Neo panamax tonnage outstrips mega box ship orders

Several owners are favouring neo panamax vessels over ultra large box ships due to their flexibility. Barry Luthwaite reports

Most observers of the ultra large container ship (ULCS) scene will welcome a relative drought in new ordering. Owners are exercising caution in newbuilding decisions, judging the market's reluctance to absorb more giant tonnage.

Congestion is proving a major headache, with some ports lacking the infrastructure for a quick turnaround of vessels. This is disturbing some schedules especially on Asia-Europe services. Indeed, the only ULCS orders recorded in the six months between April-September 2018 centred on 12 23,000-TEU vessels for Hyundai Merchant Marine (HMM). The container division of the owner had been proposed for sale but there were no takers. Now HMM has secured the confidence of creditors (mainly Korea Development Bank) to break new barriers with an order for the world’s largest container ships shared between Daewoo and Samsung.  

Statistically it is not difficult to understand why the container ship majors are hesitant over more ULCSs. The box market overall has been vibrant for feeders up to 5,000 TEU and neo panamax sizes from 11-16,000 TEU. In between capacity vessels are finding it difficult to keep pace and are ageing. The latest merger of mega liner operators was recently sanctioned between COSCO and OOCL after negotiations lasting a year. This is likely to be the last merger including ULCSs in the fleet for a while.

Compliance costs

More problems continue to present themselves at the top end of box ship capacity. Newbuildings are being ordered to tier III IMO standards with exhaust gas emission scrubber systems specified. This feature can add US$3M to the cost of a ULCS but owners gamble that cleaner fuel burning ships complying with new emission standards from the start of 2020 will sway charter companies and shippers.

Initial higher costs have been accepted by shippers facing a rise in bunker oil prices due to higher crude prices and low sulphur content bunker oil demand. Dual-fuel propulsion is more readily specified but LNG is still in an optional readiness category until LNG refuelling improves globally. The latter will significantly improve from 2020 and some of the box majors have reached their own agreements with oil majors to exclusively employ tonnage to supply LNG bunker refuelling in ports they serve.

The growing trade war between the USA and China shows no sign of easing and is disastrous for global trade. Box trade is being hit considerably. Accordingly, ULCS operators, now paying as much as US$150M per newbuilding, desperately cling to the hope that being more competitive will win the earnings argument but it is a vicious circle. Full LNG operation is now presenting itself with new orders and exhaust gas emission scrubber systems to meet climate change provisions.

Statistically 79 ULCSs are now in service – an increase of 10 in six months. These ships account for a capacity of 1,516,413 TEU. Hesitancy of owners to order more ULCSs is borne out when considering that as many as 63 more units are currently committed aggregating 1,343,838 TEU for delivery between now and 2021. Leading the way in investment is Shoei Kisen, the shipowning division of Imabari, who will construct 15 19-20,000-TEU vessels for long-term charter to Evergreen Marine with purchase options. HMM is close behind with 12 vessels valued at around US$150-160M apiece due to specifying exhaust gas emission scrubbers and LNG fuel burning readiness. MSC and CMA CGM will take delivery of 11 and 10 vessels respectively. Maersk is currently operating 27 ULCSs aggregating 509,586 TEU and is easily the world’s largest owner but has cooled on ordering more ULCS tonnage concentrating on smaller sizes instead. From the 79 in service other owners come nowhere near this ULCS capacity aggregate with single figures up to six units only.

Owners favour neo panamax tonnage

Against this, a handful of vessels have been allocated for conversion with new mid bodies raising them from neo panamax size to ULCS status by MSC and CMA CGM. With a lull in ULCS ordering, several owners have resorted to favouring neo panamax size tonnage from 11-15,999 TEU. It gives the option of switching routes in hard times. This has never been more evident than recently when, because of the ‘trade war’ between USA and China, several alliances employing neo panamax size vessels have been forced to find new routes and discontinue services.

Up until July there was a seven-month boom in charter rates across all box sectors but higher bunker costs and the trade tariffs imposed by the USA, China and the EU are now having a detrimental effect. Now owners must contemplate a questionable bad Brexit deal by the UK next March. Something needs to give otherwise there is likely to be a prolonged slump.

Owing to the relatively moderate numbers of neo panamax size ships, owners are hopeful of capitalising by offering a new choice in load factors for shippers and faster delivery. It was just over a year ago that Costamare took delivery of the first of the 11,000-TEU ships. More orders have been taken up since. In total 129 neo panamax size vessels are now on order representing a change to more economy of scale. The orderbook is devoid of any vessels between 6-10,999 TEU underlining the rise of rapidly changing markets.

The rising numbers in this category have been due in part to the deepening and widening of the Panama Canal locks. Numbers have steadily risen in passages through the canal for mid-size container ships, even if not always fully laden. This is borne out by regular 13,000-TEU transits. Following the merger of COSCO and OOCL the latter lost no time in negotiating eight 13,000-TEU units with Chinese yards which will not be fitted with scrubbers. Hudong Zhonghua is favourite to win the order. Complementing the 12 ULCSs HMM has ordered from Daewoo and Samsung for delivery as far ahead as 2021, this owner has also agreed construct eight 14,000-TEU units from Hyundai costing US$100-110M apiece depending on engine specification and scrubbers.

For current newbuilding investment, London-based Zodiac Maritime leads the way with 13 15,000-TEU ships committed at Hyundai having increased their capacities since original contracting. The ships have 10-year charters to Hyundai Merchant Marine, South Korea with whom the owner has a strong relationship. Zodiac Maritime is run by Eyal Ofer and has always had a keen participation of box ships but now brother Idan is expanding his empire based in Singapore into large container ships. Recently the latter exercised options at Hyundai Samho doubling his commitment to constructing eight 15,128-TEU neo panamax size vessels with facilities for 1,000 reefer boxes.

 The Singapore office trades under the name of Eastern Pacific Shipping and is new to the box business but is surely destined to make an impact. The Eastern Pacific ships will meet IMO tier III standard for emission controls and incorporate scrubbers. No employment is thought to have yet been secured. The 54  newbuildings will in due course challenge 299 neo panamax vessels currently in service.