No need for alarm as container lines return to the shipyards

Ordering discipline has contributed to stability in the container trades, but new ships will still be needed to meet demand up to 2050.

News ID: 80524

Date: 24 October 2020 - 17:39

Several leading containership owners are in talks with Chinese and South Korean yards about newbuilding programes for vessels of up to 23,000 teu, but with the orderbook so low, a fresh injection of capacity in a few years’ time should not destabilise the market.

MSC is one of several container lines said to be in talks with yards about 23,000 teu ship orders.

SHIPBROKERS’ circulars revealing several top container lines are in talks with shipyards about newbuilding projects would have set off alarm bells in industry circles.

Why start ordering again now, just when boxship owners finally seem to have their house in order after decades of market volatility driven largely by supply and demand imbalances?

One of the biggest surprises of the pandemic has been the ability of container lines to behave with uncharacteristic discipline.

Rather than try to fill ships at any cost, with the inevitable price war, they have removed capacity where necessary, and so managed to sustain good rate levels.

The result has been a year that is likely to produce bumper profits, in stark contrast to dire predictions in the early weeks of 2020 that carriers were heading deep into the red.

The recovery has been helped by strong volumes over the summer months as consumer spending recovered in key economies such as the US, and as inventories were replenished.

Underpinning market fundamentals has been the slow pace of ordering over the past year or so. Clarkson Research estimates that boxship capacity ordered in 2019 was more than one third down on 2018 levels, while the figure for 2020 is running at around a 70% decline.

And that is the way it should stay, say some industry leaders.

George Youroukos, executive chairman of Global Ship Lease, said lines’ strategy of not ordering new ships would keep capacity under control.

That, in turn, should ensure that carriers are able to keep producing “these amazing returns," he told a recent Capital Link forum.

Others have said much the same and, with the exception of Hyundai Merchant Marine and its controversial series of 23,000 teu ships that have been delivered this year, the global players have shown impressive restraint. Helping industry sentiment has been the absence of speculative newbuilding activity in recent years.

But is that situation about to change? Are container lines slipping back into their old habits of ordering new ships within weeks of producing better financial results?

Mediterranean Shipping Co is now in talks with both Chinese and South Korean yards about a series of six 23,000 teu vessels, according to brokers.

Hapag-Lloyd and Ocean Network Express have also been making inquiries, while Cosco subsidiary OOCL is another line that has been linked to an order for 23,000 teu ships.

It remains to be seen how China’s shipbuilders will collaborate with compatriot leasing lenders to consummate the deals

Evergreen is also in talks with yards, this time for 15,000 teu tonnage. So too is Zodiac Maritime, which is in preliminary discussions with South Korean shipbuilders about an order for four 13,000 teu-15,000 teu units. These sizes provide much greater flexibility than the 23,000 teu class.

All prospective buyers are being tempted by some attractive prices as South Korean and Chinese yards vie for new business. A 23,000 teu ship, for example, would probably cost between $143m and $148m, depending on country of build and specifications.

Prices are lower than those being quoted in the summer, while yards would have charged in excess of $170m when vessels of this size first entered service about seven years ago.

If the reports of renewed ordering activity are correct, does this demonstrate a highly irresponsible attitude on the part of those lines apparently prepared to risk market stability for market share? Not necessarily.

To put the rumoured newbuildings into perspective, the world orderbook right now is estimated to be around 8% of existing fleet capacity. That compares with more than 20% a decade ago and over 60% prior to the 2008/09 financial crash.

New ships will be needed, and anything ordered now will not enter service until 2022 or2023, and then will be required to meet demand up until around 2050.

Of course, there are all sorts of pitfalls to ordering new containerships right now. In addition to unprecedented economic uncertainty, there is also the question of what fuel to burn and how to design ships that will be able to meet as yet unknown emission requirements, and adapt to technological innovations.

But when to order new ships is not an exact science, given the almost endless number of variables that need to be taken into account. Few shipowners are likely to get their timing absolutely right.

The mark of success is to be counter-intuitive in many ways, be prepared to take risks, and to look well into the future rather than be driven by short-term market conditions.