Another Shipper Reduces Capacity

From Financial Times:

Neptune Orient Lines to cut capacity

Singapore’s Neptune Orient Lines is to slash capacity on the most important trade routes in what is expected to be the first of many responses by container shipping lines to rapidly slowing demand.

NOL, the number seven container line, is making the cuts in conjunction with the other members of the New World Alliance, Japan’s Mitsui OSK and Korea’s Hyundai Merchant Marine.

NOL, whose ships are operated by its APL subsidiary, said it was cutting the available space on Asia-Europe services by close to 25 per cent and transpacific capacity by 20 per cent.
It is also cutting capacity in the previously healthy trade within Asia, which accounts for more container movements than any other container trade.

Container shipping lines have been hit by the world economic slowdown because their main cargo is consumer goods bound for the slowing economies of Europe and North America.
There are growing signs that demand for their services has been hit by problems arranging letters of credit, instruments which assure sellers that they will be paid for their goods once they have been delivered to a buyer.

Banks are increasingly unwilling to issue such letters of credit, while many are sceptical about accepting them out of fear their issuers might collapse before goods arrive.
The collapse of demand in the Asia-Europe trade has been striking.

Volumes last year were around 20 per cent higher than the year before, but figures released last week by the Far Eastern Freight Conference showed that volumes moved between Asia and Europe by the conference’s members were 2.43 per cent lower in the third quarter this year than last.

Container lines’ problems are compounded by the large numbers of expensive new ships on order from shipyards, many of them due to enter the Asia-Europe trades.
Container lines have been vulnerable to high fuel prices because their ships need more fuel to maintain their high speeds.

Many lines have responded to slowing demand by slowing ships down.
Extra vessels are then added to services, to ensure that a weekly service from each port can be maintained.

NOL announced one such change to its South China Express service to Europe.
It added several new port calls to the service to make up for the withdrawal of another service and added a ninth ship to the service.

Eng Aik Meng, APL’s president, said the traditional softening of demand in the main container trades – which follows the northern hemisphere summer and Christmas demand – had been compounded by the financial crisis.

“In response to these factors, APL is taking quick and decisive action to adjust to this reduced demand and reconfigure our service networks,” he said.

On October 10, NOL allowed its bid to buy Germany’s Hapag-Lloyd, the world number five container carrier, to lapse, apparently over concerns over slowing demand.

There has been speculation that other big container operators will announce similar measures.



We built the tools of consumption, more and bigger ships, more and bigger distribution centers, higher capacity trains and trucks. If you take away the consumption, the tools are without merit. Each warehouse then becomes a headstone for a ruined business cycle, that of perpetual consumption and perpetual debt.

Homebuilding Index: Worst Reading Ever

A report from Wells Fargo and the National Association of Home Builders (NAHB) reports that confidence amongst homebuilders has plummeted to an all-time low in October.

The housing market index, a measure of builder confidence in the U.S., fell three points to 14, following a downwardly revised reading of 17 in the prior month. The index cited "profound uncertainties" in the outlook.

"This was one area that had been showing some tentative signs of life over the past few months, as prospective buyers, tempted by low prices, dip their toes back into the housing market," said BMO's Jennifer Lee. "Unfortunately, recent developments have clearly caused a rethink."
The index, which consists of three components, has a 22-year history.

The sales expectations index tumbled nine points to 19, while the present housing index for single-family homes fell three point to 13, and the component looking at traffic of prospective buyers fell two points to 12.

A rating above 50 indicates optimism from homebuilders. Since March 2007, the index has fallen from a reading of 36.

Ian Pollick, economics strategist at TD Securities, commented: "This was a terribly weak report and suggests to us that U.S. home prices may still have room to fall before activity begins to pick up."

The latest mortgage averages will provide little solace to homebuilders. According to Bankrate.com, the rate for a 30-year fixed mortgage rose to 6.38% on Thursday, up from 5.87% last week.

Holy Christ, a reading of 14? Here you can see the index for yourself. It looks like most of the index depends on home sales, projected home sales and foot traffic to see homes. Looks like all your variables are strongly correlated without leading or lagging indicators.

Here is a little info on how the index is constructed. I am not saying I could create a better model, but it seems like the current version just measures how good builders feel about the housing market, which is not so good (take a look at the chart).

Paul Krugman Earns The Nobel In Economics

Perhaps better known for his New York Times Columns rather than his contributions to economics, Paul Krugman has earned the Nobel Prize in economics.

For his analysis of trade patterns and location of economic activity. Location and spacial economics has been shelved for some time, getting renown in the 1950's but falling out of favor since then. Since this is my token profession, it is reassuring to see some life being breathed back into the subject.

Especially now that tools to analyze and use locational economics are coming into vogue, such as GIS and aerial photography.

What I respect most about Krugman is that he has taken his field far from academics and brought it into the mainstream, essentially making himself a target from non-academics.

Likewise, he received heavy criticism despite his earning the Nobel Prize for work he did 30 years ago and not his recent contributions to the New York Times.

Here is a synopsis of how Krugman characterizes his work, broken into 4 categories.

1. Listen to the Gentiles - Do not be afraid to talk to member of other professions or backgrounds to get an idea of the bigger picture..

2. Question the question - Question initial assumptions and even if what you are trying to solve is worth solving.

3. Dare to be silly - (my personal favorite) A lot of economics is about a silly procedure to solve a serious problem. Krugman likes to turn things on their heads by using serious procedures to solve a silly problem. In my analysis of Rock-Paper-Scissors I did the same thing, put rigorous experimentation and modeling techniques on a somewhat trivial subject.

4. Simplify, simplify - (This one I have a hard time doing) Krugman is the master of an elegant simple model using theory rather than a "robust" complex model using econometrics. He is able to be very poignant and getting to the heart of the matter, whereas I get pleasure in making simple things brain-stumpingly complex (like rock-paper-scissors).

So to all of Krugmans critics who criticize him for his criticisms of the Bush administration's war against science, reason and criticism, revenge is a dish best served on top of a Nobel Prize.

Capacity Glut?

From WSJ:

Last year, the basic price of shipping a large container of goods from Asia to Europe, the world's busiest route, was $2,800. This week, with demand plunging amid a worsening economy, that price was an unprofitable $700.

That rate is "unsustainable," says Eivind Kolding, chief executive of Copenhagen-based A.P. Moller Maersk AS, the world's biggest shipping company by sales. The industry would be crippled if that price doesn't rise soon, he says.

Hit by the global economic downturn and a financial meltdown that promises an even sharper drop in once-hot trade flows, container-shipping companies are cutting routes and capacity to stem a sudden flow of red ink.

The past 10 years were a gold rush for shippers. China joined the World Trade Organization and sold hundreds of billions of dollar of goods to European and American consumers, who were enjoying low interest rates and steady economic growth. Factories relocated to Asia, stretching supply chains around the globe. Oil was cheap, ships were relatively scarce and shipping prices soared.

Container-shipping traffic on the Asia-Europe route rose at roughly 15% a year through the period. This year it will increase just 5%, says Philip Damas, of London-based maritime consultant Drewry Shipping Consultants Ltd. Capacity is growing much faster. "There's a glut of new large container ships entering the market," Mr. Damas says.

Other shipping routes, including Asia-U.S. lanes, also are suffering from declining demand. But the U.S. has tighter harbor space than Europe. Prices for the smaller ships docking in California, Texas and the East Coast have settled around a barely profitable $1,500 a container, analysts say.

Hurt all around. Fewer goods, means fewer ships are needed and fewer large warehouses and distribution centers. At least you can relocate a boat to a more profitable route, these warehouses are not going anywhere.

Sub-Prime Fiasco

Here is a pretty good summary I found of the current situation.

Sorry I have not been writing as much lately, but the end of the quarter is here, and I still have to finish my reports. I will be posting them here shortly along with my commentary so stay tuned.