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Jan.9, 2017

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I n what was a statement of optimism and an acknowl- edgement of the depth of overcapacity affecting the container sector, the Maersk Group CEO said that by 2022 container shipping supply and demand could finally be in balance. But that is a far-away horizon that allows for any number of scenarios to derail the world's largest container line's time frame: new carriers entering the market, new ship orders, worse than expected trade growth, and political events, to name just a few. If container lines and shipowners keep their existing fleet, don't place new orders, and maintain the current rate of scrap- ping, the industry would nearly match capacity with demand in 2022, Maersk Group CEO Soren Skou said on a webcast during Maersk's Capital Markets Day presen- tation. Global demand would require 97 percent of the 23 million 20-foot- equivalent units of capacity he expects will be on the water in five years. The newest entrant, Korea Line, in November signaled it might be open to ordering new ships because shipbuild - ing prices are low. The South Korean government also is eager to prop up its ailing shipping industry, having pro - posed a state-supported ship financing vehicle with initial capital of 1 trillion won ($851 million). The new fund will provide financing of up to 6.5 trillion won to help the nation's shipowners acquire new vessels. That's something Hyundai Merchant Marine could draw on as its successful restructuring made it eligible for state aid to order new medium-sized, eco-friendly ships, and Korea Line outbid it for now-defunct Hanjin Shipping's trans-Pacific networks. In its effort to transform itself from a regional force to a global carrier, Islamic Republic of Iran Shipping Lines last month said it would order four 14,000- TEU ships with financing f rom t he Sout h Korea n government. The Iranian government-backed ocean carrier last year announced plans to add 579,000 TEUs of capacity to its existing fleet totaling only 99,867 TEUs. Hints that capacity might tighten at the top global opera- tors come as other industry analysts warn that the gap between supply and demand will widen in the coming years. An excess of 1.4 million TEUs in 2015 will grow to 2 million to 3.3 million TEUs by the end of 2020, Boston Consulting Group said in early November. Industry capacity will run 8.2 to 13.8 percent larger than demand by the end of 2020, compared with the 7 percent excess of supply over demand in 2015, BCG said. The deceleration of demand BCG sees ahead — 3.2 percent on average in the next four years compared with the frothy days of mid-single-digit growth before the recession, when trade outpaced GDP expansion — is the result of a new normal of insipid demand and container shipping oversupply. "Before 2015, the industry's major challenge was overca- pacity," BCG said. "During 2015, demand proved weak, and trend analysis suggests that this lower demand will charac- terize the industry." Meanwhile, Rickmers Maritime Trust confirmed it's sell- ing for scrap a 7-year-old Panamax ship, the youngest of its type ever to be demolished. The scrapping of the 4,250-TEU ship highlights the paucity of demand for secondhand Pana- max ships now that their canal namesake can handle ships of up to 14,000 TEUs, spurring increased capacity or at least idling of these young, but nearly obsolete ships. The Rickmers India was originally purchased for $60 million, according to IHS Markit Data, but is now valued at $5.9 million, according to vesselsvalue.com, an online ship valuation analyst. The oversupply in the 4,000- to 5,100-TEU segment was set to worsen by year-end 2016, when more ships are set for redelivery, adding to the 75 ships seeking employ - ment, according to maritime analyst Alphaliner. The return of ships chartered to collapsed Hanjin Shippin propelled the idle container ship fleet to a total of 1.7 million TEUs, equiva- lent to 9 percent of the global fleet, as of November, according to maritime analyst Drewry. Not only do container lines have a history of reinjecting capacity once they spot an opportunity to grab market share on a lane, but new entrants could push back the timeline for matching demand and capacity. Woo Oh-hyeon, chairman of Korea Line Corp.'s parent, SM Group, on Dec. 1 said talks are under way with regard to acquir- ing five 6,500-TEU ships from Hanjin, and said new ships will likely be ordered because of the dramatic drop in prices. "We're not considering chartering in existing vessels at the moment," Woo told Fairplay, a sister product of The Journal of Commerce within IHS Markit. "In the past, building a new ship cost 50 billion won. Now, you just need 10 billion won to build a ship with a lifespan of up to 17 years." By offering freight rates 10 percent lower than trans- Pacific competitors, Korea Line envisions grabbing market share with the 21 ships it plans to deploy on the trade lane early this year. The company hasn't said whether it plans to join a major vessel- sharing agreement, or alliance, that would enable it to pool its cargo with partners to fill the larger ships and mitigate overcapacity. Talk of ship orders at Korea Line and IRISL are a much- needed bright spot for shipbuilders, but liners that weren't rocked by the waves of historic overcapacity could make the industry as a whole repeat it. JOC Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com and follow him on Twitter: @szakonyi_joc. MARK SZAKONYI New entrants could push back the timeline for matching demand and capacity. An Unlikely Balance 24 THE JOURNAL OF COMMERCE www.joc.com JANUARY 9.2017 2016 ANNUAL REVIEW & OUTLOOK SHIPPERS' ROUNDTABLE

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