June 21, 2014

Winning the battle but…

The boxship segment of shipping is at the cusp of a vicious churn. And overcapacity, low rates, alliances and continued newbuild orders will ensure that the shakeout will continue, probably for years. 

Since I have often said that a consolidation was inevitable, I kind of get where operators are going. What I do not get, however, is how the players who survive the bloodbath are going to get a decent and long term return on their investment. And I am still to understand how long- and to what extent- containership owners are going to continue to bleed before the mayhem stabilises. I suspect it will be a slow death for many.

Recent events do not hold out much hope; in fact, the battle promises to become even bloodier. Brokers are expecting a new wave of fresh ordering of 14000-19,000 TEU ships later this year, as the G6 alliance of operators beefs up capacity to respond to the P3 alliance in an era where economies of scale seem to be the only bow in the quiver. I guess these ships will be out in the next two or three years. What this will do to longer term overcapacity issues is anybody’s guess; many- including Maersk’s Nils Andersen- do not expect the excess tonnage problem to be resolved before 2017 anyway.

Even after the recent Chinese spanner that was thrown in the P3 works, I feel that alliances like the P3 and the G6 will be even more dominant forces in times to come. These folk are betting on big ships and cost efficiencies- Maersk alone hopes to cut its costs by around a billion dollars every year- but I suspect this is not going to be enough. Big ships need more slots to be filled on a round-trip basis. With demand fickle and weak, this is a particularly tough area to predict or exploit. A large boxship running below breakeven capacity does not give you any advantages of scale; quite the contrary.

I suspect that, if operators cannot increase rates in the next couple of years, then the only solution- alliances or not, large containerships or not- is going to involve scrapping of ships on a large scale. I say this because there is a limit to cost cutting and because I suspect that shipowners are already cutting close to the bone.

Scrapping of ships may be the solution long term, but the dismantling of large scale overcapacity is a hornet’s nest in any industry; with shipping, fragmented as it is, it is an especially messy proposition. Many shipowners are just not going to- at least not yet- dismantle ships that have not reached the age of retirement. Besides anything else, they will probably be booking huge losses if they do so.

Which brings me to another million dollar question: Given the state of the market, has the working life of containerships reduced dramatically? Imagine the massive, massive impact to the entire business model if it has. 



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