With all of the talk about the glut of vessel capacity hanging over the world’s container trades, what you read next may come as a surprise: The excess capacity of this year and next could turn into a shortage by 2015.
And that could be dire news for beneficial cargo owners and other shipping interests who already have seen their freight rates spike this year as carriers have effectively and strategically managed their way through a supply-demand imbalance.
Behind the portent for the capacity crunch is a dearth of new orders from financially strapped carriers and vessel owners just as the traditional European bank sources to finance new ships have all but dried up.
On the one hand, a capacity shortage and corresponding jump in freight rates would be good news for those carriers able to order the much bigger, increasingly fuel-efficient ships Asian shipyards are producing. On the other, carriers unable to finance new ships would be stuck with older vessels that burn more fuel and have much higher slot costs.
And that, in turn, could be the spark that triggers the long-speculated next round of consolidation as larger, better-financed and lower-cost lines take over smaller, high-cost carriers.
Container ships that were built more than 10 years ago account for more than a quarter of the existing fleet. That’s not old in an industry that has historically held onto ships for at least 20 years to wring out every last nautical mile before sending them to the breakers. But fuel-efficiency technology has progressed so rapidly that even the 5- to 10-year-old ships — which comprise about 30 percent of the fleet — are equipped with engines half as fuel-efficient as new ships.
Liner companies recognize they will have to order the more fuel-efficient ships to stay competitive, but they lost more than $6 billion collectively last year, incurred more losses in the first quarter of this year and are just beginning to turn around. They will have to rebuild their balance sheets before they can order more ships.
“The liners are focused on their own short-term financial survival and also on avoiding over-tonnaging in the long term,” said Graham Porter, managing director of Hong Kong-based shipowner and charterer Seaspan. “But there are a lot of old-lady ships out there that are sucking up fuel, so I am confident the gates will open for new orders for next-generation ships and also for upgrades to existing vessels when liners realize that there is a relatively short payback period for these improvements,” he said.
For now, capacity is more than adequate to meet demand this year and next. “When carriers ordered all the new ships (in 2010 and 2011), they should have taken out 10 to 20 percent of the fleet that was inefficient,” Porter said.
Even at today’s somewhat sluggish growth rate, world trade should continue to grow enough to work the existing overcapacity off by 2014. “Bear in mind that the capacity overhang from 2009 has not yet been cleared,” said Hua Joo Tan, an analyst with container shipping research firm Alphaliner.
He estimates current oversupply to be around 8 percent. “Add to that the expected 10 percent growth in capacity in 2013, and we still have quite a lot of excess capacity that needs to be absorbed,” Tan said.
Container lines went on a ship-ordering spree when they earned big profits in 2010 and continued to place orders well into 2011 despite the onset of losses. But they stopped most ordering in the latter half of last year and have placed almost no new orders this year — the exception being Taiwan’s Evergreen Line, which refrained from the big-ship ordering binge earlier in the decade. Evergreen will charter 10 new ships capable of carrying 13,800 20-foot-equivalent units.
With a dearth of new orders, shipyards have slashed the price of new ships. Evergreen’s ships are much cheaper, at around $120 million each, than earlier orders for similar-sized ships, which peaked at $170 million each, and are significantly more fuel-efficient.
Despite the low shipyard prices, carriers aren’t biting. If they hope to have enough capacity to meet demand in 2015, however, they will have to start ordering by next year, because it will take until then to put them in the water.
“Probably by 2014, there will be a break-even of supply and demand, because the current orderbook is at a historical low,” said an executive with a European container line who requested anonymity. “The ships on order now will be delivered in 2013 and 2014, with only a few scheduled for delivery in 2015, so the percentage of new orders will be even lower then because we don’t have new orders for those years.”
That carrier is basing its forecast for container capacity demand on projections by IHS Global Insight, which estimates market growth at 4 percent this year, and 5 to 6 percent a year through 2015. In the U.S., PIERS, a sister company of The Journal of Commerce, expects import demand to rise 4.1 percent this year, 5.2 percent in 2013 and 6.5 percent in 2015, with exports rising 2.3, 4.3 and 4.3 percent.
The current orderbook is for ships with total capacity of about 3.7 million TEUs, or about 15.4 percent of the existing fleet of 16.6 million TEUs, according to Alphaliner. The last time the orderbook was this low was in 2002, the liner executive said. Since then, it’s been well over 30 percent most of the time and more than 40 percent at times. The peak was in 2007 when the orderbook surpassed 50 percent of the existing fleet.
Of the ships on order, some 3.2 million TEUs of new capacity, representing 20 percent of the current global fleet, is scheduled for delivery between now and the end of 2014. “Even allowing for some potential cancellations or deferrals of ship deliveries and for demolitions of older ships, there is no real prospect that current overcapacity will turn into undercapacity in the next two-and-a-half years,” said Philip Damas, director of Drewry Supply Chain Advisors in London. But 2015 is a different matter. “We think there will be a need for new capacity then,” he said.
New ships with a total capacity of 1.4 million TEUs are scheduled for delivery this year, and 1.8 million TEUs next year, but orders scheduled for delivery plummet to less than 1 million TEUs in each of 2014 and 2015, just as the current overcapacity gets absorbed by market growth.
But the scarcity of credit may preclude a lot of new ordering next year. “There’s no ship finance available, and I don’t expect ship operators or non-operating owners will go back to ordering at least for another year, Damas said. “Even if the shipyards are desperate for orders, which they are, they won’t be able to attract orders by reducing prices.”
The threat of a capacity shortage in 2015 could vanish if a few carriers place new orders next year, said Peter Shaerf, managing director of AMA Capital Partners, a New York-based maritime investment bank. “It only takes a few orders for the 10 to 12 big ships you need for an Asia-Europe string to make up for any shortfall,” he said. “We will see the recognition of the need for fuel-efficient vessels.”
The 10 13,800-TEU vessels on order for Evergreen could produce $88 million in savings a year over similar-sized vessels built only a few years ago, Shaerf said.
But for now, shipowners and operators are focusing on restoring profitability, rather than replacing the aging, inefficient ships in their fleets. The need to reduce costs by replacing those vessels likely will come by year-end, but only a few lines will be in a position to act, said Janet Lewis, head of transportation research for Macquarie Securities in Hong Kong.
Asian carriers, in particular, have been hit hard by losses in their bulk and tanker sectors, which have been even worse than in their container business. Only the bluest of the blue-chip lines will be able to start ordering. “One can be fairly confident that Maersk Line will be focused on trying to maintain market share and grow with the market,” Lewis said. “They probably realize that their order for 20 18,000-TEU ships is more than enough, so they will probably be looking at 13,000-TEU ships or smaller. They’ve got the financial firepower.”
Even carriers such as OOCL and Hapag-Lloyd that haven’t incurred losses may not rush to order new ships. OOCL isn’t likely to do so for a couple of years because it has new ships scheduled for delivery in 2013 and won’t start ordering until 2014 for delivery in 2016. “They are very conscious about not raising their debt-equity ratio above 5 percent,” Lewis said.
Hapag-Lloyd, whose parent company — tourism and hotel group TUI — is planning an IPO for the carrier, won’t order because it doesn’t want to put any debt on its balance sheet before it goes public. Others may delay ordering new ships until they are assured U.S. East Coast ports will be able to handle the new post-Panamax ships of up to 12,000 TEUs that will start coming through the Panama Canal when the waterway’s new locks open in 2015.
Of the new vessel capacity on order, almost half is for 10,000-TEU ships and larger. Evergreen has the only big order this year — and it won’t even own the vessels; instead, it will charter them for five years from Greek ship management company Enesel. Delivery of the 10 vessels is scheduled to begin in the second half of 2013.
When other shipping lines start ordering new container ships, they will have to look to new sources for funding, because European banks have all but scuttled new ship loans. And the German KG shipowners that once could get bank loans to order new ships are mostly out of business, drained of revenue and stuck with ships they can’t charter because of the capacity glut.
Although the container lines are poised to return to profitability, losses in shipping’s bulk and tanker sectors are poisoning the well. “Bulk and tanker (vessels) are going to wipe out most of the shipping banks and their ability to do any new lending of substance, because the vast majority of their loans are for tankers and bulk ships,” Porter said.
Asian funding sources may be able to pick up some of the financing slack, but it will be limited to borrowers with fixed revenue streams. Seaspan, for example, recently got a $520 million loan facility from the China Development Bank to fund seven 10,000-TEU vessels for delivery in 2014, with a long-term contract with Hanjin already in place.
“Container shipping will be funded mostly by state-owned Asian policy banks in the next couple of years, the equivalent of the U.S. Ex-Im Bank,” Porter said. “They will fund the shipyards. Their natural preference is to fund close to home, and they may not fund the shipping lines.”