Shifting Tides

A slow-boiling debate that’s been simmering since last year has broken out into the open: Is the container industry approaching an “inflection point” in which the balance of supply and demand shifts decisively in favor of the carriers? Despite skepticism among some leading analysts, several trends point in that direction.

In 2011, I started hearing the idea that all senior carrier executives needed to do was hang on for a few more rough years for the good times to arrive. They cited the declining order book as tracked by Alphaliner, a drying up of traditional ship financing sources and carriers’ growing reluctance to invest in new vessels after years of paltry profits and forecasts for lower container growth rates.

In his keynote address at last month’s TPM Conference, Maersk Line CEO Soren Skou devoted a segment of his speech to the theme. Since 2005, he noted, the average EBIT (earnings before interest and taxes) margin, roughly equivalent to return on invested capital, has hovered around 1 percent. 

In other words, “the liner industry has been destroying shareholder value since 2005,” he said. “What it means for us today is our shareholders don’t want us to invest any more money in this business. The banks that traditionally have lent to shipping are telling us, ‘You guys should not expect as much capital available for ship financing in coming years. You have to rely in the future increasingly on bond financing,’ which will be more expensive.”

He noted the trouble German KG funds are in: “The tonnage providers that own half of the global fleet of container ships are in true trouble, and every day we can read in Lloyd’s List of another German KG that has gone bankrupt. What is happening is that we’re going to be investing less, and it’s already happening,” he said, noting the order book for new vessels as a percentage of the existing fleet is now just above 20 percent, down from more than 60 percent in 2007.

“We are investing less as an industry, and I expect that to continue also because growth is coming down. And over time this will balance supply and demand better,” Skou said. “Will that be in 2013, 2014, 2015? Who knows?” 

Even Gianluigi Aponte, head of Mediterranean Shipping Co., weighed in last week, telling Lloyd’s List: “We are not after market share, and we stopped ordering (container ships) a long time ago. We have to be strong enough to resist any ordering, because it would be against our interests.”

The theme of container supply and demand swinging back into balance also came up at a session of a shipping investment conference organized by Capital Link last month in New York. There appeared to be confidence among charterers that carriers are more effectively managing capacity, according to my JOC colleague Peter Leach. “The conditions will be there in the second half of next year to absorb (excess) capacity,” said Evangelos Chatzis, chief financial officer of Danaos, a Greek charterer with a fleet of 59 container ships.

Hermann Klein, CEO of E.R. Schiffahrt, a German shipowner with 109 container ships on charter, said in Peter’s report: “The KG system is down to nothing, so there is no equity available there, and you need 40 percent equity financing. So I don’t think we will see many newbuild orders.”

BusinessWeek reported last year that 13 of the world’s 19 largest shipping banks had ceased lending to the industry.

So the industry is headed toward equilibrium and higher rates for shippers, right? Not so fast. There isn’t a unanimous view that financing has dried up, so much as the sources have changed. Asian governments such as South Korea and China support their shipyards with development bank loans, and U.S. banks are taking a greater interest in shipping following the withdrawal of traditional European banks.

And the very idea that an inflection point is coming could, by itself, draw more capital into the market, Jefferies shipping analyst Johnson Leung says. “We think the argument based on the order book running down is self defeating,” he wrote last week. “The order book could only run down if the consensus does not believe in an inflection point. The growing consensus view of shipping approaching inflection point may thus divert liquidity back to shipping.”

And that could happen easily, he said, because it’s a myth that capital is in short supply. “We do not believe there is a financing shortage as we now live in a world where there is plenty of liquidity,” Leung wrote.

I think there’s something to all of this. Too many factors point to carriers getting better at managing capacity, both short term with vessel cancellations and long term with ship ordering. What happens this year on the ordering front will say a lot about where things are headed. 

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at and follow him at


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