Can big ships make big money?

The race is on for shipowners to build a new generation of 20,000 TEU container ships. These ultra large containerships stagger the imagination in their sheer scale and massive carrying capacity. But ultimately the big question is whether big ships will equal big profits.

The New Olympics Back in January, the MSC Oscar began its inaugural voyage from Dalian, China to Europe. The first of MSC’s (Mediterranean Shipping Company) Olympic class of ships with a capacity of 19,224 TEU, the MSC Oscar is arguably the largest containership in the world [see below]. The MSC Oscar’s size takes some getting use to. The ship is 394.4m (1,294ft) long, 58m (193.6ft) wide, 73m (293.5ft) high, has a 16m (52.5ft) draft and a remarkable 197,362 dwt (deadweight). By all measures a large ship. Bu the MSC Oscar is no standalone, her sister ship MSC Oliver has already been launched, and MSC has eighteen more Olympic class vessels on order. Besides, the engineering marvel that the MSC Oscar undoubtedly is, her launching has set off a frenzied race between ship-owners to build a new generation of ultra large containerships of 20,000 TEUs. Consider the recent announcements. Last week, OOIL, the Hong Kong-based holding company for OOCL announced it was ordering six 20,000 TEU ships from Samsung Heavy Industries in South Korea for delivery in 2017. It’s likely OOCL’s order wasn’t done in isolation, as it follows their G6 alliance partner MOL (Mitsui OSK Lines) which ordered six 20,150 TEU containerships from Samsung in March. However, they are not alone in this race, as CMA-CGM has ordered three 20,600 TEU vessels, COSCO has ordered eleven 19,000 TEU ships, Evergreen eleven 18,000 TEU ships [reportedly a charter deal] and UASC (United Arab Shipping Company) back in 2014 ordered six 18,000 TEU vessels from Hyundai Heavy Industries. Even before UASC’s order CSCL (China Shipping Container Line) had already deployed an 18,000 TEU ship and the CSCL Globe with a 19,000 TEU capacity at 400m (1,312.3 ft.) is slightly longer than the MSC Olympic class vessels. According to various reports, there are now 52 mega containerships (larger than 18,000 TEU) on order with more under negotiations. At this moment there are roughly eight ship operators engaged in the mega ship race with more companies lining up everyday. Hapag Lloyd said it had received permission from the G6 partners [APL, MOL, OOCL, NYK, HMM and Hapag Lloyd] to order five 12,000 TEU ships, the maximum size for the newly expanded Panama Canal [Panama Canal authorities are now looking at building a lock to accommodate 20,000 TEU ships]. But the German carrier said 20,000 TEU vessels are on the horizon as part of the G6’s five-year plan currently under discussion. As mentioned above, OOCL and MOL are already on board with mega-containerships. Will NYK and Hyundai Merchant Marine be far behind? Maersk Line, the world’s largest containership operator (with MSC right on Maersk’s heels), took a hiatus from big ship ordering after the 2011 Triple E class deliveries. However, Maersk is expected to place the mega ship orders by the second quarter of this year. If history is any guide, the new ship orders will be larger than previous containerships orders – the bigger the ships, the larger the economies of scale. The Anti-cyclical Device With container freight rates down, containership charter rates also in the dumpster, second hand ship prices low and overcapacity an industry wide issue, it would seem an improvident time to embark on an ordering spree. Even from a customers’ perspective, ordering larger ships isn’t exactly a PR coup as a shipper can’t help but think; ‘if a carrier has enough money to order a fleet of mega-ships - the argument that freight rates need to rise, rings a bit hollow.’ Added to this feeling is the fact that containerships are notoriously poor at keeping schedules in an industry that is driven by timeliness. But there is an historic ship industry argument in favor of ordering against the trend – the anti-cyclical ship order. The concept is that by ordering in a depressed market, shipyards will offer the most favorable construction rates to offset the lack of orders. For example, ship consultant group Clarkson’s said in a report, Maersk overpaid by $1.1 billion for the 18,270 TEU Triple E class orders in 2011 that were placed during the rate rebound compared to shipbuilding prices in 2013 when over capacity kicked back in. Secondarily, ships take time to build and be delivered. Thus the market balance could have sustainably shifted from over capacity to one of demand by the time the vessels are delivered. From a ship-owners perspective, the ships coming on stream would catch the wave of rising freight and charter rates, presumably with larger more efficient ships, generating bigger profits. To that point, at this writing, there is a slight increase in both charter rates and freight rates, whether this is a trend or a tease is yet to be determined. Another factor favoring ordering newbuildings in a down market is leveraging ship TEU capacity into larger market share. With the ever-shifting system of carrier alliances, being able to develop market share on specific trade lanes, especially the critical Asia to Europe route, is an important element in any deployment strategy. Finally, there is an invisible value to a ship order. There is a finite global capacity for building vessels over 800 feet long. If a shipyard’s capacity is occupied by your order, a competitor might not be able to make place an their order. In short, the shipyard slot itself becomes a stake in the game. The Money Pit Traditional financial houses are running away from ship finance [see Matt Miller’s stories on page 8]. There are numerous reasons for the flight from ship finance, but return on investment is among the chief culprits. The asset value of ships hasn’t kept pace with alternative industries. Banks are a little gun-shy of investing in industries with poor ROIs and there are few industries with worse track records than shipowning. But there is money to fill the void. Ironically, ship financing may look more like it did during the tanker and dry bulkship ordering spree of the 1970s than the Euro-centric financing systems of the last couple of decades. During the 1960s-70s a Japanese financial system was created by which ship-owners (frequently based in Hong Kong) were extended financial support to build vessels in Japanese shipyards. The loans to the “ship-owners” were backed against long-term charters to third party operators, these operators were often Japanese ocean carriers affiliated with the same yards that built the ships. At the time the system made good sense. The Japanese government was interested in promoting both its shipyards and ocean carriers and ensuring enough tonnage was available to support the burgeoning economy. The system fell during the oil crash, which reduced demand for tankers and caused freight rates to precipitously drop, squeezing ship-owners ability to pay charters and ultimately the banks and shipyards. A neo-shikumisen was deployed in later years with nearly similar results – bankruptcies and an industry consolidation. According to a recent report from Clarkson’s, finance from Chinese financial institutions account for 61% of the Chinese owned orderbook of about 51 million TEU. Perhaps the key point is that most of these finance houses will be “charter owners”, who will charter out the new ULCVs on long-term contracts to foreign boxship operators such as MSC, CMA CGM or Maersk. In a nutshell, this is a shikumisen redoux. Other Asian money is also in play as ship finance shifts East, with Singapore and Hong Kong both vying for a seat at the table. In the bigger picture, this means that the current buying spree of containerships won’t be short changed by a lack of capital. Track Record One aspect of container shipping that confounds all parties involved in the industry, is how a business that generally grows every year, as does the volume of containers transported, rarely turns a profit. Last year [2014] was better than most with roughly half of the top twenty containership operators reporting returns in the black (this includes estimates on privately held companies like Hamburg Sud and MSC). In this case, bigger was better. Maersk Line, arguably the largest carrier, posted a $2.34 billion operating profit, up from $1.82 billion in 2013 [perhaps providing a counter argument to the delivery timing of the Triple Es]. CMA-CGM, number three on the list, also had a good year with an operating profit of $973 billion. [See chart on page 25] However, most containership operators in recent years have seen very good results, even with increases in volumes. Last year, it is estimated [Alphaliner] that box volumes rose by 4.7% but the margins were only 2.7%. Even the bunker “bonus” of lower fuel costs hasn’t delivered a real bottom line boon. The dismal results are in part the motivating factor behind cost cuts, efforts to improve efficiencies and ultimately the decision to put their faith in “economies of scale” to deliver the goods [profits] for the company. In the future, will bigger ships deliver the bigger profits? Maybe. The question is whether the mega-ships will be worth the cost of putting so many eggs in one very large basket. Still there is also a lesson to be learned by Wan Hai Lines, which reported a profit of $718 million, modest but consistent in positive returns. The carrier operates in the intra-Asian trade lanes and has been judicious in ordering newer and larger vessels, operating in a manner best described as being true to oneself.