Containership owners to take cover

After a decade of vibrant growth and strong markets, containership owners are finding themselves faced by an increasing oversupply of vessels. The economic recession last year coincided with all-time-high deliveries of large container vessels which will see the fleet grow by 26 per cent by 2004. With OECD growth prognoses of 1.5 per cent in GNP for the coming years, the container market will have to go through a painful process of adapting tonnage to trade.

Container transportation has been the strongest rising sector in shipping for 15 years, with an average annual increase in volume of nine per cent. It has grown from the general containerization process as well as the globalization.

The last decade has witnessed an immense consolidation amongst liner services and the establishment of large-flow systems around the world. These systems are based on high volumes from hub to hub, from which secondary services take over the north-south legs.

Most of the large operators like Maersk-Sealand, P&O-Nedlloyd, Evergreen etc, are also owners of their core fleets, mainly of large vessels, whereas a significant share of the world’s container fleet is owned by independent owners and time-chartered to operators. Officially a quarter of the container tonnage is owned by German companies, according to statistics from Verband Deutscher Reeder, and Germany as a maritime nation has prospered greatly from the vibrant container market. And thanks to a favourable tax regime German owners have had access to equity to build new vessels.
The structure of the container market resembles that of the tanker market, with a large number of charterers operating ships on T/C. The three largest operators, Maersk-Sealand, Evergreen and Cosco between them control some 18 per cent of the container ship capacity.
Examination of the order stock reveals that the main share is for very large units of 4,000 TEU and above, a segment which is set to grow by 58.5 per cent in the next few years. For smaller vessels the growth ratio is more modest; 16 per cent for the 2,000– 4,000 TEU category and nine per cent for 1,000–2,000 TEU.
However, the trend has shown that larger vessels are replacing smaller according to scale economies, and some observers think this may increase the rate exposure on medium-size vessels. However, 1,000-TEU carriers have fared rather better in the charter market than larger ships and were paid the same rates as 1,700-TEU vessels when the marked scraped bottom, as in the winter of 1999. It also appears that the largest vessels have the greatest fluctuations in rate level, notably a 40 per cent drop last year.

A passing recession
We have seen collapsing markets coincide with huge deliveries before. That was exactly what happened to the VLCC market in 1973, from where it took 12–14 years for the demand to absorb the surplus. That time, however, the world economy was heavily upset, oil consumption dropped and balance was only restored after extensive scrapping.
The present situation is apparently just a passing recession, but a surge of scrapping of older container carriers is expected. Howe Robinson, a London-based shipbroker, has estimated that vessels of 35,000 TEU were scrapped last year and expects another 125,000 TEU this year.
For container vessels in European feeder trades the specifications have been sharpened for capacity and speed. Older vessels from the mid-70s are still being used, but will be replaced by newer and somewhat larger units. Modern container-fitted vessel of 4,500 tdw with a capacity of 350 TEU may squueze out smaller vessels in established services, simply because they are available at only marginally higher rates.

Tumble down
Newbuilding and second-hand prices have tumbled down in the wake of the charter market. For newbuildings the softening market through 2001 has given a drop of around 20 per cent, from USD 40 to 32 million for a 3,000 TEU carrier, according to R S Platou Shipbrokers. Second-hand vessels have been even harder hit, from USD 15 to 10 million for a 17-knot 1,000 TEU vessel.
Container shipowners did enjoy strong markets from 1988 to 1998 when they were affected by the Asian crisis and now the recession. There is however much to indicate that the party may be over, and that even this sector will see the narrow margins of a more balanced market in the future.
Future demand will depend on the continued growth in South East Asia and consumption in OECD countries. There may still be a potential for containerization in undeveloped areas, but this will mainly benefit smaller units. The large fleet and the intensive competition between operators in a consolidated market all point to lower rates and profit for container shipowners in the future.

//Dag Bakka Jr