Shipping Market Comment Q3 2020

Today’s container ship orderbook: small and unbalanced!

Good news from the supply side in container shipping: During the course of the year the newbuilding orderbook has been further thinned out – it is now down to a multi-decade low equivalent to 7,7 % of the trading fleet, but we should also keep in mind, that the container fleet more than doubled in the last 10 years. So far this year a mere 30 new vessels, representing an aggregate 150.000 TEU, got added to the orderbook whereas more than 89 units (650.000 TEU) were delivered from the yards. The biggest chunk of new capacity delivery can be attributed to HMM who alone received 12 vessels of 23.000 TEU each, adding up to 286,000 TEU. The unpleasant reality for shipbuilders is that they are running 4.5 times faster out of work than securing new employment – a worrying trend for them. Bearing these facts in mind, one cannot deny that the consolidation process in shipbuilding (China, Korea...) makes absolute sense even though some western antitrust agencies may take the opposite view. Consolidation has become a commercial imperative for survival.

The Structure of the Orderbook - The Maritime Overview – Issue 10/2020
The Structure of the Orderbook - The Maritime Overview – Issue 10/2020

Basically, the orderbook can be divided into three clusters: feeder vessels below 3,000 TEU, intermediate North South-trading vessels of 13,000 to 15,000 TEU (!!!) and Megamax vessels of 23,000+ TEU. Overall, the share of tramp shipping owners of the orderbook – once a dominant force – has become negligible. Even within the feeder sub-segment of 3,000 TEU and smaller, two thirds of today’s orderbook are liner-related. Out of 150 pending orders in this sub-sector, 103 orders for 216,000 TEU in total have a liner background, tramp owners only account for 47 projects totaling 87,000 TEU. In the new intermediate sector, there are still 45 vessels of 587,000 TEU in the books related to eight (mainly) Asian or Greek tramp owners. Needless to point out that the German participation in newbuilding contracting has drifted into complete insignificance, German tramp owners account for as less than 5 units. All in all, the container ship orderbook comprises 1.8 mill TEU. In a historical perspective this looks pretty good, however we should keep in mind that these are not normal times from a demand perspective as it may take until end of 2022 until global GDP is back to pre-corona levels.

Looking ahead some uncertainties remain around the structure of the orderbook and whether it’s consistent with demand and deployment trends: 

  • Is there really no need for vessels between 3,000 TEU and 15,000 TEU as the gaping hole in the orderbook for this size range suggests? We have our doubts... Trade data shows that there are more than enough trading routes left with limited weekly loading volumes that simply don’t warrant deployment of neo-panamaxes or Megamax vessels. This is the case on certain Intra-Asia or second-tier long-haul trades to from Oceania or Africa. Even if there are no physical (nautical) constraints to vessel calls, average call sizes (boxes loaded & discharged per vessel call) mean that larger vessels would have to go half-empty or stop at too many ports to achieve a sufficient number of round-trips under full utilization. Therefore tonnage from classic panamax and wide-beam to large gearless 7,000 TEU will remain system-relevant for container shipping in the foreseeable future! Which brings us to the next vital question... 
  • Are there any investors out there seeking opportunities in the smaller size range? Who then will order newbuildings in those under-represented size classes? It’s very unlikely that speculative money will be put up from the tramp side given past experience on speculative projects. No one is willing to accept a short-term charter cover of just 5 years against the full downside risk on residual values as spot charter benchmarks were set by an ageing fleet at negative capital costs plus a small goodie for superior designs. At least that’s how charterers like to have it. In fact the last years are full of examples where totally devalued B170 types (1,730 TEU, geared) dragged down earnings of modern equivalent TOPAZ designs from financial breakeven from day one! The same can be said about wide-beam vessels versus cheaper traditional panamaxes. Bearing in mind how market dynamics played out last time, the investment thesis for new small-to-medium vessels doesn’t look attractive on the face of it. 
  • However, the ignorance of “professional” investors towards these segments is likely to enhance the potential benefits for first movers in this market segment. Undersupply will only propel charter rates higher for the few available modern ships. Or will certain investors and lenders finally emerge on the scene and start contracting in droves, perhaps for other reasons than for commercial reasons. Chinese leasing houses could be a case-in-point further down the line, coinciding with the next wave in newbuilding interest from Intra-Asian feeder operators. It might fit well with maritime state policy in China and political ambitions to support the struggling domestic shipbuilding Industry. 

Summing up: We believe that smaller container vessels will maintain their raison d’être as under good utilization they are able to compete on slot cost basis with larger vessels sailing half empty. Due to the fact that there is zero delivery volume to be expected, the supply demand dynamics look more than ok and should well support the business case for future vessels in the panamx and post-panamax ranges.

Dr. Thomas Hartwig - „The Maritime Overview – Issue 10/2020”

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