Drewry Shipping Consultants, in their latest Container Forecast, predicted that 2009 would be a very tough year for the Container Industry.  They went on to question whether the liners would be able to hold rates steady or whether there would be further price cuts or even industry consolidation.

A couple of things stood out to me from this report.  First, in 2008 the number of TEU through global ports grew at a 7.2% year over year growth rate.  7.2% is a very healthy number and significantly above the rate of US GDP growth for the same period.  While some individual ports had declines in their throughput, overall the industry held up pretty well.  Drewry went on to predict that 2009 YOY growth should trickle in at only 2.8%.  I would bet that this is still a substantial spread over the 2009 YOY GDP growth that the US will generate.  So, the container industry will continue to outperform the US economy.

The second thing that stood out was whether a decline in rates was a bad thing for real estate.  We have to keep in mind the reason why so many companies outsource their manufacturing – to reduce costs.  The cost of labor was the primary driving force and this outsourcing significantly lengthened our supply chains.  In 2008, as oil prices escalated and the transport piece of the supply chain became more expensive, many companies examined bringing those manufacturing operations back to the US.  Oil has receded and now the economic conditions and excess shipping supply are pushing the cost of off-shoring down again.

As companies suffer through the domestic economic woes and try to find ways to maintain margins in an environment where raising prices would amount to suicide, cutting costs will become a primary focus.  With lower shipping rates, off-shoring becomes an attractive option.  More companies may off-shore to save costs, meaning more containers on the shipping lines (albeit at a lower rate) and the demand for port related real estate increases.  This is a good thing if you are a real estate professional.

Finally, the shipping lines will not be immune to the need to become as efficient as possible.  We’ve already seen some lines trimming service and mothballing ships.  While these are never easy decisions to make, they do make the liners more efficient and more profitable.  This may mean survival now, but will lead to much better positioned companies as the economy improves.  One area where a number of shipping lines are focusing their efforts is in the shift to larger vessels.  A 10,000+ TEU vessel carries more cargo using less fuel (per TEU) and requires a smaller crew.  As companies fight to protect margins, expect to see larger ships being used everywhere they can be.

Does your portfolio strategy contemplate the long term effects of larger vessels or potentially fewer carriers?