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Container Shipping & Trade

Container Shipping & Trade

Race to be king of the ULCS

Fri 27 Oct 2017 by Barry Luthwaite

Race to be king of the ULCS
Will the two mega-vessel orders from MSC and CMA CGM trigger a new rush of ULCS business from competing carriers?

CMA CGM and MSC have both placed orders for 22,000 TEU behemoths. Will this push the container ship market recovery over the edge and will other shipping lines follow their lead? Barry Luthwaite takes a look

Recent evidence suggests that the container trades may have turned the corner in terms of earnings but will any recovery be sustained?

Revival has been assisted by a general upturn in trade and profits finally accumulating on the lucrative Asia-Europe route. This was boosted by a drought in ordering of ultra large container ships (ULCSs) for over a year but all this is about change dramatically as the ULCS fleet will increase in the coming months with more giants hitting the water.

Once again the market is witnessing a race to be king of the capacity stakes. Shipyards are keeping pace as ULCS orders in multiple units yield high cgt figures. Prices remain between US$150M-165M apiece but owners are leasing more units or operating on a joint basis with a partner.

Is the resumption of ULCS ordering good or bad for future trade? Next to the latest behemoths, other owners have stepped up interest in larger intermediate vessels of 14-16,000 TEU to serve ports that cannot receive ULCSs yet but have improved infrastructure to receive bigger TEU loads. Such factors bring economy of scale and reduced costs longer term.

With the recent collapse of the bulk carrier market in particular, traditional builders of Capesize bulk carriers are now turning attention to lucrative series construction of ULCSs. China recently beat off strong competition from South Korea to land a big order from CMA CGM and a commitment to nine 22,000 TEU container ships from the French giant from two shipyards in China was a notable success for hugely ambitious China. Shanghai Waigaoqiao (SWS) and Hudong-Zhonghua share the order with five and four units respectively.

The ships will eventually take the prestigious title of the world’s largest behind a recently commissioned newbuilding series of 21,410 TEU vessels for OOCL (now merged with COSCO group).

The bigger the better

The hunger to be the best and the biggest knows no bounds. Soon after the CMA CGM order it was confirmed that rival MSC had committed to 11 units of 22,000 TEU; the owners are members of rival alliances on the Asia/Europe services. These orders have been placed with South Korea’s Samsung (six) and Daewoo (five), although all the orders were originally due to go to Daewoo.

Only three years ago, CMA CGM was in a precarious financial position but has since turned this right around. The owner already has three 20,600 TEU units on order – contracted in April 2015 – from Hanjin’s Philippines yard in Subic Bay; at the time of writing in mid-October, the first is imminently due for delivery.

The trio were originally intended for the P3 alliance on Asia-Europe service but CMA CGM was later dropped and Maersk and MSC went into a two-company partnership now known as the M2 alliance. The French owner is now spearheading Ocean Alliance with partners COSCO and Evergreen Marine to provide strong competition to M2.

A little-known detail is that the French owner holds options for three more ULCS from SWS (one) and Hudong Zhonghua (two) giving a possible total order of 12 vessels at the two yards.

So will these two tranches of orders from the competing majors trigger a new rush of ULCS business? Originally, shipbuilders confirmed their absolute capacity for these giants was 26,000 TEU each but most observers feel this will not happen due to lack of infrastructure in many global ports. But who knows? The current 22,000 TEU was a distant dream not so long ago.

One of the key aims was to eliminate smaller traders for recycling but this is not working to date owing to derisory scrapping figures. Instead, 2020 is now seen as the action year when compulsory legislation kicks in on even tighter emission controls and other environmental measures. More vessels will be forced into redundancy rather than risk increased expenditure on vessel improvements in a volatile market.

ULCS numbers countdown

Statistically there are currently 57 ULCSs in excess of 18,000 TEU in service aggregating 1,081,581 TEU with a further 75 behemoths due to add 1,534,738 TEU between now and 2020. Some of the big names missing from the complement of fleets are in the ULC race but have opted to charter vessels from Japanese trading houses, builders or leasing companies with purchase options.

The first overseas orders in China from MSC are likely to use a Chinese leasing company due to sheer cost of the vessels. These loan deals are an inducement to order more vessels than originally planned but banks have taken fright and investors do not see shipping as a safe long-term bet any more. There are now some impressive order backlogs to support continuing ULCS box growth, almost evenly spread among the leading countries of Japan (27), China (25) and South Korea (23).

Until recently, Japan was handicapped in its ability to accept orders but in October Imabari opened its new large building dock in Marugame which now enables it to compete for big vessels of the highest capacity. The new dock took two years to build and will deliver its first vessel in February 2018, to Doun Kisen. Its employment now stretches into 2020 and it will propel Japanese owners back to where they belong – in the premier league of box ship owners.

All orders so far taken for ULCSs are for around 20,000 TEU vessels for Japanese account for charter to major operators. Among owners who will take Imabari newbuildings on charter are Evergreen Marine (seven), Yang Ming (one), MOL (two) and K-Line (one). Other charters are under negotiation from Imabari’s shipowning wing – Shoei Kisen Kaisha. Ship orders are spread among its two shipbuilding sites of Marugame and Saijo.

China, of course, is building 16 ULCS for COSCO Shipping Lines following the COSCO merger with China Shipping Container Lines (CSCL). Experience in China and cost swayed CMA CGM’s decision to prefer China over South Korea, but the latter has its share of success, holding 22 orders all for export clients. Pricing varies between US$133.5M-163M apiece.

Only seven ULCs will deliver before the end of 2017 but then the floodgates will open. The questions are: can the market absorb all these giants and will more be ordered? There is a division of opinion. Some experts warn the current revival will be killed off by next year on the Asia-Europe route while others argue that alleged over-capacity has been exaggerated. When the 75 ships on order are commissioned, it will result in a 23% capacity rise and, of course, none of the 57 currently in service will be withdrawn or switched because they are too young and big.

Will anybody now order new ULCSs or will they leave the present situation untouched? Certainly, all the majors would appear to have had their fill by now so more orders on the scale of CMA CGM and MSC appear inconceivable. However, you can rarely guess reaction in the newbuilding market but the fact that such vessels can only trade between Asia and Europe surely rules out more orders.

All 18,000+ TEU units need a utilisation capacity of 91% to be profitable, which is a tall order even with the current improvement. The future battle is likely to be for 14,000-16,000 TEU vessels, which will seek to eradicate 8,000-13,000 TEU range units purely on economy of scale.


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