Has the time come for ‘demolition flurry’ everyone was talking about to boost liner profits?

The container shipping industry is grappling with a complex challenge – an overcapacity crisis. The surge in new containerships ordered during the pandemic, coupled with supply chain normalization at major ports and inland regions, has led to a flood of capacity that is profoundly disrupting the equilibrium between supply and demand.

Concurrently, the scrapping activity in the sector, as reported by Clarksons, remains relatively modest. Only 38 small container vessels, equivalent to a total of 56 TTEU, were retired during the same six-month span.

In the first half of 2023, orders were placed for 93 container vessels with a total capacity of 0.9 million TEU, a drop from 1.7 million TEU in the previous year (Clarksons Research, July 2023).

By June 2023, container vessel tonnage on order had risen to about 7.0 million TEU, up from around 6.7 million TEU in June 2022, maintaining the order backlog to global container fleet capacity ratio at 26.5%. This ratio, although high, remains significantly lower than its peak of around 61% in 2007, as reported by MDS Transmodal.

The containership sector’s ordering trend shows no signs of slowing down, extending into the second half of the year. Just yesterday, the industry witnessed a substantial order announcement related to MSC ordering ten LNG-powered newbuilds.

The commitment to expansion is commendable, especially having in mind that a notable aspect of these orders is the inclusion of alternative fuels, such as LNG and methanol, as a considerable percentage of the fleet’s power source. However, despite this environmentally conscious approach, accommodating these innovative vessels within the existing fleet structure might prove challenging due to ongoing demand constraints.

The consequences of this overcapacity crisis are starkly visible in freight rates across key trade lanes. During the first half of 2023, the Shanghai Containerized Freight Index (SCFI) averaged a concerning 976 points. This is a substantial drop of 78% compared to the average of 4,504 points recorded during the same period in 2022. This downward trend underscores the challenges that liner companies face in maintaining profitable operations amidst the current market conditions.

Industry majors like Hapag-Loyd, Maersk, CMA CGM, Ocean Network Express, and HMM, have reported lower profits amid subdued demand as the market normalizes after the COVID-19 surge.

Earlier today, German major Hapag-Lloyd reported a profit of USD 3.1 billion (EUR 2.9 billion) for the first half of 2023, a massive drop of over 70 percent from EUR 9.8 billion reported for the same period last year.

Similarly, HMM reported a 90% drop in its profit year-on-year with KRW 610 billion net profit in the first half of 2023, against KRW 6.078 trillion net profit reported a year earlier.

The French shipping group CMA CGM reported a second-quarter net profit of $1.3 billion, a considerable drop from $7.6 billion in the year-earlier period and $2 billion in the first quarter.

Meanwhile, during the first half of the year Hapag-Lloyd took delivery of four newbuilds (two owned vessels and two on long-term charters) with a total capacity of 63,562 TEU. These include the Berlin Express, the first 23,660 TEU vessel with a high-pressure dual-fuel engine that can run on both LNG and conventional fuel.

Berlin Express was followed by the delivery of the second 23,600 TEU containership powered by LNG from Hanwha Ocean, Manila Express.

The company has 10 more newbuilds of 23,660 TEU and two newbuilds of 13,000 TEU each slated to join its fleet between 2023 and 2025.

In addition, Hapag-Lloyd plans to add two new vessels each of a size of 13,250 TEU to its fleet as long-term charters in 2023 and 2024.

Other liner majors have impressive orders as well.

Specifically, HMM has nine 9,000 TEU containerships powered by methanol set for delivery in 2025 and 2026, Maersk has 25 methanol-powered ships on order while the Swiss-based container shipping giant MSC has the largest orderbook by far in the industry with around 130 containerships on order.

A significant increase in vessel deliveries is planned for 2023. Drewry expects the globally available container vessel fleet to grow by 1.3 million TEU, or 5.1%, year-on-year after scrapping and postponement of deliveries.

With industry giants having ambitious newbuild plans, driven by decarbonization strategies to bring into the market more efficient and environmentally-friendly ships, there is a mixed outlook on how this will impact the ongoing overcapacity situation.

On one hand, the introduction of more vessels into an already saturated market could further exacerbate the issue in the short term. As the law of supply and demand dictates, an oversupply of shipping capacity would likely place continued downward pressure on freight rates, affecting profitability for shipping companies across the board.

Given the significant increase in new container vessel deployments and the limited volume of scrapping activities, the current market conditions appear to favor a strategic approach to scrapping older and less efficient tonnage.

The influx of new vessels with advanced technologies and eco-friendly features indicates a broader industry shift towards modernization and sustainability. Scrapping older vessels that might be less fuel-efficient or have higher maintenance costs could potentially help shipping companies optimize their fleets, improve operational efficiency, and reduce their environmental footprint.

However, the decision to scrap vessels also depends on various factors including the financial implications, the specific needs and strategies of individual shipping companies, and regulatory requirements. Scrapping vessels involves costs and potential downtime, and there might be instances where keeping certain older vessels in operation could still be economically viable based on their routes, cargo types, and operational demands.

The container shipping industry’s overcapacity challenge is a multifaceted issue with intricate dynamics at play. The influx of newbuilds certainly adds a new layer of complexity to the situation.

While short-term concerns about freight rates and profitability persist, the industry’s future trajectory will likely hinge on its ability to manage the delicate balance between supply and demand as global trade patterns continue to evolve.

Therefore, the current landscape does present a window of opportunity for scrapping less efficient and older tonnage. This also coincides with the long-awaited entrance into force of the Hong Kong Convention on sustainable shipbreaking set for 2025.

The upcoming period will show whether the regulatory landscape and market conditions will lend themselves to finally create the ‘flurry of demolition’ market analysts have been predicting for a couple of years now.