Amid an increasingly chaotic world, container lines crave more ships

“The orderbook is the elephant in the room,” said Jan Tiedemann, senior analyst at Alphaliner. “But what’s important to understand is there have been two waves of orders for newbuildings.

“The first wave we can explain away as post-Covid. Carriers made loads of money and where do you put the money? In assets. They formed a conga line with a glass of champagne in their hands and they ordered.”

That first wave focused mostly on larger-capacity tonnage and was followed by a lull. The second wave, which is still ongoing, focuses on medium-sized ships.

“The second wave is different. It is clearly deliberate,” said Tiedemann. “I think the second wave is primarily because the carriers regained a long-term belief in the industry. Carriers believe they’re in it again for the long term.”

Carriers realise they will suffer periods of breakeven or loss-making rates, but they expect there will be spurts of high profits over the lifetime of the assets, driven by “black swan” events, as in the case of Covid — and they can afford this strategy.

According to Rahul Kapoor, global head of shipping analytics at S&P Global Energy, “We will have EBIT [earnings before interest and taxes] losses over the next two to three years, but the container shipping industry is well prepared going into a downturn with balance sheets as strong as they are today.”

Preparing for disruptions in the years ahead

“It’s almost a cliché to say that disruption is the new normal. In times of constant disruption, you need to have that asset,” said Tiedemann.

“Carriers are thinking: the best ship is the ship we have. They’re inclined to hold onto tonnage just in case. If you’re living day to day and your company is barely breaking even, you cannot use this approach, but carriers’ coffers are full; they are very financially solid.”

When the Red Sea crisis struck in late 2023 and rates surged in 2024, “it hit carriers completely differently”, said Tiedemann. “Some of them had been asleep at the wheel and were short of tonnage. They had to charter in ships at very lucrative rates for owners, or buy secondhand.”

Liner operators’ approach is being seen across the shipping universe: tankers, bulkers and other vessels are being purchased at high prices that are not justified by trailing long-term time charter averages.

Scrapping is minimal across all sectors. In container shipping, the lease market remains highly elevated despite falling freight rates; the historical correlation between leasing and freight rates has completely broken down.

Owners and operators increasingly want tonnage to take advantage of disruptions due to the transformed geopolitical landscape, analogous to the post-Covid importer shift from “just in time” to “just in case” inventories.

According to Paul Gruenwald, global chief economist of S&P Global Ratings, “Tariffs are no longer economic distortions. Sanctions are no longer distortions. These are policy tools now. These are part of our day-to-day business.

“The trust has broken down. The security has broken down. The surety of trade relations, the consistency of policy — this has all broken down,” said Gruenwald.

Ulrik Sanders, senior partner at Boston Consulting Group, said, “Geopolitics is creating asymmetric risk based on ownerships. Disruptions no longer hit companies equally. Risks will become differentiated by flag and country affiliation.

“We’re moving away from the old world where container operators were all competing on the same playing field. Going forward, we’re looking at a much more polarised world where your geopolitical ties matter,” said Sanders.

Current events validate shipping’s focus on controlling assets to take advantage of disruptions.

The Middle East war is creating massive dislocations in tanker, liquefied natural gas and liquefied petroleum gas shipping sectors, and a significant disruption for container shipping.

South Korea’s Sinokor, with the financial backing of Gianluigi Aponte’s Mediterranean Shipping Co, embarked on an unprecedented consolidation spree in the very large crude carrier sector in the months leading up to the Middle East war.

Owners selling to Sinokor boasted about getting “dream money” for older VLCCs. But the real dream money is being earned by Sinokor and Aponte following the chaos in the Middle East. When disruption hits, the winner is the one with the asset.

Container lines lambasted for “foolishly” over-ordering in the wake of their Covid cash bonanza have received, or are in the process of receiving, tonnage from the first wave of newbuild orders.

That incremental capacity has allowed them to benefit from Cape of Good Hope reroutings and should allow them to take better advantage of market dislocations caused by the Middle East war.

Side effect of more orders: more disruptions

A world with more disruptions drives the need for container lines to build up their asset base.

Ocean Network Express chief executive Jeremy Nixon said, “Carriers have to survive for themselves. There is no international government looking after liner shipping in terms of protecting its interests. The carriers have to ride through these black swan events by themselves.

“They need to have the best slot cost; the most efficient cost is every trade. So, to survive, you’ve got to have the biggest possible ships you can deploy in that network,” said Nixon.

Building more ships to get the best slot cost and simultaneously create surge capacity to take advantage of geopolitical disruptions has a side effect: it spurs more disruptions as a result of port congestion.

According to Trine Nielsen, vice president of global ocean at Flexport, “There are a lot of moving pieces at the moment. There are a lot of really big vessels that are being deployed into the networks. We’re seeing trade shifts as a result of tariffs, and we’re also seeing demand patterns shift overall in the world.

“With these rapidly shifting patterns, port infrastructure is not necessarily ready when it needs to be ready. Moving into the next period, keeping an eye on port congestion is extremely important,” she said.

Port congestion has been minimal in the US in the years since the Covid crisis, but not so elsewhere.

“We didn’t snap back to the stable pre-pandemic baseline,” said Turloch Mooney, global head of port analytics at S&P Global Market Intelligence. “There has been a persistent performance gap, and that gap is a major drag on system capacity.”

“It’s not just north Europe,” said Johan Sigsgaard, executive vice president of Maersk. “The east coast of Latin America has been very congested, some places in Africa have an issue, and even in China, Shanghai has effectively been congested.”

Nixon said, “Close to 10% of the fleet is caught up because it cannot get a berth on arrival. If we go back 15 years, we used to get pretty much every berth on arrival; there was probably 1% or 2% friction with the fleet. Now it’s a big factor and it’s not going away.

“The ports are struggling to handle bigger-size ships. The berths may be there, but the carriers have been cascading in bigger tonnage,” said Nixon.

Asked whether looking at the industry from the classic supply and demand standpoint is “antiquated”, Nixon said, “I think that’s correct. It’s not just dictated by how many ships are coming out of the yards. It’s actually the bottlenecks in the ports.”

Analysts view the supply-demand balance based on the number of ships on the water and newbuilds on order, implying high overcapacity, but that is not the way it works in the real world, said speakers at TPM26.

Amid “a world of overcapacity on paper,” said Mooney, “this year did not begin with a clean slate and things are getting much, much worse. Capacity is on the books, but functional capacity keeps disappearing as networks get knocked off rhythm.

“Ships can be added on paper, but if port waiting time rises, functional capacity shrinks.”