Ocean container lines and the shipowners that lease ships to them are suspending new ship orders for fuel-efficient mega-container vessels until they can assess the impact of the expanding carrier alliances like the P3 Network, the expanded G6 and the CKYHE, and now the new merger between Hapag-Lloyd and CSAV.

This temporary halt to new orders will not be enough to offset the record amount of new container ship deliveries this year, which will continue to put a lid on freight rates, according to a panel of shipowners and investors at the annual Invest in International Shipping Forum held by Capital Link in New York on March 20.

Even in the face of the modest growth in global demand for the container trade, carriers and shipowners alike will keep ordering the big new ships because they give them the economies of scale they need. “It’s a necessary effort by the liner companies to reduce their costs,” said Tasos Aslidis, chief financial officer of Euroseas, a NASDAQ-listed ship-owner. “The outstanding orderbook, which amounts to 20 percent of the existing container fleet, is not a big number by historical standards,” he said.

New ship orders are also being driven by the lower cost of the big ships. “A 13,000-TEU ships that cost $160 million in 2010, now cost $110 million,” said Peter Shaerf, deputy chairman of Seaspan, which operates a fleet of around 100 container ships on long-term charter to major carriers.

Alphaliner in its most recent forecast projects that the global fleet will expand by 5.5 percent in 2014, after growing 5.7 percent in 2013.

The large new ships, which are mostly being deployed on the Asia-Europe trade, are forcing carriers to cascade unneeded vessels onto other trades, and this is depressing rates on those trades. “Cascading is putting pressure on charter rates for smaller vessels up to Panamax,” said Dr. Herman Klein, CEO of the German shipowner E.R. Schiffahrt. He expects this to “be sorted out” in the next few years when charter rates start to move up again.

The outlook for carriers this year is still cloudy. “Demand is less than robust,” Shaerf said. “The liner companies will hold back a little bit (from ordering new ships). While the spirit is willing, the flesh is weak.”

He expects to see ship orders pick up again after the P3 and the G6 alliances implement their planned joint services. “I think it’s slowing down for the rest of this year, but once one company starts ordering again, the others will follow suit.”

As carriers and shipowners continue to take delivery of larger, more fuel-efficient ships, this will result in less demand for smaller and older ships. Shaerf estimated the formation of the P3 Network will mean that its members may “potentially” need 200 fewer ships in their fleets on the east-west trades where they are deploying their new ships.

The panelists were generally optimistic about the outlook for global economic growth, which may help carriers fill more of their capacity. Aslidis said that intra-regional trade and the north-south trades are growing faster than the east-west trades. Klein expects the intra-Asia trade to grow fastest. But this growth may not help absorb excess capacity, because so many smaller ports on the intra-regional trades can’t handle the bigger ships that carriers are cascading onto those routes.

This could mean a pickup in demand for smaller, fuel-efficient ships in the 2,500-TEU range. That demand could be filled by new ship orders or by retrofitting older ships with more efficient engines. “That also could be interesting for investors,” Klein said.

(Source : Journal of Commerce)