, NYK, OOCL, Gold Star and Zim, agreed
to increase freight rates by US$325 per 20-foot equivalent unit (TEU) and US$650 per FEU from July 10
2009. BMI believes that like fellow liner conference association the TSA, the AADA hike will only be
successful if all its members adhere to it.
Will There Be Container Shipping Line Failures?
Yes, and they have already started. Drewry Shipping Consultants believe that 'the basic make-up of the
industry will change as companies either go bust, amalgamate or shrink, shedding assets and personnel in
the process'. Maersk Line's CEO, Eivind Kolding, appears to be of the same view, stating in an interview
with the Financial Times Deutshland that he believes that some lines would not survive beyond 2010.
A company's ability to survive the downturn depends on the company's financial health and its strategy
for weathering the downturn. It is difficult to assess a company's financial health, but a firm's downturn
strategy is more easily accessible and so offers an insight into how the company is handling the drop in
trade volumes.
BMI's shipping desk has noted the raft of cost-saving initiatives that the major container lines have so far
launched in our Q3 Container Shipping Overview. A number of the main box lines announced how much
they plan to save in 2009 and also how they plan to do it. The main strategies that we have noted so far
are rate hikes (which we have covered in a separate question), personal layoffs, service-sharing
agreements, idling vessels, deferring newbuilds, and scrapping. BMI offers an up-to-date, in-depth
overview of each of the top 10 liner companies' strategies in the Company Profile section of its shipping
report, and in the Q4 Container Overview will offer a more general global view of the differing strategies.
The popularity of route-sharing agreements has increased over 2009 as lines join up with their
competitors in a bid to stay active in as many regions as possible and so cater to their clients' needs and at
the same time decrease the number of vessels they have running, to save on operating costs. The most
prolific route sharing route is Asia-Europe. BMI notes that the most recent route-sharing pacts for Asia-
Europe services took place in June 2009, with Taiwan's Evergreen Line and the China Shipping
Container Line linking up and the Shipping Corporation of India and the Mediterranean Shipping
Company also uniting.
Laying up vessels has been a common strategy in 2009, as a way of decreasing overcapacity. Major lines
including Maersk Line, CMA CGM, K-Line and CSCL have all deployed this tactic. According to the
latest reports, the global shipping fleet that is currently idled stands at 9%. Of the global containership
fleet, 564 vessels, approximately 11.4% of the total fleet, is laid up. The most popular areas for container
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