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Container makers in a bind as demand drops off

Posted to Far East Maritime (by on July 17, 2012

When demand picks up again, the industry is sure to face a shortage of containers, just like it did in 2010.

A stark indication of the container industry slowdown is in the profit warning issued this week by China International Marine Containers. The company warned investors that it expects to post a 55-75 percent drop in first half net profit over the same period last year.

 The Cosco and China Merchants Group owned box maker said it would report a net profit of US$111 to $198 million for the January to June period, well below the $450 million it raked in last year.

A sharp drop in orders is the main reason for the poor results, although falling container prices have contributed to rapidly falling revenues. With China’s exports slowing, the demand for new boxes has fallen off a cliff and container lines have enough problems trying to figure out how to utilise excess ship capacity, let alone a surplus of containers.

The Shenzhen-headquartered CIMC is the global leader in container manufacturing, and has been for well over a decade. Almost all the world’s containers are made in China and CIMC holds a market share of close to 60 percent with 12 production centres scattered across the country.

There are two main box makers in China – CIMC and Singamas Container Holdings, owned by PIL. Between them, they can make around 3.5 million TEUs a year.

That number of boxes has not been required recently and the uncertain economic outlook means the container manufacturing machines will remain idle for the time being.

A real problem will emerge when trade begins to pick up again (this slowdown can’t last forever). Cast your minds back to July 2010 when the box makers were caught unprepared for a surge in demand after drastically cutting back production in 2009.

Prices for containers surged more than 30 percent as CIMC and Singamas tried to match demand and shipping lines and forwarders were scrambling to find boxes.

Cynics suggested a the time that it was a deliberate strategy by the container makers to ensure a shortage of boxes that would force up prices and help the companies recover losses from the market slowdown.

There is little doubt the industry will experience another container shortage as soon as there is a sustained spike in exports from China, and with half-year net profit falling by up to 75 percent, the resulting increase in the price of boxes will no doubt be welcomed by the makers of containers.