Are idle ships a good gauge of liner sector health?

Janet Porter – LLOYD’S LIST

ORDERS for new containerships are likely to be placed within the coming year regardless of how many others remain in lay-up.

The size of the idle containership fleet is coming down rapidly at the moment as lines revive services that were suspended at the height of the recession, ahead of an anticipated peak season this summer.

But some commentators claim too much attention is being paid to inactive capacity when taking the pulse of the liner shipping industry.

“That’s 180° wrong,” says Tiger Group chairman Graham Porter.

“No aviation industry analyst would judge the airline business on the number of planes mothballed in the desert,” he points out.

Likewise, the total amount of under-employed boxship tonnage is too blunt an instrument to use when determining the health of container shipping.

Instead, attention should be paid to the way that lines have cuts costs and adjusted their fleets so that the most suitable ships are in place on the right trades, a far more subtle methodology.

At the moment, the amount of laid-up capacity appears to offer a good bellwether for the industry as ships are put back into service in response to a steep recovery in cargo demand that has sent freight rates soaring.

That has lightened the mood in an industry that emerged from 2009 shell-shocked, and with question marks over the survivability of some household names.

Having touched almost 12% of total fleet capacity late last year, the size of the decommissioned containership fleet is now down to about 8% and expected to decline further in the weeks ahead.

In some categories, such as the sector covering ships in excess of 5,000 teu, the idle fleet is insignificant, according to Maersk Broker, with the 30 vessels still inactive expected to come back into service in the second quarter.

But overall, the industry may have to get used to a semi-permanent pool of unemployed tonnage, says Mr Porter, one of the founders of containership owner Seaspan.

That will not necessarily indicate that the industry is still weighed down by excess capacity which will depress ocean carriers’ profits, he says.

Rather, it shows that lines will pick and choose the particular ships they operate in each trade with perhaps more care than in the past.

Container lines have proved that they are sophisticated users of capital, he argues, with a mix of owned tonnage and ships on short-, medium- and long-term charter in their fleets.

Companies such as Seaspan, which pioneered a new business model for the container shipping industry by only ordering ships backed by long-term charters from bluechip customers, are the beneficiaries of this shift in corporate thinking over the past decade.

While the container shipping industry has been accused of reckless behaviour for ordering far too many ships on a speculative basis, Mr Porter contends that most of the major lines have acted responsibly in the way they have managed their own businesses.

Talking to Lloyd’s List shortly after Seaspan chief executive Gerry Wang said the recession had not been deep enough to drive out the speculative forces, Mr Porter drew attention to different approach to risk and reward that owner-operators take, compared with the non-operating owners.

Lines will fix ships on short-term charter at higher rates during the busy times, and return them in the slack periods, with the excess tonnage acting as a shock absorber for carriers as they adjust capacity through the seasons.

In the coming years, fleet upgrades will be a priority as pressure grows for cleaner and cheaper ships.

Returning to profit and replenishing their balance sheets after the shock of 2009 may take some years, but that will not stop lines from approaching the shipyards fairly soon, Mr Porter anticipates.

Those ships that remain in lay-up will not meet the needs of the lines and may find themselves stuck in long-term under-employment. That will hold down charter rates for certain ship types.

Instead, carriers will be after “the right ship for the right trade”, with more efficient propulsion systems than the current generation, higher reefer capacity, and new design characteristics that reduce running costs without impairing cargo intake. Mr Wang wants yards to reduce the amount of steel in newbuildings and the use of more lightweight materials, and is calling for some “revolutionary” changes, not simply a few “tweaks”.

Both he and Mr Porter say the shipyards have not shown enough leadership in developing new designs, and that their customers will expect more innovative thinking during the next round of contracting.

That may not be far off, despite the horrors of the past year as massive over-supply sent freight and charter rates into freefall.

Lines will be highly selective in what they order, and will acquire tonnage both directly and through third-party providers such as Seaspan. Third-party providers will have a vital role to play in an industry that needs to find new sources of capital to fund future newbuilding programmes.

Those operators in the vanguard of resumed newbuilding activity are likely to be after tonnage with specific features such as wide post-panamaxes suitable for the north-south trades, and super-sized ships up to 13,000 teu, as well as new-style feeders with very high reefer capacity that would render older vintages redundant.

Shipyards will have to fight hard for the business and be able to offer lines more innovation, but with designs based on standards modules so that alliance partners can more readily inter-change and share tonnage.

Prices will not necessarily be much lower than they were at the height of the newbuilding boom, but the ships of the future should be far cheaper to run than those in operation today, and be less-polluting, Mr Porter says.

South Korean shipbuilders are in particular danger of being left behind unless they work with their customers to build better ships, he warns.

That view is backed up by others, with Maersk Broker noting that Chinese yards are the most active in marketing new designs, although they have not yet taken any orders.

Nevertheless, a number of lines are already preparing to return to the yards with tender requests, with the first orders likely to be placed early next year regardless of whether a sizeable pool of inactive containership capacity still exists.

Many of the ships still out of work are sub-optimal and may remain stuck in long-term lay-up.

But that apparent surplus capacity is a misleading measure for an industry that should soon decide the time is right to start ordering new ships again.

Leave a comment

Filed under Lloyd's List

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s