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The Containerships Market in 1998  

The free-fall

 

The containership charter market remained in free fall, with declines accelerating in most sectors throughout the year. With all new tonnage that came on stream, the older and slower vessels have been permanently cutting their rates and accepted lousy terms just to stay employed. The lists of open vessels remained long in almost each category and we have seen a number of owners constantly willing to undercut the last done fixture.

In this spirit, owners often had to accept ballasting considerable distances for their charters, sometimes even for relatively short term fixtures, and additionally wait to deliver their vessels.

In addition to the phenomenal amount of new-buildings delivered this year, a great number of long term charter-parties fixed during the strong market in 1995 came to an end in the course of 1998 and naturally created extra pressure on the market.

Charterers being extremely confident that the market was continuing to move in their direction, we naturally observed shorter charter periods which then quickly became a further destabilizing element. With many ships fixed for round-voyages or short interval periods, a multiple of vessels have been landing back on the market regularly.

We won’t spend too much lines on statistics, but here below the highlights observed in 1998. A total of 302 newbuildings have been delivered this year in the range 150 teu and upwards, and although the number of, scrapped units in 1998 (just over 50) is now becoming more sensible, it is still far from having any influence on the market.

In certain categories, mainly the large sizes, the orderbook is still extremely important. For instance, the size 5,000 teu and upwards, where some further 41 units are still to be delivered. This represents over 80% of such existing tonnage. Another 78 new vessels are still expected in the size 1,000 to 2,000 teu (about 10% of existing fleet in this size); a pretty worrying fact, considering the existing overtonnaging conditions already prevailing on that sector of the market.

Only a few categories show more reasonable figures, such as the small sizes up to 500 teu where only 3% of the existing fleet is still on order, or the 3,000 to 4,000 teu with less than 6%.

Beside this foreseeable overtonnaging situation, other aspects have driven us into this depressed scenario.

By the middle of last year, carriers active in the North Europe / Far East trades were more optimistic about prospects than they had been for a very long time and lots of efforts were made in order to develop such route by the major container operators. Some 18 months later, the picture is totally reversed. No doubt the Asian economic crisis has had an enormous impact on international container trades. On the world’s trunk routes, except for the Atlantic trade, the supply / demand situation for container flows from Asia has improved remarkably as a result of a sharp increase in cargo shipments from Asian countries. As far as this year is concerned, liner companies active on the Asia / Europe route have been able to restore rates (freight rates have improved by almost 60% from end of last year). By contrast, Asian bound cargo flows have decreased sharply due to a decline in the purchasing power of many Asian countries. As a result, the imbalance between out-and-inbound commodities has widened month after month and thousands of empty containers were stacked up in major western hubs, awaiting redistribution into Asia. Furthermore, intra-Asian liner operators severely reduced the frequency of their services through joint operation and space charters. Such logistical nightmare and its financial consequences have created an operating problem of major proportions to all container operators.

According to some Seatrade analysis, main affected trades are both the Transpacific and Asia / Europe shipping lines. Transpacific imbalances are expected to be in the region of an estimated 1.6 million boxes in 1998, with the backhaul trades accounting for about 70% of the fronthaul. Driven by continued growth in China’s exports and expected flatness in Asian imports, this deficit is expected to grow to about 2 million in 1999, 2.3 million in 2000, 2.5 million in 2001 and 2.75 million in 2002. At that point, the backhaul ratio could be close to 50%.

No doubt the liner industry will need new ways of coping with such imbalances and their impacts. Specifically, the container alliances will be pressured to take further steps to rationalize further container fleets and inland moves.

Showing the significant impact of Asia’s turmoil on world’s economy are the following figures: converted into teu, the world’s growth is expected to have increased by only 2% in 1998. In 1997, such progression had been estimated to about 8.5%. According to analysts, such annual growth is however expected to pick-up again to about 3% in 1999 and about 6% in 2000.

As we stressed last year, the race for consolidation has been accelerating sensibly. The revised Grand Alliance, in which OOCL and MISC joined Hapag Lloyd, NYK and P&O Nedlloyd, and the New World Alliance of APL (former APL/NOL), MOSK, and Hyundai Merchant Marine, were phased in early this year, while Hanjin Shipping pulled closer to former TRICON partners, DSR-Senator and Choyang.

A number of further grouping took place in 1998: partners since the beginning of the year, Compagnie Generale Maritime, Marseille Fret and Contship run together a "round the world" service with 2,200 teu ships and one sailing every ten days. CGM also took over Australia National Line with three ships for about 7,000 teu trading between Asia and Australia.

In France, Compagnie Maritime d’Affretement announced a new partnership on the Europe / Asia route with Swiss Norasia that quitted MSC.

One big name regularly making headlines in shipping newspapers has been CP Ships. In the course of the summer, CP signed a 50/50 alliance with Transportacion Maritima Mexicana. Such agreement involves the liner activities of TMM and CP Ships’ two subsidiaries, Lykes Lines and Ivaran. CP Ships were regularly mentioned for further approaches and is now a major player on North / South trades.

In Italy, the state-owned group Finmare concluded the sale of Lloyd Triestino (LT) and Italia di Navigazione to private interests. LT went to Taiwanese Evergreen with whom they were already cooperating on a few routes linking Europe to Asia and Australia. Such decision was an evidence of major carriers looking closely at breaking seriously into the Mediterranean market.

Italia di Navigazione on the other side, remained with Italian partners and was taken over by D’Amico with whom they were also formerly operating the Mediterranean Basin / Pacific (West Coast US) service.

In Germany, Hamburg Süd took over Alianca.

In South Africa, Safmarine, which took in July the full control of SCL, was officially announced at the end of the year as being themselves for sale. Controlling a total fleet of about 40 units, 16 owned and serving routes between Europe / Africa and the Indian Ocean region. This shows how fast the scene is changing since you will remember than just two years ago, Safmarine was together with a group of companies bidding for the privatization of the French state-ruled company, CGM.

A number of further talks were also taking place around Latin America. Container lines operating between South America, Europe and the US were reported to take the necessary steps to reduce capacity by as much as 30% in response to poor volumes triggered by the Asian crisis and chronic overtonnage.

Further joint ventures were about to be made public at the very end of the year involving Hamburg Süd, Alianca, CGM and Transroll between South America and Europe. On the South America / US trade, other negotiations were rumoured to be pretty advanced for another grouping where Maersk, Sea-Land, Hamburg Süd and CSAV would be involved.

Paradoxically, at a time when most carriers are forming alliances or mergers with former competitors, the Swiss MSC is one of the very few, along with Evergreen, that now stays without a partner on the Europe / Asia routes. They now operate this service with 10 ships of 3,300- 3,700 teu offering a weekly service.

Another major explanation for such an ugly year in liner shipping also comes from the wrong analysis of the market by some shipowners and banks. Obviously, too many owners in Germany had been ordering new ships, thinking primarily of tax advantages rather than taking first into account commercial considerations. Everybody on the market is now fully aware of this situation, and, in any case, this is going to change. Indeed, 1997 was the last year when German investors could be able to benefit from a "loss allocation" of 12.5% of their original investment. With the amendment of the law and the elections in Germany, we have seen German Shipping Funds decline from a level of about 3 billion DM in 1997 to about half that level in 1998.

Like every year, we shall try, within a few lines, to describe the trends for the various sizes in the market:

 

Mare Internum, 2,955 teu, 34,800 dwt

Mare Internum - 2,959 teu, 34,800 dwt, 22 knots, delivered Dec 97 by Hyundai.
Controlled by Hansa Mare, Bremen

Ships of 3,000 teu and over

With the permanent rise in size, 1998 has been the year of the entering in service of AP Mĝller’s "Sovereign Maersk" type (almost 8,000 teu) and P&O Nedlloyd’s "Southampton" type (almost 7,000 teu). Back in 1993- 1994, units of 4,000-5,000 teu were already seen as monsters and we now even read about projects for units close to the 10,000 teu capacity.

A new aspect that we observed is the first appearance of tramp owners on the post-Panamax sector. This is of course unusual since ships of that size were normally considered as core assets by the big liner operators. For instance, Sea-Land decided to join the handfull of ocean carriers operating post-Panamax containerships and concluded a long term charter deal for 5 x 6,200 teu newbuildings, to be delivered in two years time from Hyundai Heavy Industries, with Greek shipowner Costamare Shipping Company.

In November, South Korea’s Hanjin Shipping Co. was rumoured to be involved in talks with Conti Reederei, for five new containerships on order at Hanjin Heavy Industries.

Further similar schemes were also being discussed at the end of the year and such potential agreements is a good sign that some major carriers are thinking seriously to turn to the charter market for future capacity rather than building ships on their own.

A few strings are now operated entirely with post-Panamax vessels and this sector of the market is expected to expand strongly in the future. A good illustration of this tremendous increase offered by this generation of new vessels is Maersk and Sea-Land’s AE1 service where the weekly capacity in teu offered today is 6,885 teu against some 4,599 teu only two years ago.

In the lower sizes of this category, we have noted an increasing amount of fixing activity. Most new business was motivated by Europe / Asia routes with the Mediterranean area receiving a considerable attention. Being still a very narrow sector in the market, with charterers looking primarily for large and speedy vessels, this category has been offering better resistance to owners.

A few fixtures to illustrate this trend:

  • "Hanjin Osaka", 62,681 dwt, 5,300 teu, 24 knots, was committed to CMA for 12 months at $26,500 daily.
  • In the fall, Yang Ming Lines took the "Northern Dignity", 45,000 dwt, 3,607 teu, 24 knots, for 2 years as a relet at $25,200 daily.
  • They were also linked with the fixture of the "Lutjenburg", 45,000 dwt, 3,501 teu, 22.5 knots, for $20,500 daily, showing the influence of speed in market rates.
  • The older types suffered more as showed at year end through the Maersk fixture of "Pegasus", 3,118 teu, 21.5 knots, at $13,750 daily. This was down from $16,750 back in the early part of the summer.



Shipping and Shipbuilding Markets 1999

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