Shipping Market Comment Q1/2021
Container ship ordering: Are six months of good markets enough to lose all inhibitions?
Shipyards have been booking newbuilding contracts from container lines and investors at breath-taking speed over the past months. So much so, that it’s become the talk of the town in the industry and beyond. Now, with Q1 done, it is worth making a tally. Within the last two quarters, more than 2.1 mill. TEU in total were ordered. No doubt, we have entered the next cycle of ordering. Currently, we see most of the activity in the 13,000 TEU-plus size where more than 1.9 mill. TEU got added to the orderbook. Judging the supply demand outlook might therefore largely be a matter analyzing cargo trends in the few big “Tier 1 Trades” and the large “North South Trades” where these neo-panamaxes (and larger ones) get deployed. On the „Tier 1 Trades“, Corona lent a boost especially to Transpacific carryings (Eastbound headhaul) with year-on-year increases as high as +30 % at times during the past 9 months. This growth alone would well warrant recent tonnage ordering levels. HOWEVER: When taking into consideration that most of this growth was likely based on an atypical demand pattern due to Corona, the alarms start ringing!
We as tramp owners have the impression that with today’s extraordinary good container freight markets, more or less every carrier wants to be at the forefront of ordering new “Eco Vessels” to make sure they can take in as much of the volume recovery as possible once world GDP growth gets back to normal. Their desire gets aided by a broad upgrading of capital strength and credit ratings by Moody’s, S&P and the likes in recent weeks and months. The result is ultra-cheap debt as credit spreads for container shipping are reducing further. Hence it looks mega-attractive to load further debt on the balance sheet (be it directly or indirectly through IFRS16 lease accounting). True – in the long term, cheap finance is a pillar stone of success. BUT, if all the industry is rushing to invest on the same motivation – think of the lemmings! – then we have the nucleus of another „pig cycle“! And mind you, not all carriers are opting for the cheapest way of refinancing, which is quite concerning... From the balance sheet of a major carrier we can glean that last year they paid on average 8.16 % on $ 4,6 bill. of lease obligations. Applying the same cost to an equivalent proportion of the current orderbook would mean that close to $ 7 bill. of assets are getting expensively refinanced – another source of concern.
Our worries grow further when we consider that we are probably just half-way through the ordering cycle. A couple of large accounts have not joined the bandwagon yet and are probably waiting in the wings to place their newbuilding programmes. So, what to make of all this? Will it be doom and gloom again soon as excessive ordering volumes start to deliver? Or is there more life in the old dog of „Tier 1 Trades“ than we believe? The latter is worth taking a closer look at based on what we know today:
1. There is the big sword of Damocles – the EEXI regulation (the IMO’s introduction of the Energy Efficiency Existing Ship Index). We understood for many liner operators this will practically mean that the ships will opt to reduce the maximum engine power in order to comply with the new regulation. Most of the time this will not affect day-to-day operations. However, one very important fact gets neglected: sometimes container lines need to speed up to compensate for congestion and bring vessels back on schedule. In our last edition we identified congestion as a key element of the charter market rally. If upspeeding gets impossible, charterers have no choice than to add more capacity to get the same amount of flexibility as before. In that case, the recent ordering rally looks rather justified…
2. Could it be that we are stuck in historical patterns that actually don’t apply any longer when limiting the big ships to just a few big trade lanes? Some food for thought in that respect: Out of the 400 busiest ports, 142 are capable of handling 14,000 TEU vessels. And these represent around two thirds of all global port calls in container shipping. Moving down to the next smaller class of 8,000 TEU, the range of operable ports is just 50 more – boiling down in term of total port calls to just 9 % more flexibility. Therefore the 14,000 TEU class is simply the workhorse of the future for global coverage. It means that opportunities for this size class are much bigger than previously thought. In that respect, the addition of 2.1 mill. TEU (or 10 %) to a trading fleet of 22 mill. TEU looks far more manageable.
3. Likely the most important question for future container growth: How will the „Green Deal“ of the European Union impact and shape global trade? At the moment, more or less all European leaders proclaim a „transformation“ to a green, zero-carbon economy at all cost. The commercial consequences are clear: there will be massive energy cost inflation in the EU making production yet more expensive. Politicians vow that they will still maintain a level playing field for the industry, which would only be possible through massive protective tariffs to protect expensive EU production. However, due to the complexity of it, it is more than likely that the EU will fail on this issue – like it does already on the complex issues related to Corona. Container shipping could then reap substantial benefits as CO2 emissions (and production) will shift East and additional export volumes start flowing West (China-to-EU). Forget all about nearby-sourcing…
So, in summary: Generally, we cannot avoid the impression that the recent ordering spree might be pushing it too far. Everyone would like to gain the advantage of a first mover, when in reality it’s become a mass trend already with major consequences for supply demand overall. On the other hand, past experience may not the best guide any longer due to changes in port infrastructure, trading flexibility and new demand trends based on disparities in energy costs. The truth is, we have no clue what kind of markets there will be in two years time when all the ordered ships will hit the water. One thing is for sure, though: ultra cheap interest rates will overdraw today’s ordering trend. Therefore, this time I wouldn’t play all-in.
THE MARITIME OVERVIEW (DR. THOMAS HARTWIG)