Steel prices are on the rise in China and this will eventually feed into newbuilding prices. Other factors pushing the growth in prices for large tankers include a surge in demand for large containerships. Is this a new peak in the cycle, or a short-term issue?
The Steelhome China Steel Price Index is an index that covers a wide range of steel product prices in China, including steel plate and steel strip. The index is basis 100 index points as of 28 September 2004. In June 2020, the China Steel Price Index was still below 100 points, but a slow, steady rate of growth saw it surpass 100 points in November 2020. The growth continued and by December 2020, it spiked at 120 points before levelling off until February 2021. The Index then climbed sharply to 150 points in May 2021. There was a downward correction from that peak, but as of June 2021, the Index is 50% higher than 12 months ago. This seems to be part of a longer-term trend and owners should be prepared to see newbuilding price rises justified by rising raw material costs.
If steel price rises are a cause for concern, what about the competition for large vessel newbuilding slots? The main rival is the large containership and LNG carrier sector, but it is the boom in demand for large containerships, driven by record-breaking containership charter rates, that might have the most impact. Clarkson Research Services (CRS) notes that its Containership Charter Rate Index has reached a new record high of 191 index points, the highest level since March 2005 (the index started in 1993 and is updated to cope with the increase in containership sizes).
“I will go out on a limb and say there is no reason to panic”
A typical VLCC is 330-m long and the dimensions have remained virtually unchanged for 30 years. Historically, containerships were not a threat for yard space and a containership did not rival the length of a VLCC until 1997, when AP Moller’s own shipyard at Odense in Denmark launched the 9,600-teu S-class series for Maersk. Today, there are containerships on the orderbook that are over 400-m long.
Should tanker owners be worried that there will be too few slots available? I will go out on a limb and say there is no reason to panic.
In my opinion, the containership market has all the hallmarks of the froth the tanker markets had when Saudi Arabia opened the crude oil production taps in early 2020. Tanker supply reduced as traders scrambled to fix large tankers for storage duties. Those tankers eventually came back onto the market. The surge in container charter rates is due to a shortage of supply of large containerships, which in turn is due to the inability of ports in China and the US West Coast to process the cargoes. The large containerships have effectively become, like tankers in 2020, floating storage. They are currently being used as floating warehouses for containers of manufactured goods from China. This is not a fundamental driver for increasing the supply side of the fleet.
I believe the manufactured goods supply chain will rapidly strip out the inefficiencies and those floating warehouses will return to engorge containership supply. This will force those that contracted large containerships to reconsider their long position. I believe those slots will be sold and converted to VLCC newbuildings to replace the portion of the fleet unable to meet ever-more stringent IMO and, I fear, local regulations on carbon emissions. But that, as they say, is another story.