Shipping forecast: as East Asian factories multiply and more ports worldwide reach capacity, Charles Orton-Jones spots a storm brewing. How will your business fare if it has to wait for its ship to come in?

AuthorOrton-Jones, Charles

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World leaders don't seem to be worried. The BBC is unperturbed. As for Joe Punter, reading the Daily Sport on the Clapham Omnibus or the Lanka Sun on the Colombo commute, everything is tickety-boo. But Andrew Linington, editor of the seafarer's journal Nautilus, has words to shiver the timbers of complacent landlubbers.

"I can see a crisis with a potentially devastating impact for everyone," he says. "It could start with a slight disruption but become a major global problem, In a worst-case scenario we are talking about a complete meltdown." And the timescale? "Soon: three to four years."

Linington is talking about an impending disaster in world shipping. Demand is rocketing and we are inches from full capacity. The global supply chain is already showing the strain. In the world's busiest coal port, Newcastle. New South Wales 60 ships are queuing to load up. Some nave been waiting for four weeks, n Long Beach, LOS Angeles, capacity has hit 100 per cent. Ships remain at anchor outside the harbour, awaiting the call to dock. British ports are at crisis point, too. All it would take is a small spike in demand--just the so*** that you see at Christmas and they'd be overwhelmed.

In one category, shipping has already hit crisis point. Dry bulk is defined as cargo that can't be containerised and isn't a liquid: predominantly iron ore, coal and steel. The Baltic Dry Index (see panel, page 18) is a measure of the cost of shipping these materials. Unlike the FTSE or Nasdaq it is not affected by market sentiment, reflecting only the price of transporting cargo by ship. Since 2000 it has risen five-fold up 40 per cent this year alone.

"This is what happens when demand rises faster than supply. Suddenly the industry can't cope" says Linington, who warns that other categories of cargo may follow. "Worldwide shipping capacity is running at 90 to 95 per cent. Thee are forecasts that capacity won't be able to handle demand. When there is no slack in the system, you get gridlock."

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He's not scaremongering. The Bain Consulting Group published a report in May detailing the choking of world ports and lamenting that "few executives at retail or durable-goods companies understand the magnitude of the challenge being forced on them". It warned of a "riptide effect" that would turn outsourced operations in China into a "strategic trap". The situation was becoming so bad, it said, that companies should consider shifting their East Asian operations back closer to home.

China is at the heart of this story. In 2000 its ports handled 1.4bn tonnes of cargo. Last year they handled 5.6bn tonnes and the figure will rise by about 20 per cent this year. China's insatiable appetite for raw materials such as iron ore, coal, oil, asphalt and tin is the reason that dry bulk shipping costs have spiralled. And the country's prodigious manufacturing industry is likely to have the same effect on container shipping. China recently overtook the US to become the world's number-one exporter of manufactured goods. Its neighbours are contributing to the problem. Vietnam's economy has been posting seven per cent growth since 2000, while Malaysia, Thailand and Indonesia are close behind. The effect of this boom has been to increase demand for shipping as much as 20 per cent a quarter. This is a serious problem when the supply takes years to catch up.

Port construction is normally a slow process and planning delays often hold up crucial developments. "The lead time for expanding capacity is getting longer and longer," says Nell Davidson, research director at shipping consultancy Drewry. "It can take three years to get approval for an infrastructure expansion project. Then it takes 18 months to build."

Shipbuilding is an equally time-consuming process. The dockyards of South Korea, Japan and China are full and the number of orders has tripled in three years.

"If you want to order a ship of any type, the earliest you'll see the finished product is 2010," says Peter Norfolk, research director at Simpson, Spence & Young shipbrokers. "Even with this high level of construction, all the new ships won't be enough to bring the cost of shipping down."

Given the size of the vessels under construction, this is surprising. Container ships used to be limited to a capacity of 5,200 containers, known in the trade as 20ft equivalent units (TEU). Not any more: with a 29 tonne anchor and a fuel tank big enough to take it around the world without a refill, the 400m-long Emma Maersk can carry 11,400 TEU (see panel, above).

Should the ship ever sink, its insurers would have to pay out 1.5bn [pounds sterling]. As the world's largest container vessel, this leviathan is shipping's closest thing to a celebrity, attracting crowds wherever she berths. Yet AP Moller-Maersk's shipyard in Odense-Lindo, Denmark, is building eight...

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