There could be light at the end of the tunnel for the container trades, especially for bigger vessels. Rates have improved but the problem remains of how a plethora of ultra large container vessels (ULCVs) will affect future trades in 2017
Larger box ships have received a boost as the regulatory hurdles were cleared for the start of the Ocean Alliance and THE Alliance, bringing long-awaited competition for the 2M alliance of Maersk Line and Mediterranean Shipping Co (MSC). No time was lost in the start of operations on 1 April, after a long drawn out approval process that was largely brought about by delays on the part of the regulatory authorities. A spate of charters at very good rates immediately followed.
Some vessels which had gone straight into lay-up from the builders have been snapped up at much better rates than have been seen for a long time – but still well below what they should be earning. The majors are cautious in their chartering but up to a year’s employment is more commonplace these days, so owners are competing to the wire. While the year has got off to a good start, the initial euphoria may fade as a result of the availability of so much tonnage. However, the modernity of vessels may prove a mitigating factor.
A massive number of container ships – 229 – are currently on order in the post Panamax range.
One boost will come from neo Panamax container ships. The enlargement of the Panama Canal allows vessels of up to 9,500 teu to transit the canal. All neo Panamax vessels up to this capacity will add a little bit more to their earnings from the extra capacity and shorter voyage times on the east–west route. Here, Hamburg Süd will replace lower capacity vessels with high capacity reefer newbuildings to serve between Europe, Mexico and Central America.
Hamburg Süd is now under the wing of Maersk Line and following the merger there will be a major shake-up of the reefer trades, which is a fiercely competitive business. The major prize, of course, is Asia–Europe which has seen rates clear US$1,000 per teu for the first time this year. But will it last?
The good news is that newbuilding orders have virtually ceased. Only four ULCVs were ordered in 2016 and they were for builder’s account at Imabari Shipbuilding Co. It took a long time, but the appetite for ordering has waned among owners – but it may be too late. Altogether, vessels on order that are in excess of 17,000 teu number 68, including 34 that are more than 20,000 teu. This is where the problem lies.
Of the 34 ULCVs, 13 are scheduled to deliver this year, together with eight of between 17,001 teu and 19,000 teu. It is a sign of the changing times and economy of scale that no vessels are on order in the 7,001 teu to 9,000 teu range, and only seven vessels are on order of between 15,001 teu and 17,000 teu. Almost half of the total orderbook is set to deliver in 2017 with a large number of vessels – 113 – adding 1,466,250 teu to the high seas.
There needs to be a substantial trade recovery to bring about a sustained improvement, but most owners are just grateful that things are, at last, improving.
A plethora of second-hand deals is occurring, as prices are tempting. But prices have risen since box rates improved. For the larger sizes there are fewer distress sales unless whole companies go bankrupt, as happened with Hanjin Shipping Co. While it is sad to witness the demise of owners, this particular failure proved a bonus as vessel resales were swift and priced at attractive levels.
A temporary rise in demolition prices to over US$400 per ldt gave a temporary boost, but prices have since considerably slipped back. If the market stays slack some owners will throw in the towel, especially faced with expensive upgrades to meet environmental regulations. In recent weeks some vessels built since 2000 have gone for recycling because they are uncompetitive.
One thing is certain – more mergers are inevitable. German industry struggles with those vessels that are under KG control and controlled by the banks. One never knows when banks will call in their cards and moves of this kind are often made at very short notice by the custodians of such vessels.
Reederei Claus-Peter Offen has taken over Conti Reederei. When the move was pending Conti disposed of three 7,471 teu neo Panamax units for US$14 million apiece to rivals CMA CGM (two vessels) and Sinokor. The three vessels had been affected by the collapse of Hanjin Shipping to which all were on long-term charter at high rates. Charter earnings are expected to continue to rise through 2017, although worrying market features remain that could bring about a reversal. Owners are actually enjoying their best earnings for two years. Prediction puts scrapping at 700,000 teu this year, but much of that may be under post Panamax size.
Another worry highlighted by some brokers is the rapid escalation of Chinese leasing companies, enabling the construction of newbuildings and the acquisition of second-hand ships. This has been a shot in the arm for big liner operators and will continue. Most of the Chinese leasing arms are state owned and can be divisions of the shipyards in their group.
If nothing else, the availability of so much cash did kick-start improvement in the liner trades, but global trade still lags far behind in terms of balancing demand with availability. Essentially the major operators bareboat charter the Chinese leased ships with purchase option at any time, which is mandatory at the end of the charter period. It is estimated that some US$25 billion has so far been invested by China to finance the acquisition of container ships. This applied to existing ships as well as newbuildings. It enabled owners to improve their cash flow tremendously with sale and lease-back transactions.
Some owners are realistic about making operational profits in 2017. The biggest of them all – Maersk Container – is aiming to achieve a US$1 billion profit, after announcing a US$376 million loss in 2016, boosted by negotiated contracts on the Asia–Europe service at raised prices.
So what can be expected in the fiscal year ahead? Consolidation will continue and more mergers will happen. Orient Overseas Container Line (OOCL) is the latest company in the frame for a take-over. Second-hand purchase activity will increase for modern tonnage. The number of newbuildings will continue to decline, a trend which is badly needed. Pressure will increase to strike more leasing deals with China. South Korea is thinking of a adopting a similar policy because of its critical shipbuilding situation, but this would merely compound matters.