There are problems at both ends of the market, with the mega box ship fleet facing overcapacity issues and smaller ships suffering a rate softening. But there are still opportunities to be had, writes VesselsValue analyst Court Smith
The container shipping markets face significant headwinds. Global economic growth appears to be slowing and stock market volatility has increased.
Years of sub-par earnings have thinned the balance sheets of many market participants. But the fundaments of the container space is a tale of two fleets, with each end facing its own challenge. The large and modern ULCS fleet faces significant overcapacity issues. Smaller ships are weathering a prolonged rate slump. A detailed look at each follow.
The outstanding orderbook for ULCSs remains ominous with many ships still due to hit the water. The business model for these new ships remains untested as this new high-capacity fleet enters full service. We are unlikely to see any units sent for recycling, although layups could become possible. The commercial and operational consolidation of large shipowners is most promising from a sustainable earnings perspective as it could allow some additional pricing power.
Smaller, sub-panamax vessels have faired best, but the rates have softened since mid-year as prospects of a real trade war between the two largest economies on the globe is becoming more of a reality across a broader spectrum of goods.
Still, shipowners who are committed to the long haul should note that the number of smaller feeder-sized vessels looks set to contract, and the fleet has a favourable age profile for this sector. Many of these ships will be required to tranship goods from the larger hubs, particularly as the cost of overland transit in many developed countries is rising.
The number of feedermax vessels on the water equal to their demolition value is high, which may lead to a surge in smaller and older ships removed from service for recycling over the next 1.5 years. Older units don’t justify the addition of a scrubber, and the market consensus suggests a large rise in the differential between high sulphur residual fuel and 0.5% compliant bunkers. This will probably make older, less fuel-efficient units far less economical to run. There is also a large number of ships aged 10 years or older, but not yet at their third special survey. The outstanding orderbook for these smaller units is small.
The current earnings environment looks bleak, but changing market conditions will bring new opportunities, and shipping, as always, will adapt. Market participants have little control over the macro-economic climate, tariffs will come and go over time, and do not warrant excessive attention. Shipowners seeking to profit in the years ahead should continue to focus on the most promising niches.