China COSCO expects a sustained recovery in global container freight rates and a strong market demand in 2007 despite fears of a capacity glut.

Describing the reason for its positive outlook, COSCO Chairman Wei Jiafu said at a shipping forum yesterday: "Rates hit the bottom in February, but started to recover from June, a situation likely to persist for now."

"The downturn had been mostly psychological," he said. "With stable growth in the mainland's internal demand and the end of its recent macro-control measures, I think the freight rate will continue to pick up next year."

The chairman of the mainland's largest container shipping conglomerate said: "The specific growth rate would depend on the market demand."

Some industry executives agreed with Wei and brushed off analysts' concern that the growing number of ships in the pipeline would keep freight rates low.

Chairman of APM Terminals and a partner at AP-Moller-Maersk Tommy Thomsen said: "There has been an over-reaction in the market this year, and rates have gone down too fast. Based on the signals we can see the rates are recovering... you will see rate increase going into next year."

The highly cyclical shipping industry caught investors off guard when a three-year shipping boom, fuelled by growing global trade on the back of strong demand for made-in-China goods lasted longer than expected, that is, till the final quarter of 2005.

Wei said: "Our performance on the Asia-Europe routes is rebounding, thanks to the freight rate recovery." Asia-Europe freight rates as whole dived 15 per cent in the first half of the year, forcing a year-on-year drop of 12.22 per cent in COSCO's revenue from the routes (including the Mediterranean). It plunged from 4.67 billion yuan (US$583 million) to 4.1 billion yuan (US$512 million) in the first six months.

Its average freight rate per twenty-foot-equivalent unit (TEU) slid by 13.8 per cent in the first half, though the drop narrowed down to 7.8 per cent in the third quarter.

COSCO Executive Vice-President Xu Lirong had earlier said that a recovery in freight rates was crucial for the company to turn around its performance. "We need to recover our freight rate and this will largely decide our company's final results," Xu had said.

Some analysts, however, expect global container freight rates to drop by another 5 per cent in 2007 because of overcapacity, saying a new freighter has been ordered for every two afloat.

Brokers say that the supply for new capacity is expected to outpace container volume growth by 3 percentage points this year and another 2 points in 2007, while orders for new ships amount to 52 per cent of the world's existing container capacity.

But Wei disagreed with them. "The market demand and supply is balanced. The mainland's trade has been going very well, and we believe demand will continue to be strong next year," he said.

(HK Edition 11/03/2006 page3)