News / Vessel values plunge as container shipping sails into heavy seas

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Container shipowners are predicted to be in for one of the toughest years on record as vessel values continue to plummet, offering a key insight into see-sawing sea freight rates. Despite signs of a significant contraction in shipbuilding activity, it appears that the gap between container slot supply and demand for box transport will only widen.

According to Danish Ship Finance’s latest market review, the prognosis for the box trades appears to be unremittingly gloomy for most major deepsea carriers, and even worse for shipowners, because the orderbook, which currently stands at around 3m teu of capacity, is way above what the global economy actually needs to move its trade around the world. And more than half of that 3m teu is due to be delivered this year alone, mostly in the form of ultra-large container vessels that are likely to be destined to operate on the moribund Asia-Europe trade.

Owners have come to find themselves in a series of Catch-22s. As demand remains flat and overcapacity continues, charter rates – the price at which owners lease vessels to shipping lines – have barely remained above break-even levels, and bankruptcies among the smaller owners – particularly the German KG funds which typically own just one ship – are on the rise.

For owners to see any returns, either demand has to increase or supply decline. The former appears to be out of the hands of well… anyone, on current evidence; while tactics available to reduce supply are limited to three: slow steaming, lay-ups and outright scrapping.

Despite the fact that all three were deployed over the last year or two, and continue to be, values of container ships have been dropping steeply, Danish Ship Finance said. The average value of a 10-year old vessel (almost a spring chicken in shipping terms – most commercial vessels are designed for a minimum age of 25 years, and depending on trading areas many can operate for considerably longer) fell by 44% last year, which was 70% lower than the 2008 market peak; a five-year old 3,500teu ship was worth 32% less than in 2011, while the value of a 15-year-old vessel of the same size was 50% lower; and newbuilding prices dropped by 20%, almost entirely eradicating any profit for shipyards.

“Newbuilding prices seem to be approaching construction costs. This, combined with the low number of yards actually capable of building container vessels, could indicate that newbuilding prices are at, or near, the bottom. Let us hope that this will not result in a new order boom,” it said.

And therein lies the rub: once the prices of assets in an asset-heavy industry appear to be bottoming out, a whole raft of speculative, cash-rich investors begin circling it, eager to pick up bargains which are expected to generate fat returns once the market starts growing. But in this particular industry, where the prospects of strong demand seem so distant, opportunistic ordering such as this is likely to prolong the depression in the box trades.

Nonetheless, with the fleet expected to grow by 7% this year, taking into account possible order cancellations and delivery deferrals, nominal overcapacity is also expected to rise by around four percentage points to some 23% of the global fleet (or 4m teu slots), so scrapping will also have to increase, although whether it can make any meaningful dent in the overall supply-demand gap is questionable.

“Post-Panamax vessels younger than 10 years-old have to become scrapping candidates if the capacity of the current post-Panamax orderbook is to be counterbalanced by scrapping. Temporary lay-ups of idling vessels may [also] become an issue again this year or next.”

A further bind for non-operating owners is that most of the new generation of ultra-large containerships are owned by shipping lines, and since the cost-per-teu of operating a 13,000teu vessel is way under that of an 8,000teu vessel, demand for smaller post-Panamax tonnage is even further depressed.

One potential upside however, is the resulting rebalance of the supply of ships, with a slew of small and medium-sized Chinese shipyards expected to go out of business this year and the next.

“We estimate that as much as 20-30% of current yard capacity will be in excess and might eventually be shut down. Small and medium-sized privately owned Chinese yards appear to be at the epicentre of the capacity adjustment process. We estimate that by the end of 2014 global yard capacity could be back at the 2008 level.”

Ironically, this would appear to be a major step forward for the shipping industry, given that the prime cause of the current crisis – and in itself a major contributor to the huge volatility in freight rates – is overcapacity. Whether it was over-ordering that led to overcapacity in shipbuilding, or that overcapacity in shipbuilding encouraged over-ordering is a moot point. There was too much of both, but it will take some time to work its way out of the system – last year global shipyard capacity declined by just 3%.

It needs to shrink further because the present situation is patently ridiculous. It is a colossal waste of time and effort, as well as  natural resources, to mine all that ore, transport it halfway across the world (burning hundreds of thousands of tonnes of fuel in the process) to build an enormous box ship that is economically obsolete in less than half its possible working life. Isn’t it?