Boxship orders to begin anew

Boxship orders to begin anew Analysts predict lines will begin ordering vessels again in 2011, though financing will likely remain difficult.

By Eric Johnson

      With the apparent recovery in the container shipping industry well underway, analysts have begun to suggest that container lines will likely begin ordering vessels at some point in 2011.
      Philippe Hoelinger, vice president of SeaAxis, said at Containerisation International's Global Liner Shipping conference in London in mid-April that ordering would begin again as soon as the third quarter of 2011.
      He said the order book, as a percentage of the existing fleet, hit a peak in 2007 at 63 percent. Historically, the minimum percentage in that ratio is 20 percent, which the industry will likely reach in the third quarter of 2011.
      So Hoelinger is predicting orders will have occurred by that time, 'if nothing dramatic happens until then. The order book by the end of 2010 will go from 4.2 million TEUs to 3.5 million TEUs, and drop to 2.5 million TEUs by the end of 2011. Lines will definitely start ordering in 2011.'
      In early May, maritime news service Alphaliner made much the same case.
      'If the present drought of orders continued for another 12 months, the order book could fall to a record low of 9.8 percent by December 2011. During the last industry slump in 2002, a consequence of the dot-com crisis combined with ripple effects of the 1997 Asian crisis, the order book dropped to 17.6 percent before a recovery that saw sustained ordering activity which lasted six years. Going back further to the previous slump in 1999 (aftermaths of the Asian financial crisis), the order book-to-fleet ratio touched 14.6 percent at its lowest point.'
      Alphaliner's prediction is even more aggressive than that of Hoelinger, with the Paris-based analyst saying ship orders could occur as soon as the first quarter of 2011.
      'Alphaliner expects owners and operators to begin to seriously consider placing fresh orders for containerships once the order book ratio goes below 20 percent, which is expected to be reached by the first quarter of 2011,' it said. 'There are already signs that some owners are considering the placement of new orders during this year, while prices are still competitive and while yards are more receptive towards new designs.'
      Evergreen Line, the only line among the world's largest to have refrained from ordering new ships in the latest vessel-ordering cycle, said earlier this year it planned to order as many as 100 new ships in the near future, though it has yet to place a firm order for any ('Evergreen to order up to 100 ships,' www.AmericanShipper.com/links).
      'Apart from Evergreen, it is still unclear which of the major carriers have the appetite and capacity to take on new orders following last year's industry slump, which has wiped out about $15 billion collectively from the carriers' balance sheets,' Alphaliner said. 'While Evergreen does not have any vessels on order presently, the rest of the carriers in the top 20 all have vessels on order, ranging from 12 percent of the current operated fleet for Hapag-Lloyd to 78 percent for COSCO.'
      In September 2008, the full containership fleet was 11.8 million TEUs, with an effective fleet of 11.6 million TEUs, Hoelinger said. In March 2010, though the fleet is 13.1 million TEUs, the effective fleet is actually down almost 2 percent from 18 months ago, at 11.4 million TEUs. That's due to idling, slow-steaming and scrapping measures ' not to mention order deferrals and cancellations ' taken by carriers the past year.
      The order book has fallen from 6.4 million TEUs in September 2008 to 4.2 million in March 2010, with 1.8 million TEUs delivered and 400,000 TEUs canceled.
      Hoelinger has calculated that the five-year average of ship deliveries adds about 110,000 TEUs to the global fleet every month. Despite all the order deferrals and cancellations, owners are receiving roughly this amount every month again. He also said that scrapping 'remained a negligible part of the total fleet and mostly was confined to 10 or so container lines that scrapped a lot.'
      'There's also been a lot of talk about cancellations, but only 6 percent of the September 2008 order book has been canceled,' he said.
      The idle fleet, Hoelinger said, allowed global excess capacity to be 5 percent, rather than 15 percent, in 2009. He projects that the idle fleet would return to 2008 levels by spring 2011.
      'If you look at the liner companies, reduction of the idle fleet started in December 2009,' he said. 'At the current pace, the idle fleet will be fully absorbed by the end of 2010. But for the charterers' fleet, the idle fleet will take until the end of 2011 to clear at the current pace.'
      SeaAxis estimates that by the end of 2010, the global fleet will have 13.6 million TEUs, of which 12.8 million TEUs will be fully utilized. By the end of 2011, there will be 14.5 million TEUs, of which 14.2 million will be fully utilized, or a 25 percent increase on today's level.
      'That's quite a lot of capacity being added,' Hoelinger said.
      He also said there's a 'strong underlying trend that charterers will own more vessels than operators.' Considering Japan's big three carriers all indicated this year they plan to reduce the size of their owned containership fleets, he may well be right.
   One of the biggest lessors of containerships, Vancouver-based Seaspan Corp., agreed that non-operating owners may well take an increasing share of global capacity.
   'Non-operators control 50 percent of capacity today,' said Gerry Wang, chief executive of Seaspan. 'In 1999, charters were less than 15 percent of global capacity. It's impossible for liner operators to update these fleets just through their own profits or cash reserves. Our job is to figure out how to take advantage of the bad times. The company was born during the 1998 Asian crisis, so we're accustomed to dealing with bad times.'
      Wang compared the overcapacity crisis in the shipping industry to the U.S. subprime mortgage meltdown.
      'Three years ago, financing was as simple as going to Starbucks and ordering a coffee,' he said. 'But my worst fear is that the crisis wasn't big enough or deep enough to provide the correction that was needed.'
   Wang said he is upset, as reports earlier this year indicated, that ship owners who are honoring their contracts are being penalized for doing the right thing.
      'Fourteen percent of Hyundai Heavy Industries' order book is Seaspan,' Wang said, adding that his company has more capacity on order with the Korean shipyard than any other single ship owner. 'When I went to see them, they didn't want to see me because they knew we would pay. For those that weren't paying, they rolled out the red carpet. We're trying to change the mentality.'
      Wang said he thinks the shipyards believe business will come back. He also said he doesn't see the industry jumping into 16,000- to 20,000-TEU ships.
      'It takes time to figure out how these new animals will perform,' he said. 'I think we'll live with 13,000- and 15,000-TEU ships for a long time. My prediction is that ship prices will go down and it has nothing to do with freight rates. It's simply because there is no money to pay for these ships.'
      To that end, Peter Shaerf, managing director of AMA Capital Partners, said there are a number of ways owners can raise that money:
      ' Use traditional bank financing, though this option is dwindling given banks' reticence to finance projects laden with uncertainty.
      ' Seek German KG ship financing, though KG houses are facing a murky future, with many under a threat of insolvency. Shaerf added that KG houses raised only 871 million euros in 2009 after raising 3 billion euros in 2008.
      ' Find private equity investors, though 'private equity is not in love with container shipping,' he said. 'You can't make money right now in the short term and long-term prospects are unclear.'
      ' Conduct sale and leaseback schemes, which Shaerf argues might be the best source of future financing. 'The sale and charter-back model is working, but it will take companies with strong balance sheets.'
Shaerf said the fundamentals of container vessel ownership make it a difficult proposition for lines.
      'Obsolescence occurs much faster with containerships,' he said. 'You have 1988 post-Panamax ships now being scrapped. You have 3,500-TEU ships being cascaded into the feeder market. The market has to absorb significant supply in the next few years. The order book is valued at $70 billion and that's being partially paid and partially financed. The industry needs $35 billion in financing for the container fleet alone.'