China’s COSCO Holdings Co. Ltd., an arm of the country’s top shipping conglomerate, expects a sustained recovery in global container freight rates and foresees demand staying strong in 2007, despite fears of a capacity glut.

Rates hit bottom in February and started to recover from June, a situation likely to persist for now, COSCO Chairman Wei Jiafu told a shipping forum in the southern Chinese city of Shenzhen.

Wei said a downturn in the market was mostly psychological. Some industry executives agreed, brushing off analysts’ concerns that a growing number of ships in the pipeline would keep up the pressure on freight rates.

“There has been an over-reaction in the market this year, and the rates have gone down too fast,” said Tommy Thomsen, a partner at AP-Moller-Maersk and Chairman of APM terminals.

“Based on the signals we can see in the market, the rates are coming back. It is conceivable to think that you will see rates increasing, going into year 2007.”

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

Asia-to-Europe freight rates dived 15% in the first half, analysts say. COSCO’s own average freight rate per twenty-foot-equivalent unit (TEU) slid 13.8% in the first half, though that drop narrowed to 7.8% down in the third quarter.

Some analysts expect global container freight rates to slip another 5 percent in 2007, citing overcapacity. They said that for every two carriers afloat, a new one was on order.

China again

Supply of 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 amounted to 52% of the world’s existing container capacity, shipbrokers say.

Wei argued that market demand and supply was balanced.

“China trade has been going very well and we believe next year demand will continue to be strong,” he told the forum.

Global shippers from Taiwan’s Evergreen Marine and Korea’s Hanjin Shipping to Japan’s Kawasaki Kisen have enjoyed a China-fueled boom.

The world’s largest exporter of containerised commodities exported 4.23 million teus of goods to the United States in the first half, up 20% from the same period of 2005 and accounting for 62% of all containers exported from Asia to that country, shipbrokers Clarkson said.

China now makes up some 35% of all US-bound container volumes, against 21.5% in 2001. (Reuters)