The newbuilding orderbook is showing steady growth within the container feeder sector, the secondhand market is soaring and China’s role is ever more dominant
Feeders continue to go from strength-to-strength with 2018 so far promising to be one of the best in general trading terms.
The market both in secondhand and newbuilding business reflects this. The scene portrays a double-edged sword, especially in secondhand business where distress sales still dominate, particularly with good quality ex-German built and owned tonnage. The KG debacle is far from over, but the spotlight has now passed to banks or leasing companies on their behalf. Nominal owners or operators are perplexed that financiers owed money can strike at any time. Some of the feeders are running on month-to-month instalments and owners/operators could be punished if defaults occur.
Fortunately, market rates for time and spot freight business continue to rise on the back of a lack of availability, and congestion in ports as ultra large container carriers often take 24-36 hours to clear cargo. While Europe grabs most of the headlines, there are changes in intra-Asia trading too. Owners operating mixed fleets in addition to container ships can be badly hit by cash flow and ordered to sell ships to ease the situation. The tight situation with the latter produces a steady flow of sales candidates where the owner is not in control of the situation and is forced to accede to demands from bankers, shareholders and sometimes courts.
Conversely, many owners are making handsome capital from enforced sales at prices often below the book value of vessels, which are sold to relieve the debt taken on by banks and lessors. In some cases whole fleets are being purchased outright at bargain prices.
It would, however, be a mistake to say that everything is fine in feeder trades. About a year ago, a scheme was suggested by struggling owners to set up a warehousing system under caretaker control of banks and leasing companies, with ships remaining under operation of previous owners who know the markets and have employment for them. Patience is a fragile asset today, however. New kids on the block are emerging and several have the advantage of being debt-free with financial backing to spend big in growth sectors.
Feeder trading is a big attraction. Such is the scramble for good quality modern tonnage, that competition is a healthy factor in driving up spot rates and inducing longer time charter deals in order to hold on to precious business secured.
In one of the biggest-ever secondhand deals, Sinokor Merchant Marine agreed in principle to acquire 32 feeders between 698 and 1,794 TEU from nominal Dutch owner Vroon Containers after the company successfully concluded a financial restructuring of its mixed fleet in April. Vroon was quick to point out that it was only acting as commercial manager of the 32 vessels and the sales were concluded direct from a warehousing structure operated by Nord/LB Asset Management bank in Germany. Five vessels have already been delivered to Sinokor but there may still be subjects to clear on the whole deal.
The ambition of Sinokor knows no bounds as the joint Chinese/Korean owner aims to dominate intra-Asia trading. China itself has recognised the importance of more self sufficiency in direct feedering and is now investing in many newbuildings. For Sinokor this year is a defining moment since, if the warehouse deal concludes for 32 ships, its feeder fleet will increase by over 20,000 TEU.
In tandem with this move Sinokor also announced it will merge its shipping operations with Heung-A Shipping by the end of this year and the duo is expected to integrate Hyundai Merchant Marine into its setup by the end of 2019. Heung-A is heavily engaged in feedering in Asia especially around the 1,000 TEU mark for which there is strong demand. Sinokor and Heung-A Shipping already control 34% of Asia’s total fleet complement. A rationalisation programme is currently being implemented by the South Korean government and the combined fleet of Sinokor and Heung-A, including charters, will take it ahead of SITC, China. Sinokor will trade the vessels within China and to South Korea.
Although not intended, the Sinokor move is enhanced by the unfortunate bankruptcy of privately owned Chinese builder Zhejiang Ouhua. Chinese builders still have serious liquidity problems despite state mergers. In the case of Zhejiang Ouhua not enough cash could be raised to save the builder and work has been halted since early this year, although one completed vessel was delivered in January to Reederei Nord, but the owner has had to forcibly cancel three sisters. Little interest has been shown in saving the builder and court protection intervention has been ruled out.
In feeder terms, this is not just any closure but one of the leading builders of coastal container ships. The current orderbook comprised 13 feeders and seven multi-purpose vessels with teu provision. Most of these will be cancelled and refund guarantees honoured. In a bullish climate owners want their ships and will be bitterly disappointed at the outcome. Zhejiang Ouhua joins six other failed Chinese builders in recent times. Some of the orders have been switched to other builders such as Huangpu Wenchong but building schedules have been deferred and later delivery times apply as well as additional cost. Support was given to the yard by local government but the scale of debt outstanding in loans was too much to continue.
Some will rightly argue that freight rates will rise at the prospect of so many vessels being removed from future trading. Due to smaller sizes scrapping is a rarity and longevity is a feature in well-kept vessels.
Secondhand business rockets
Latest statistics point to sobering confirmation of market strength. In a plethora of secondhand business, 90 feeders up to 5,000 TEU have changed hands in the first five months of this year and this figure does not include a potential 27 more vessels in the Nord/LB warehouse collection to Sinokor. Nord/LB have taken their selling interest further by introducing an experimental online site dubbed VesselBid.com in collaboration with Toepfer Transport. The scheme has taken a year to establish and the first vessel inviting bids was 2,702 TEU BuxHarmony built in 2007. Offers were asked from a starting base of US$11.5M.
Rising secondhand prices may defer interest in potential bids as wise owners like to buy at low prices when they have the upper hand. The market will determine how this move shapes up but there are plenty of ships to choose from with German-related tonnage the leading provider as an outlet for banks, lessors and private equity investors. Unfortunately, this further underlines how German domination may disappear in the feeder markets over the next few years. This would be a sad occurrence if it happens. MPC Trading is moving closer to its goal of trading 100 feeders by later this year. The Norwegian-listed German operator has now reached 78 vessels in its quest to offer the biggest feeder fleet based in Europe.
Newbuilding contracting shows a steady growth with 46 feeders committed so far in 2018, aggregating 85,998 TEU. The difference this year is that more Asian owners have recognised the need for feeder tonnage against increasing congestion. China Navigation leads the way with eight ships committed. In the context of the overall order backlog, Chinese construction dominates with 182 vessels aggregating 373,339 TEU which will commission by the end of 2019. This firmly underlines China as the leading feeder ship provider. In total 253 vessels are committed globally so China’s share is almost 72%. Most builders deem such construction as uneconomical.
The relative drought for non-Chinese owned newbuildings has played its part in driving up freight rates. In trading fleet terms Germany still leads the feeder table with 1,169 vessels totalling 2,351,508 TEU. China has moved up to second place with 420 units offering 698,736 TEU. Greek owners occupy third place with 343 units aggregating 842,925 TEU. A concerted effort is being made to modernise Greek cabotage, mainly through the acquisition of secondhand feeders.