The containership market in 2003
 

The charter market 
The fleet
The operators
The second-hand market

After the 2001 traumas, the year 2002 was a year of convalescence, and full health was restored in 2003. And what health! The seaborne containerised trades have boomed, box rates have risen on most trades and virtually all operators have renewed with profits. The year 2004 has opened on a rare optimistic note, which has not been seen since the early 1970s boom. 

Demand in containerships has reached record levels. An unprecedented wave of orders has poured into shipyards. Charter rates have soared and have yet to reach their climax. Opinions differ depending of course who you ask, but as one charterer puts it, 'The charter rates will probably be the only cloud in the otherwise blue sky'. 

This rise in container transportation, and international trade as a whole, is explained by several factors. First, the adjustment effect following a stagnant year 2002, then, a lot of countries saw their industrial production booming again, and third, one of these countries is China, with its already huge economy having logged a 9 % growth in 2003 and is export-oriented. 

The slump of 2001-2002 led to fears of durable overcapacity. In fact, the strong growth in transport demand observed over the past 18 months combines both the long term growth and a post-slump adjustment in volumes carried, although it owes much to the Chinese export boom. 

Taking a long-term view, the planned fleet expansion, in relation to the orderbook, will just match the growth of the demand - at least until end 2005. The balance is to remain in favour of owners for the whole of 2004 and for most of 2005. In late 2005 or 2006, the pendulum could swing back given the calendar of ship deliveries (the supply-demand balance may reach a critical stage). 

However, the depression -if any- could be temporary should there be a drop in deliveries in 2007. And with shipyards filling rapidly their 2007 building slots with tankers and bulk carriers (also much in demand), less capacity will be left to order big containerships in large quantities.
 

The China effect 

In 2003, Chinese ports have handled 48 million teu, against 37 million teu in 2002, i.e. an increase of some 30 % in one year (and daily movements of 100,000 teu). The performance may be difficult to be repeated in 2004, but even with a lesser rise, it will be a boon for carriers. 

So, the big question for 2004 (and the years to come) is: Will it go on? 

China has benefited for several years of a transfer of manufacturing activities from mature economies. There is no doubt that this movement is far from being completed, given China's large reservoir of cheap manpower. But it may slow down at some point, and exports may not rise as fast as they did. 

On the other side, as Chinese citizens get richer, they can afford more and more imported consumer products, or industrial components needed to manufacture consumer products. A side effect of these trends is that it would reduce trade imbalances. 

There are also uncertainties. It is too early to know if the Asian Bird Flu will have an impact on trade, but if the SARS epidemic is a guide, tourism could suffer, but trade would not (except for the poultry business). 

The Euro appreciation effect 

Another key factor is the dramatic evolution in currency rates, with the euro having appreciated by 20 % against the dollar during 2003, while most Asian currencies did not appreciate at the same rate, far from it. 2004 will witness the full year impact of the high purchasing power of the euro vis-a-vis Asian currencies, which will boost the Asia-Europe trade westbound, but may also deepens the eastbound-westbound imbalance. 

As for the Asia-US trades, the relative weakness of the dollar against most Asian currencies may dampen American buying of Asian products and may have a positive effect on the trade imbalance. However, it does not work for the China-US trade, as the Chinese yuan remains pegged to the dollar, despite pressing US demands to re-evaluate it. 

If trade remains as healthy as it is, one can wonder how far charter rates can go if the 2004 transpacific summer season sees volume grow by 8-10 %, not to mention the rises expected on Asia-Europe. It will lead to an acute shortage of containerships. Contrary to other peak times (such as the summer 2000), conbulkers will not be of great help as they obtain still higher rates on the bulk market than on the container market.
 

Keeping the market share in 2004 will be a costly exercise for the operators which have been late to react. Those who have chartered ships several months in advance for 2004 delivery, will be more at ease. MSC has even gone further, buying 34 ships of 1,000 to 3,500 teu in 2003, which will allow savings on charter hires (despite the relatively high price paid for some of them). 

Of course, charterers react, but they have not much room to manoeuvre. The main sweetener to sky high rates is the length of charter periods. During the second half 2003, duration of 36 months have become a rule for ships of more than 2,500 teu, with owners conceding 10-15 % discount against the 12 months daily rates. 

With only a very few large ships left available in 2004, the most dynamic operators will have no options but to accept ultra high rates to snatch ships which arrive at the end of their charter from their current operators, who will obviously be ready themselves to pay the price to extend them. 

For these latter ones, losing the bid would lead to the disruption of well oiled weekly norias - unless of course they receive a sufficient number of large newbuildings or have covered their 2004 positions with charters negotiated in 2003, which is the case for half a dozen of the large operators. 

A number of operators have indeed covered their positions and protected themselves from possibly sky-high rates in 2004. Operators with a high component of owned ships in their fleet will be also in a quite confortable position. Conversely, high charter rates are a real burden for operators engaged with 100 % chartered tonnage, and box rates are far from having risen at the same pace. 

The latter ones count niche operators and some common feeder carriers. Now that their previous, relatively cheap charters arrive at their term, they have to extend the ships at the high rate. It may effectively encroach on their margins, and some of them are trying to rationalise their services in order to save one ship or two. Happily enough, they run a lot of smaller ships (under 1,500 teu) for which the rates remain reasonable. 

Similarly, large operators may cut down services for which the profitability is jeopardised by high charter rates, opting instead for alternatives, such as slot buying or partnership with rivals. 

As ships of around 4,000 teu are to remain a very scarce commodity during the year 2004, and even beyond, owners are in a position to ask, and obtain, rates of $ 40,000 for the few ships seeing their charter periods expire this year. Charterers will have to accept such high rates if cargo volumes dictate, to maintain their market share. 

The charter market for 4,000 teu ships took off in 1999 and peaked in the summer 2000 at $ 29,000 before sinking in the 2001 gloom. It has since well recovered. 

In September 2003, an historical high of $ 32,500 has been reached for a 4,158 teu ship chartered for a period of six months. It is the first to be known as having broken the psychological $ 30,000 level. Two months later, a 4,038 teu ship went at the same $ 32,500 rate, but for a much longer period of 2.5 years (meaning that, had the ship been fixed for a 12 months period, the rate would have passed the $ 35,000 mark). 

Ships of 2,500 teu have scored the highest rate rise in 2003, with average rate levels 93 % higher than in 2002, as can be seen from the accompanying table. 2,500 teu ships closed the year with daily hires of $ 24,750 for 12 months periods, up from the depressing lows of early 2002, when owners had to accept a miserable $ 8,000. And rates are still going up, with a 2,500 teu ship having reached an historic $ 30,000 for 12 months in early 2004. 

By comparison, the least advantaged size, 1,000 teu, gained only 37 % to $ 8,237, and is still well below the $ 10,500-11,000 averages observed in the mid-1990s. 

As for ships of 1,700 teu, they are traded in the same way that tramp cargo ships were traded 40 or 50 years ago, acting as stop gap ships and as sweeping ships on east-west trades as well as playing a key role on many secondary trades. 

Ships of this size come and go, with sometimes surprising movements in charter rates. This trend was well illustrated in December-January: while rates for B-170s (the 'barometer ship') fell just under $ 10,000 for 2 or 3 months periods, they remained above $ 15,000 for ships fixed for 12 months periods, and going up once the Chinese New Year festivities ended, with a all time record of $ 20,000 recorded in February 2004 for a B-170 fixed for 3 months. 

Rate rises have been much more modest for ships of around 1,000 teu. But rates could be pushed up in 2004 as charterers may be forced to charter smaller ships than they wish if the scarcity effect reach the 1,500-2,000 teu size. 

Actually, the highest rates observed in 2003 could well represent the average rate for 2004, if the world economy remains as sustained as it is, especially the Chinese one, as far as seaborne transportation is concerned. 

As for ships above 5,000 teu, they are not yet played on the daily charter market and are contracted for long periods (above five years). Ships of 5,500 teu are negotiated at around $ 28,000 for 7-10 years periods. As for charter rates for 8,000 teu ships hired for long periods (10 to 12 years), they stood in the $ 29,500 to $ 31,000 range in 2003, with a trend towards $ 32,000-33,000 in early 2004. Such ships could be ordered at a price of $ 70 million in early 2003, rising to around $ 80 million in early 2004.
 

At 1st January 2004, the cellular fleet reached 3,185 ships for 6.63 million teu, in progression of 8.9 %, a relatively modest increase as the average annual progression during the past 10 years have reached 10.7 %. The cellular fleet accounts for 88.5% of the total fleet deployed on liner trades in teu terms.

2003 deliveries stood at 177 ships for 575,000 teu (against 201 ships for 646,000 teu in 2002). Orders stood at a record number of 520 ships for 2,123,000 teu, sending the total orderbook to 2.7 million teu in early 2004, representing 41 % of the existing fleet. The total value of cellular ships ordered in 2003 reached almost $ 22 billion. By comparison, in 2002, only 82 ships for 363,000 teu were ordered for $ 3.7 billion. As for deletions, 34 ships for 32,839 teu were sold for scrap last year (in 2002: 59 ships for 74,001 teu).

The cellular fleet is expected to reach 9.15 million teu in January 2007 (assuming no scrapping), i.e. an average annual progression of 11.3 % within the three years to come. Furthermore, virtually all the large ships are capable of speeds over 24 knots, meaning that the transport potential will rise even faster.

Given the schedule of deliveries, the size of the fleet may enter the 'danger zone' in the second half of 2005, and 2006 could be a year of low charter rates.

The value of such warnings is however very relative, because it is impossible to forecast the level of the demand with a sufficient accuracy in two or three years time. After all, supposing that Chinese exports remain sustained (even at a lower rate than observed in 2003) and that both the USA and Europe economies are healthy, driving with them other countries as well, it could lead to a transportation demand which could absorb the huge capacity which is to come on stream.

But sooner or later, a political or economic event of an unforeseeable nature will make the bubble burst, with the resulting nightmare that nobody wants to dream about.
 

The year of the 8,000 teu ship

Eighty percent of the capacity ordered in 2003 concerned ships of more than 4,000 teu. Among these large ships are 109 ships of over 7,500 teu, boosting the order book for such ships to 126 units at 1^st January 2004, while only 30 ships above 7,500 teu are in service.

VLCS (Very Large Container Ships) of 8,000-10,000 teu will be the workhorses of the Asia-US and Asia Europe route during the second half of the decade. At the beginning of 2007, 140 ships of more than 7,500 teu will ply the high seas. It will be enough to run 12 Asia-Europe loops and 12 Asia-US loops (offering a weekly capacity of 100,000 teu on each of these two routes). In 2010, there could be as much as 300 of these giants in service.

The injection of VLCS on high volume routes will displace 5,000 teu tonnage on secondary east-west routes, while 3,000-4,500 teu ships will be displaced on niche east-west routes (such as those launched in 2003 between Asia and Black Sea) and of course on north-south routes.

This raises a question: what size range will be the most affected by the cascading triggered by massive deliveries of VLCS? Before trying an answer, it must be considered that 2,400-2,700 teu ships have also been much in favour in 2003, with 64 orders in this size range.

Actually, 2,500 teu ships are expected to play in 2006-2007 the roles currently ensured with 1,700 teu ships. There are already a lot of 2,500 teu ships around. These existing ships and the new ones will make redundant 1,700 teu ships on many trades.

In early 2007, there will be some 280 ships of 2,400-2,700 teu and there could be as much as 370 in the 1,500-1,750 teu range. It appears to be difficult to displace as much ships on feeder trades or regional trades. Thus the 1,500-1,700 teu ships will probably be the size which will suffer most from the cascading effect.

In 2003, the total teu capacity deployed on liner trades has grown by 9.3 %, reaching 7,485,000 teu as at 1st January 2004, against 6,850,000 teu one year earlier, according to BRS-Alphaliner data.

In deadweight terms, the figure stands at 7.3%, with 111.5 million dwt at 1st January 2004 against 104 million dwt one year earlier. These figures take into account all the types of ships deployed on liner trades. The cellular fleet itself amounts to 6,625,000 teu, i.e. 88.5 % of the total teu figure deployed on liner trades.

The capacity of the fleets of the Top 25 operators has grown by 12.3 % during the year 2003, which is in line with the average Top 25 growth rate observed since 1997. From 1st January 2003 to 1st January 2004, the Top 25 fleet has grown from 5,302,000 teu to 5,955,000 teu.

Its share of the world fleet deployed on liner trades has risen during the period from 77.4 % to 79.6 % in teu terms, confirming the concentration trend. The five largest carriers alone concentrate 35 % of the capacity effectively deployed on liner trades.

The largest of them, Maersk-SeaLand, operates a capacity of 920,000 teu, representing 12.2 % of the global active capacity in teu terms. The next in size is MSC, with 536,000 teu and 7 % of global market share.

Among the ten largest operators, CMA CGM is the incontestable teu gainer, as it has seen its fleet rise by 36 % in 2003. It has also logged the second strongest growth in absolute teu terms, with the addition of 84,414 teu, boosting its capacity to 319,180 teu.

CMA CGM has climbed from rank 8 to rank 5, passing Cosco, APL and Hanjin-Senator. While APL logged a fleet growth of 13.6%, Cosco and Hanjin-Senator saw their fleet decrease by 1.4% and 7.2% respectively.

On the mergers & acquisition side, the largest transaction concerned the buying of the Kien Hung Line services by Hamburg-S'd, enriching the already consistent network developed by this company on South America trades. The China Navigation Co, the shipping arm of the UK-based John Swire Group, has bought two multipurpose services, the Bank Line Europe-South Pacific service (bought from Andrew Weir) and the Indotrans US Gulf-South Asia service (bought from Oldendorff carriers). The other transactions are summed up in the accompanying table.

A new US-based carrier is born, U.S. Lines, which has launched a South China-California service in December, with 1,500-1,700 teu ships.

2004 will see the emergence of two new players on the Asia-Europe route, Pacific International Lines (PIL - Singapore) and Wan Hai (Taiwan). Both lines will offer a joint service employing eight ships averaging 2,500 teu (owned or chartered in 2003 for delivery in Q1 and Q2 2004). Although they are to start from scratch on this trade, both operators have strong trump cards to play because of their vast networks east of Suez, which allows them to offer much more than a mere east-west service.

2003 has been also marked by the launching of fully fledged Asia-Med services dedicated to regions usually feederised, such as Turkey and Black Sea or, to a lesser extent Adriatic. These initiatives have been launched by CMA CGM, MSC and Lloyd Triestino (all three lines dealt already with large volumes via feeders in these areas). These services employ a total of 22 ships of 2,000-3,000 teu,

These new services (to only mention them) have of course exerted a significant pressure on the charter market, and have helped to soak up the pool of available ships in the 2,400-3,000 teu range.

It must also be added that, in 2003, the extra volumes carried during the transpacific summer season have been dealt with in an orderly manner, i.e. through the launching of well defined extra loops, in contrast with 2002, when extra ships were chartered for single trips or round voyages, out of any schedules, and acting as sweeping ships.