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Inside The Now-booming Business Of Building Container Ships

In ocean transport, current success typically breeds future failure. Across the a long time, freight-rate spikes have spurred newbuilding sprees, wiping out freight charges. Which brings us to right this moment: Container freight charges are spiking and container-ship newbuild orders are surging at yards in China, South Korea and Japan. Is the ending of this story inevitable? Not essentially. There have been a really giant variety of orders in This autumn 2020 and Q1 2021. Yet container transport’s orderbook was traditionally low earlier than this new wave of contracts hit. What occurs subsequent will likely be vital to look at. Not just for traders in container transport, however for tanker and dry bulk traders, as nicely. It has lengthy been argued that shipowners are abstaining from orders as a result of they worry future decarbonization guidelines will not grandfather in right this moment’s carbon-emitting newbuild designs. What’s occurring now in container transport implies that homeowners can overcome this worry if returns look excessive sufficient. “Turns out, when things are good, people will still order even if they are concerned what type of fuel to use,” wrote Stifel analyst Ben Nolan. Orderbook-to-fleet ratio nonetheless low According to the most recent figures from Alphaliner, the orderbook as of Friday was 401 container ships totaling 3.63 million twenty-foot equal items (TEUs). The orderbook is 15.3% of the on-the-water fleet’s capability measured in TEUs, up from a multi-decade low of simply 9.4% in mid-2020. However, right this moment’s ratio pales compared to an orderbook-to-fleet ratio of over 60% in 2008. “An orderbook of 15% of the fleet is normal,” assured Stefan Verberckmoes, transport analyst and Europe editor at Alphaliner, in an interview with American Shipper. This is an orderbook degree that is sensible to resume the fleet and deal with annual cargo development. Rolf Habben Jansen, CEO of Hapag-Lloyd, made the identical level throughout his firm’s name with analysts on Thursday. “We are nowhere near the situation we saw in 2007-2008, when we saw the orderbook that was more than half the global fleet. Today, we are concerned when we look at 12% [his estimate was below Alphaliner’s current number]. I would say it’s probably going to hover around a number that’s slightly better than that. But that would still allow us to be in reasonably healthy territory.” The downside for container transport would come up if the orders preserve coming. Verberckmoes warned, “If the orders continue at the same pace in Q2 and if we see speculative orders coming in, and it goes from 15% to 20%-30%, then it becomes worrisome. Because we don’t have any visibility on the cargo demand a few years from now.” A story of two quarters As beforehand reported by American Shipper, This autumn 2020 container-ship orders have been dominated by so-called “megamaxes,” vessels with capability of over 18,000 TEUs and 23-24 container rows on deck. Most of the 25 orders have been for carriers that did not have sufficient megamax capability. These have been largely orders that had been beforehand anticipated. For 2020 general, nearly the entire orders have been for megamaxes or for smaller ships (2,500 TEU or under) used primarily for intra-Asia trades. There have been just a few “neo-Panamaxes” — ships of 12,000-16,000 TEU with 20 container rows on deck that may traverse the brand new Panama Canal locks. There have been just about no orders within the midsize 5,000- to 9,000-TEU classes. Newbuilds have been both very large or very small. In distinction, Q1 2021 has seen 4 extra megamax orders and ongoing orders for smaller ships, however a surge in orders for neo-Panamaxes — 60 up to now with at the least 9 extra potential by the top of March. “There is a very clear preference for neo-Panamax ships,” reported Verberckmoes. The new workhorse “Some are 13,000 TEU but most are 15,000-15,900 TEU. We can now see that these ships are going to be the workhorses of the sector, comparable to the maxi-Panamax [up to 5,100 TEU] ships that went through the old Panama locks. “Carriers are asking: What is the best ship of the long run, versatile sufficient for use in loads of trades? The reply, largely, is the most important ship potential to transit the Panama Canal.” The 14,414-TEU neo-Panamax CMA CGM Theodore Roosevelt, an example of ‘the new workhorse’ (Photo: Panama Canal Authority) In the larger categories, owners are ordering either megamaxes or neo-Panamaxes, “however nothing in between,” he continued. “Nobody is ordering 18,000-TEU ships. And I strongly really feel that nothing will likely be ordered [in this size], just because it does not make sense. “You will have ships in Far East-Europe and you’ll want the biggest ships — 24,000 TEUs. Or you’ll want the flexibility and you’ll go for 15,000-15,900 TEUs, which you can deploy on virtually all trades. “You can put them within the trans-Pacific by way of Panama, on Asia-Latin American, on Asia-West Africa. There is even a 15,000-TEU ship now going from India to the U.S. East Coast.” Orders despite decarbonization specter The common wisdom is that new orders in any shipping segment favor designs allowing for liquefied natural gas (LNG) as fuel. LNG is viewed as a transitional choice before the switch to the new generation of fuels necessary to meet the International Maritime Organization’s 2050 decarbonization goal. But this theory is not playing out in container shipping, the one segment where current fundamentals justify large-scale newbuild orders. “We have solely seen three carriers going for LNG: CMA CGM, Hapag-Lloyd and ZIM,” said Verberckmoes. ZIM (NYSE: ZIM) opted for LNG fuel for newbuilds chartered from Seaspan, a division of Atlas Corp. (NYSE: ATCO). CMA CGM LNG-powered newbuild (Photo: CMA CGM) “All the others are scrubber-fitted,” he said. Scrubber-fitted newbuilds allow the consumption of cheaper 3.5% sulfur fuel known as high sulfur fuel oil (HSFO), whereas non-scrubber ships must consume more expensive 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO). It is much more economical to install scrubbers in newbuilds than to retrofit them into existing ships. Asked why so many container-ship owners would order ships despite the looming specter of decarbonization rules, he replied: because “there isn’t any different.” “Methanol ships are in growth. There are trials with ammonia. There are research of ships with hydrogen. None of those ships are orderable but. If you’re a provider like MSC that expects 3% [demand] development per yr, you might want to add to your fleet. And the one choices proper now are LNG or scrubbers and utilizing soiled gasoline oil. Some might have a look at LNG and say it is nonetheless a fossil gasoline, so they simply resolve to go together with scrubbers.” “Maersk stated, ‘OK, we aren’t going to broaden the fleet [until there is a carbon-neutral newbuild option].’ But they’re the one ones within the trade taking this strategy.” Liners opt to lease not own Liner companies own a portion of their fleets and charter in the rest from non-operating owners (NOOs). U.S.-listed NOOs include Atlas Corp., Danaos (NYSE: DAC), Costamare (NYSE: CMRE), Global Ship Lease (NYSE: GSL), Navios Containers (NASDAQ: NMCI), Navios Partners (NYSE: NMM), Capital Product Partners (NASDAQ: CPLP) and Euroseas (NASDAQ: ESEA). According to Verberckmoes, “The important orderers are the NOOs, firms like Seaspan, Zodiac, Eastern Pacific and Capital Maritime. Carriers resembling Evergreen, OOCL and Hapag-Lloyd accounted just for about one-fifth of all orders in This autumn and Q1. This is identical tendency we have seen for numerous years.” Atlas Corp.’s Seaspan has been particularly aggressive. It has ordered 31 newbuildings since December with an aggregate capacity of 451,000 TEUs, all with charters attached for durations ranging from six to 18 years. “For the carriers, there’s an excellent case for time-chartering these neo-Panamaxes from the NOOs,” explained Verberckmoes. “If you constitution them, you do not have to pay for them all of sudden. You can substitute your 8,000-TEU ships which are 20 years previous and are obliged to burn more-expensive VLSFO with a 16,000-TEU ship with a scrubber, so you may burn heavy gasoline oil [HSFO]. “And if you replace two 8,000-TEU ships with one 16,000-TEU ship, economies of scale not only give a lower per-slot cost. They also reduce CO2 emissions per TEU. That is why MSC says its biggest megamaxes are its most environmentally friendly ships.” Are speculative orders subsequent? Newbuilding orders by liner firms — or by NOOs with long-term charters to liners — don’t elevate pink flags. What will elevate pink flags is speculative orders by NOOs with no charters connected. The Alphaliner analyst emphasised, “The big question is whether there will be speculative orders, whether Greek or other companies will just say, ‘OK, we feel there will be a market for these ships. We will order them even though we don’t have a charter yet.’ “That is the large query that also stays unanswered. We have some orders the place we can not but see the charterer, so that they might be speculative. But we haven’t any proof but of speculative orders.” He cautioned, “We may see the repeat of the previous mistake of carriers [and NOOs] ordering too many ships. We shouldn’t overlook that the scarcity of ships can also be partly resulting from congestion, with a mean ready time at anchor in Los Angeles/Long Beach of over seven days. If solely the issue in Los Angeles/Long Beach is solved, it can already carry round 30 large ships again on the market. That’s loads of capability coming again.” What this means to ports Today’s orderbook trends offer an important signal to the world’s ports. If you’re handling mostly midsized 5,000- to 9,000-vessels, expect to service ships twice that size in the years ahead. “Nothing is being scrapped,” said Verberckmoes. “All the ships are being chartered. All the ships are nonetheless round. But if the market falls down or when a brand new wave of neo-Panamax ships hits the waters, there are candidates for scrapping,” he noted. “It’s clear that almost all ports are able to deal with 15,000-TEU ships. And there are loads of 7,000-, 8,000-, 9,000-TEU ships nonetheless lively within the trans-Pacific. They are getting older and so they can simply get replaced.” What this means to cargo shippers There are not enough ships in existence to handle today’s containerized cargo demand. Thus, every new vessel order is a plus for importers and exporters. “Cargo homeowners would hope that there are much more orders and there will likely be overcapacity and costs will return down once more,” said Verberckmoes. But recent orders are mostly for delivery in 2023. Shippers still face years of the vessel-supply status quo before a big wave of fresh capacity hits. Fearnleys Securities estimates that global volumes will increase 6% this year, while capacity will only increase 3%. Alphaliner net expects fleet growth of 3.7%. Clearly, this supply-demand outlook offers no relief from historically elevated spot rates. As of Thursday, Asia-West Coast spot rates (SONAR: FBXD.CNAW) were at $4,292 per forty-foot equivalent unit (FEU), up 191% year-on-year. Asia-East Coast rates (SONAR: FBXD.CNAW) were $5,716 per FEU, up 109% year-on-year. (Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.) The longer-term question for cargo shippers is whether larger fleets will compel liners to go for market share and compete more on price, i.e., whether liners’ current capacity-management discipline will ultimately break down. What this means to stock investors The NOOs face the highest long-term risk from overcapacity. When markets collapse, as most recently occurred in 2016, charters get renegotiated or canceled. “In the previous, when volumes went down, the very first thing carriers did was return chartered ships. So, the issue was not with the carriers, it was with the NOOs,” said Verberckmoes. Given newbuild lead times, this potential risk is still years away. Furthermore, the orderbook is actually still too low, according to Fearnleys. It estimates that the orderbook-to-fleet ratio needs to grow to 17% just to cover cargo demand through 2023. For dry bulk and tanker investors, the container-ship ordering spree raises the question: What if the thesis that owners won’t order because of fear of decarbonization rules is actually owners “speaking their guide?” What if bulker and tanker newbuilds will be ordered regardless of regulatory concerns, whether to enhance vessel efficiency to comply with looming efficiency rules, to add LNG fuel capability or to install scrubbers and take advantage of the re-widening VLSFO-HFO spread? As Deutsche Bank transportation analyst Amit Mehrotra told American Shipper in a recent interview, for commodity ship owners to go on an ordering binge, “charges would should be a lot stronger for for much longer than individuals assume right this moment,” “secondhand asset values would should be loads greater,” and consequently, “equities must be considerably greater.” In other words, dry bulk and tanker markets would have to be as red-hot as container markets are now — which would be a highly lucrative “downside” for dry bulk and tanker traders to have. Click for extra FreightWaves/American Shipper articles by Greg Miller MORE ON CONTAINER SHIPPING: New video exhibits large scope of California box-ship visitors jam: see story right here. California port pileup leaves previous data within the mud: see story right here. See extra from BenzingaClick right here for choices trades from BenzingaRailroad Megamerger Could Be Boon For ShippersWill Pork Market Go Hog Wild Over Prop 12?© 2021 Benzinga.com. Benzinga doesn’t present funding recommendation. All rights reserved.

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