Big ship shopping

12 Nov 2017Print

Which companies are most likely to order more mega-ships, and should they?

One of the most asked questions from Drewry’s container market outlook webinar last month was if we think other carriers will follow CMA CGM and MSC with a further ordering spree for Ultra Large Container Vessels (ULCVs) of over 18,000 teu.

Our answer at the time was that we think it unlikely, but not impossible. Since then, Cosco Shipping Holdings has announced plans to raise a huge $1.9 billion war chest through the issuance of new shares, which will be used to part fund the purchase of 20 new ships, including 11 units over 20,000 teu and nine in the more modest 13,800-14,500 teu range. Meanwhile, Korean line Hyundai Merchant Marine (HMM) has also denied various reports that it is planning to splurge on as many as 14 vessels of up to 22,000 teu.

As well as proving that no analyst can ever be right all of the time, the latest developments highlight the shortage of logical assumptions that one can reasonably apply when predicting newbuilding plans.

Our rationale for being doubtful on new orders included financing constraints, latent market overcapacity and the size of the existing orderbook. Additionally, we believe that the scale economies argument for wanting ULCVs in the first place is false as cost savings at sea are countered by higher costs at port, which in theory should have reduced the industry’s appetite for them.

Last year, Drewry carried out a simulation study of the operational and financial impacts on lines, terminal operators, ports and other supply chain stakeholders as vessel size increases up to and beyond 18,000 teu. The study found that scale economies from megaships only work for the total supply chain if terminals can increase productivity in line with increases in vessel size. Figure 1 shows the combined shipping line and port ‘total system’ cost savings peak at only 5% of total network costs and economies of scale diminish as vessel sizes rise beyond 18,000 teu.

Figure 1: Are economies of scale running out?

Source: Drewry Maritime Advisors

Clearly, not everyone shares our opinion on the diminishing returns of ULCVs, and of course the financial constraints we mentioned do not apply to every company in the industry. China’s Cosco, for example, has vast state-backed resources so it can almost afford to play by its own rules.

At present the orderbook is very top-heavy with ships of 18,000 teu and above, accounting for very nearly 50% of all ships scheduled to be delivered by the end of 2020 (see charts below). Based on the current demand outlook that is arguably already more than what is required in the short and medium term, so adding the Cosco and possible HMM orders into the mix will only damage carriers’ chance of attaining supply and demand equilibrium.

Figure 2: Containership orderbook by size range, '000 teu, November 2017

Source: Drewry Maritime Research

Figure 3: Containership orderbook by size range, share, November 2017

Source: Drewry Maritime Research

One thing that did make us pause when mulling over the likelihood of more ULCV orders, was the uneven distribution (active and ordered) by operators and alliance. CMA CGM’s order made some sense because it helped them play catch up with its nearest rivals in the rankings game as the French company has a relative shortage of ULCVs in comparison to Maersk Line and MSC (see Table 1), while it also faces stiff competition from the expansionist Cosco, threatening its pre-eminence in the Ocean Alliance.

Table 1: Carriers with containerships of >18,000 teu, active or on order, November 2017

Note: Includes six active units of 17,700 teu operated by CMA CGM; treats all companies involved in M&A activity (finalised or pending) as a single entity
Source: Drewry Maritime Research

Table 2: Alliances with containerships of >18,000 teu, active or on order, November 2017

Note: Includes six active units of 17,700 teu operated by CMA CGM; treats all companies involved in M&A activity (finalised or pending) as a single entity
Source: Drewry Maritime Research

Therefore, we considered that any future ULCV orders would come from an operator within an alliance with the fewest of them. As Table 2 shows, the obvious candidate using those parameters was THE Alliance, comprising of Hapag-Lloyd, Yang Ming and the three Japanese lines (NYK, MOL, and K Line) that will next year merge container operations into the Ocean Network Express (ONE) brand. Its fleet of 18,000+ teu ships will barely be one-fifth the size of 2M’s when all of the newbuilds are delivered.

We considered ULCV orders from this group unlikely because of more limited financial resources, and because nothing in their public utterances suggested any of them would make the splash. Here, at least, it appears we were correct in our assessment as last month at the TPM Asia conference, ONE chief executive officer Jeremey Nixon said: “I am not convinced by the big ships. I don’t believe that is the way forward.”

Outside of the Top 20, two carriers to watch out for as potential ULCV buyers because of past expansionist rhetoric are IRISL of Iran and newcomer SM Line from South Korea.

Our view

Companies with the most logical reasons to order ULCVs probably won’t, whereas companies that already have plenty are the most interested in adding to their fleets. The supposed prestige of being the biggest carrier appears to be outweighing economic sense at the moment.