Drewry: Potential for Container Shipping Profitability In Danger
Having been dormant for over 18 months the containership orderbook could be about to jolt back to life as CMA CGM is reportedly on the verge of signing an order for nine 22,000 TEU ships.
One of the two conditions for sustainable liner industry profitability that Drewry only last week laid out in a whitepaper is already in danger of being compromised. Despite a long period of sobriety it appears that carriers’ addiction to big new ships still remains in the blood stream, with news that CMA CGM is preparing to order up to nine 22,000 TEU units.
As first reported by Daily Splash and then Lloyd’s List last week the French carrier is in the final stages of negotiations for six firm orders, plus three options. If confirmed, the ships would become the largest of their kind, overtaking the 21,413-TEU OOCL Hong Kong (and its five sister ships still on order) that was delivered earlier this year. According to the media reports the ships are likely to be LNG dual fueled with China’s Shanghai Waigaoqiao Shipbuilding (SWS) and South Korea’s Hyundai Heavy Industries (HHI) in the running for the contracts, either solely or partly.
Given the chronic (and ongoing) overcapacity problem that has blighted carrier profits in recent years what could have tempted CMA CGM to risk undermining the still very fragile recovery?
To answer this question we have to remember that first and foremost carriers make decisions and investments with a view to their own standing; the potential impact to the wider industry being a secondary consideration, if at all. From CMA CGM’s point of view it is faced with demotion in the carrier rankings post Cosco and OOCL merger, while it was also short of top-end ships compared to its nearest rivals.
Add in the fact that the underemployed shipyards have probably offered a sizeable discount (admittedly we do not know the terms of the potential order) then it is easy to see how CMA CGM was convinced to make the splash. An improvement in cash flows linked to higher freight rates may also have given the carrier more confidence in making large capital investments.
In some ways this deal is all about the company playing catch-up. Its largest active ships are six (three owned) units of between 17,772 TEU and 17,859 TEU, while the biggest ships in the orderbook are three 20,600 TEU units that were originally due this year but were deferred to 2018. In comparison, Maersk Line has a total of 31 (all of which are owned) units above 18,000 TEU, either active or on order. Adding all nine ships will nearly double CMA CGM’s current orderbook to about 423,000 TEU and will help close the gap to its nearest rivals, although not by enough to reclaim its third place ranking.
As compelling as the individual case may be no carrier operates in a bubble and should this order become reality there could well be some hidden costs that CMA CGM and all of its cohorts will have to bear. From an industry perspective there is simply no good reason to add these ships to already overcrowded oceans.
We don’t know when (if at all) these ships will hit the water, but the existing orderbook is already close to three-million TEU due by the end of 2020, to add the active fleet that recently passed the 20 million TEU milestone. The bulk of new deliveries will arrive before 2019 and are heavily skewed at the top end of the range with 18,000+ TEU units (that have very limited deployment options) taking up nearly 40 percent of the orderbook. Adding even more ships to this top-heavy pool will make the task of deployment and cascading harder than it already is.
How much damage these ships might do to the supply and demand balance will depend on the prevailing conditions at the time of their delivery. We assume they will arrive after 2019 when the orderbook will have mostly played out, while increasing cargo flows and greater scrapping could also mitigate their impact. Yet, while these ships on their own will not significantly alter the supply-demand dynamics, it will become more of a problem for the industry if herd mentality kicks in and others follow. Will Evergreen, ONE, and Hapag-Lloyd, for example, now follow with orders for 22,000 TEU to play the catch-up game or will they remain more cautious in managing their balance sheet?
This unconfirmed order suggests, for some carriers at least, that growing market share remains their driving principle, when the recent trend has been to pay off debt. How many lines share that view will determine whether the industry can stay on the path towards sustainable profitability, or slip up and repeat the arm’s race and the over-capacity tendency of the past.
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