Rising steel prices and the weak dollar mean shipbuilders face a massive cost squeeze this quarter, says Maritime Strategies International senior analyst Daniel Richards
MSI’s QI 2021 Containerships Report has seen a major revision to its newbuilding prices forecast, driven by changes to the key factors that drive shipyard pricing. First, there has been an outbreak of exuberance in the newbuilding contracting market that has led us to revise up our estimates for new orders in both 2020 and 2021.
Second, shipbuilders are facing a massive cost squeeze in Q1 2021 as rising steel prices and the weak dollar combine to devastating effect. Taken together, these factors have caused a major rebalancing of MSI’s shipbuilding model, boosting shipyard Forward Cover by 17% and its index of shipyard costs 7% in 2021.
The impact of either would have been significant, but together they provide sharp upward pressure. It remains the case that in a period of flux, broker indications of underlying newbuilding prices remain contested, and we are seeing a serious divergence in opinions. At present, the exact scale of the price reversal is not clear, and we have followed our model in setting levels for 2021.
Chart 1 shows the scale of the revision to our estimates of 2020 contracting, alongside the proportion of ordering that was placed in the last three months of the year in each sector.
Not surprisingly, given the strength of earnings, investment has been focused on ultra-large container ships (ULCSs), with MSC backing an order for 10 24,000-TEU vessels, and Hapag-Lloyd for six 23,000-TEU ULCSs at South Korea’s DSME, with delivery scheduled between April and December 2023. Evergreen has also reportedly placed an order for six 24,000-TEU mega-maxes via third parties.
Other major players joining the party at the end of last year were OOCL and Zodiac Maritime, which collectively placed orders for a total of 17 ULCSs – seven 23,000-TEU ships for OOCL and 10 15,000-TEU ships for Zodiac.
And in the new year, Evergreen Marine Corp spread the bounty with a huge order for 20 15,000-TEU vessels split between South Korea’s Samsung Heavy Industries, China’s Hudong-Zhonghua and Japan’s Shoei Kisen shipyards.
It should be noted that most, although not all, of these orders were expected at some point given our assessment of the medium-term needs of these companies. However, as is often the case, a good earnings environment means a great time to place orders and these opportunities are being taken now rather than over the next year or so.
Container ships fuel earnings
Chart 2 shows the total volume of commercial marine newbuilding activity against our weighted index of average one-year time charter rates for the main shipping sectors. The remarkable transformation of the earnings environment in 2021 is largely fuelled by container ships but there has also been a sharp upward revision to prospects for dry bulk carriers.
In this context, it is perhaps not surprising that outside container ships, the upgrade to newbuilding contracting forecasts has been less dramatic, though all the major sectors have seen some upward revision.
Turning to the cost side of the equation, recent events have been equally dramatic. Amid loose talk of a commodity supercycle, steel prices have increased by around one-third since Q2 last year, which was the low point of the current cycle. Prices are now on a par with the last peak in Q1 2018 and at the top of the range seen in the last decade.
Using a through-cycle average of around US$610 per tonne over the last decade, prices are 12% higher in Q1, at around US$680 per tonne. We anticipate prices will remain close to this level on average this year, before falling back to US$615 per tonne on average next year.
The sharp increase in steel (and other commodity) prices seems at odds with the ongoing economic damage being wrought by the pandemic, but the issue is not just one of demand, but also a misalignment with supply. In the second half of the year, Chinese demand for a range of commodities soared, producing a very unbalanced global picture that distorted underlying supply/demand dynamics.
The final aspect of the disruption to the global economy over the course of 2020 has been the underlying weakness of the US dollar, reflected in the dramatic strengthening of the major Asian currencies. In early March, the Chinese yuan and the Korean won were around 10% stronger than a year earlier and close to recent peaks last seen in 2018.
MSI’s current outlook is presented in Chart 3. In addition to seeing prices rising year-on-year in 2021, MSI predicts this will be sustained at higher levels through 2022 and 2023.
To place this in context, Q1 2021 levels are generally down around 6-7% from the last peak in mid-2019 and close to levels when the cost factors last peaked in Q1 2018.