CONTAINER shipowners are said to be in for one of the toughest years on record as vessel values continue to fall.
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, said a Danish banking group.
The latest market review by the Danish Ship Finance and cited by London's Loadstar indicates that the outlook for the box trades appears to be gloomy for most major deep-sea carriers and even worse for shipowners, because the orderbook, which currently stands at around three million TEU of capacity, is way above what the global economy actually needs to move its trade around the world.
Owners are also in a dilemma as demand remains flat and overcapacity continues, charter rates 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 average value of a 10-year old vessel fell by 44 per cent last year, which was 70 per cent lower than the 2008 market peak; a five-year old 3,500 TEU ship was worth 32 per cent less than in 2011, while the value of a 15-year-old vessel of the same size was 50 per cent lower; and newbuilding prices dropped by 20 per cent, almost entirely eradicating any profit for shipyards.
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 seven per cent this year, taking into account possible order cancellations and delivery deferrals, nominal overcapacity is also expected to rise four percentage points to some 23 per cent of the global fleet, so scrapping will also have to increase, although whether it can make any meaningful dent in the overall supply-demand gap is questionable.
"Postpanamax vessels younger than 10 years-old have to become scrapping candidates if the capacity of the current postpanamax orderbook is to be counterbalanced by scrapping. Temporary lay-ups of idling vessels may [also] become an issue again this year or next."
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 per cent 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," said the Danish Ship Finance review.
Ironically, this would appear to be a major step forward for the shipping industry, given that the prime cause of the current crisis is overcapacity, said the report. Last year global shipyard capacity declined by only three per cent and "it needs to shrink further because the present situation is patently ridiculous," the review added.
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