2016 was a bad year generally for the box trades but some segments are off to a good start in 2017, says Barry Luthwaite
The first eight weeks of this year yielded US$1,000 per container on routes from Asia to northwest Europe, and healthy jumps in rates have been recorded elsewhere. Owners have taken stock of economies of scale, with similar increases in charges per teu in evidence this year, lifting average rates up by one third over 2016.
Caution is the watchword, as 2017 is still young and much could still happen in such a volatile market. Signs are encouraging, however. While orders for tankers and cruise liners continue to be placed, the newbuilding market has witnessed a virtual standstill in orders for deepsea container ships, which is good news for those who want to see a more balanced market. The opposite viewpoint is held by shipyards, however, which are desperate for more business. In the short term they must not get their wish, if a fragile recovery is not to be killed at birth.
Other drastic measures are ensuring that smaller operators are squeezed to the bone by the undisguised ambition of the major operators. Mergers are occurring and these will gather more momentum in 2017. Already, of course, Maersk Line has taken over Hamburg Süd and the three Japanese majors Mitsui OSK Lines (MOL), Nippon Yusen Kaisha (NYK Line) and Kawasaki Kisen Kaisha (K Line) will consolidate into a joint container operator from June 2017. The next big one on the cards is Orient Overseas Container Line (OOCL). There are rumours of bidders but nothing has been confirmed at this stage.
The big shock in 2016, of course, was the bankruptcy of South Korea’s Hanjin Shipping Co and the speed with which the event happened. The industry is still not immune from further liquidations. Germany continues to be badly hit having once been the market leader. Its hitherto strong trading presence continues to decline as shipowners are powerless to prevent the enforced sale by banks of KG funded individual vessels. How fortunes have changed since KG funding first put German owners in pole position. Now a new problem looms, as smaller private equity investors question the wisdom of putting more money into a struggling industry. Investors continue to be nervous as shipping is seen as risky, and even a bad investment.
BRL Shipping Consultants statistics at the end of 2016 show that 508 vessels will have added 3,982,200 teu into the global fleet by the end of 2020. Negotiations to defer and even cancel some of the current newbuildings continue. The market upturn could persuade most owners to hang on to their ships. Other owners have adopted a successful policy of leasing vessels from shipyards on a bareboat charter basis, with a compulsory purchase clause at some stage within the charter period. This is employed by owners of newbuildings in Japan and South Korea, in particular. Attractive offers of this kind make it easier for shipbuilders to acquire new business and for owners to manage their cash flow better. Already, majors Maersk Line, Mediterranean Shipping Co (MSC) and CMA CGM have taken advantage.
A salient factor in 2016 was the dearth of orders for ultra large box ships. Set against this is the fact that in 2015 a number of owners joined the rush to order ships with Tier II engines in order to beat new legislation, when a cap of 0.5 per cent sulphur content in fuel is introduced in 2020. The prospect of installing Tier III engine models, plus ballast water treatment systems, adding US$1-3 million to the cost of a ship, is dissuading shipowners from ordering at the current time.
Scrapping, while remaining low, enjoyed its best year for some time in 2016 with over 500,000 teu removed. Units built in the 1990s are now prime candidates for recycling while Panamax sizes remain under threat from wider beam vessels and ultra large container ships, as they become uncompetitive with the march of size and technology.
In 2016, 127 container ships were ordered but there was an absence of ultra large vessels save four 20,150 teu vessels for the Imabari Shipbuilding Co account. These will trade in the shipping division of Shoei Kisen Kaisha. Among the orders there was a plethora of feeders from 1,000 to 5,000 teu, underlining the influence of boom conditions in this sector.
A saving grace for shipyards suffering a dearth of orders came in the second half of 2016, when sanctions against Iran were lifted. Four 14,400 teu units were contracted at Hyundai Heavy Industries in South Korea and more will be ordered in 2017, probably in China. Iran opens up new trading options in the Middle East. Services that are already operating are utilising modern tonnage, as the Iranian merchant fleet has deteriorated.
New trade is welcome, so it is unfortunate that there is now uncertainty about the restrictions the USA may impose on trade as it promotes an America First policy. Already the US has pulled out of the Trans-Pacific Partnership, forcing the other eleven Pacific Rim nations to seek new trade agreements.
Engine manufacturers have not been hit badly with cancelled contracts so far, but they have been forced to accept production delays as owners defer some deliveries, especially for ultra large container vessels. This is a sound move, as slowly but surely the trading balance gap is shrinking – although it is affected by seasonal variations. With increasing debts in an economic downturn, China is suffering badly. Bold plans to be more self-sufficient in feeder trades have suffered through cancellations. A number of vessels were ordered at small and medium yards that have since gone into liquidation or come under court protection.
The feeder perspective globally is doing very well. Even now, despite an improvement in trading conditions and higher rates per teu, some ports are being missed out by the majors or are only being served on alternate voyages. This has considerably boosted the employment of feeders to fill the gaps, hired at attractive rates for spot or period business.
For suppliers of propulsion solutions there is a feeling that the industry has gone as far as it can go at the moment. Energy saving is of paramount importance for operators, especially with fuel prices again edging up. This will always concentrate the mind, but for the moment Tier III model engines are filling production gaps to meet the new emissions control legislation. The rush in 2015 to beat the deadline for the validity of Tier II engines will pay dividends in cost savings against more expensive Tier III types.
There will be a boost, too, for repair yards, with more modern container ships drydocking early to fit ballast water management systems and scrubbers. It is noticeable that once-favoured four-stroke engines, employed on many German owned feeders, are disappearing into history. Modern two-stroke dual-fuel types are featuring more and more, especially for Baltic and Scandinavian traders as the infrastructure for liquefied natural gas (LNG) fuelling takes shape. Wärtsilä offers two-stroke and four-stroke engines, as does MAN Group. The port of Rotterdam is pursuing a programme of LNG supply for bunkering the world’s biggest container ships.
This year will offer tough conditions which are expected to ease as a result of economies of scale and developments in the industry. It brings a growing belief that a corner may have been turned and that the industry is beginning to recover. There is one sobering thought, however. Between now and 2020, 72 ultra large container vessels are due to add 1,420,708 teu of capacity. This could upset the market, unless the increase in recycling continues apace.