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Collapsing orders for new ships set to hasten market rebalancing

Investors’ confidence in market prospects dramatically weakened last year, resulting in orders for new ships in the main sectors completely collapsing. Fading optimism about future investment returns, and a more widely held belief that drastic adjustment is required to correct market imbalances, proved compelling. An implied reduction in newbuilding vessels joining the fleet will assist in restraining capacity growth.

There were variations in the scale and pace of reduced ship ordering during the past twelve months. These reflected differing circumstances in the three main sectors – tankers, bulk carriers and container ships – and among smaller categories. One visible exception to the pattern of steep falls was orders for cruise ships, which soared to a new record high level, spurred by entirely different drivers in that specialised market.

The chart below highlights trends in the recent period and preceding years. Inevitably, the impact of the 2016 slump is emphasised by comparison with exceptionally massive contracting for new ships in 2006-2008, towards the end of the shipping markets boom. Notably, however, two subsequent secondary ordering peaks occurred in 2010 and then again in 2013 when investors’ optimism, especially for bulk carriers, revived strongly.

Ordering new ships proves unattractive

Depressed or weaker current market freight rates, coupled with shipowners’ receding confidence in future markets and potential profitability, was reflected in only minimal interest last year in buying new ships. Provisional figures compiled by Clarksons Research show that 480 newbuilding contracts were placed with shipbuilders around the world in 2016, totalling 27.4 million deadweight tonnes. This low volume represented less than two percent of the existing world merchant ship fleet.

Percentage declines in newbuilding orders placed globally in 2016, compared with the previous year, varied among the main sectors. Container ship and tanker orders fell dramatically, by 91 percent and 82 percent respectively. In both sectors however, the decline was accentuated by comparison with very strong ordering in the preceding year.

In the bulk carrier segment there was a less steep but still massive 46 percent fall after a relatively low previous total. Among other categories orders for gas carriers, both liquefied natural gas (LNG) and liquefied petroleum gas (LPG), diminished and offshore service vessel contracting remained limited.

Another feature of last year’s contracting activity was prominent. Over nine-tenths of the bulk carrier orders placed, which also comprised almost half of all merchant ship orders, consisted of one type of vessel intended for employment by one user. Contracts for valemax 400,000 dwt size very large ore carriers (VLOCs) numbered 31, totalling 12.4m dwt. The majority will be built for three Chinese owners, plus one for a Japanese owner, with all ships destined for long-term charter to Brazilian mining company Vale.

Newbuilding deliveries: differing sector outlooks

How do these changes affect the overall global newbuilding orderbook profile and scheduled deliveries over the next few years? As measured at year end, the 2016 merchant ship orderbook total was down by 92m dwt or 29 percent compared with twelve months earlier, based on Clarksons Research data, from 315m dwt to 223m dwt. That reduction reflected deliveries of new ships from shipyards heavily outpacing incoming new orders.

Significantly, looking at the potential impact on future fleet evolution, orderbooks as a ratio of the existing fleet were down sharply in all main categories. At end 2016 container ship orders were equivalent to 15 percent of the current fleet, while tankers comprised 13 percent and bulk carriers 11 percent of the respective fleets. Reductions will contribute to restraining fleet expansion, which depends also on how scrapping evolves.

The scheduled delivery date profile of global orderbooks is relevant to gauging the impact on fleets in the near future and further ahead. Orderbook delivery schedules usually stretch out over three years ahead, with some vessels due for completion later. At any point the pattern reflects vessels ordered one, two or sometimes more years before agreed delivery dates. Typically the largest proportion of the total orderbook at any given time is due for delivery within the twelve months ahead.

Current delivery schedules will affect the various fleets differently. Estimates of actual annual deliveries are based on scheduled completions, modified by adjustments to reflect orderbook ‘slippage’ and postponements, for which assumptions are made that are not always accurate. Calculations suggest that container ship newbuilding deliveries in 2017 may be higher than seen last year. Conversely, tanker deliveries may decrease while bulk carrier deliveries are set to fall. In the specialised sectors, LNG carrier newbuildings may increase but those of LPG carriers may decline.

Further ahead changes are less predictable. Based on current orderbooks, deliveries in the three main sectors could diminish in 2018, but there is still potential for new orders to be added for completion next year. Low newbuilding prices at shipbuilding yards are an attractive incentive, although financing has become more restricted than it was in the past when bank lending was abundant.

Fading enthusiasm of investor nations

Examining investment in new vessels by prominent countries, based on their ownership and control, reveals insights into views on future markets and potential opportunities for further involvement. Indications of differing national attitudes towards prospective returns and preferred activities are also reflected.

Global investment in orders for new ships fell dramatically in 2016, as discussed. Based on contract value the annual total is estimated to have been down by almost two-thirds compared with the previous twelve months, from $90 billion, to under $34 billion, using provisional figures calculated by Clarksons Research. This decline, in turn, followed a substantial fall in 2015 from much higher levels in the two preceding years.

The largest investor nation by far last year was the United States, which saw a total of $7.6bn, a relatively modest annual reduction of 11 percent. Most of this investment reportedly consisted of ten high-value cruise ships. In the top three shipowning countries – Greece, Japan and China – by contrast, investment was massively cut. While this pattern seems an accurate guide to the direction and magnitude of change, the actual figures are likely to be revised as additional information becomes available.

In Greece, usually at the forefront of investment in newbuildings, the estimated value of 2016 orders was $2.2bn, down by 69 percent from the previous year. One individual Greek owner ordering LNG carriers and large tankers comprised a major part. Japan’s $1.9bn total was down even more drastically, by 88 percent. In China a $4.4bn amount was 61 percent lower, supported by the large order for valemax size VLOCs. But not all changes were negative. Notable variations in two smaller investing countries were the six-fold upsurge in Malaysia to $3.2bn, and strong 77 percent UK growth to $2.7bn.

A case study in unforeseen events

Among shipowners and others, there is cautious optimism that the recent collective restraint in ordering new ships will soon greatly contribute to bringing fleet growth under more control. But, as is well known, two other major influences also will have a large impact on the eventual outcome.

On the supply side of freight markets, changes in scrapping volumes could assist or counteract the effect of reduced newbuilding deliveries on fleet growth. For example, if scrapping diminishes greatly amid declining newbuilding deliveries, fleet expansion may remain brisk. On the demand side, changes in seaborne trade volumes and associated vessel capacity requirements could assist market rebalancing. Solid demand growth, matching or exceeding fleet growth reduces over-capacity but, if that does not occur, the imbalance (gap) between demand and supply widens.

Bulk carrier market events in the past twelve months neatly illustrate these points. A widely expected further slowing of fleet growth did not happen. However, a pickup in some elements of seaborne dry bulk commodity trade, greater than many expectations, provided assistance for the move towards reducing the market imbalance.

One element of the 2016 bulk carrier market was quite accurately forecast when the year began: newbuilding deliveries. As widely expected at the outset, an annual total of about 48 million deadweight tonnes delivered proved similar to the 49m dwt seen in the previous twelve months. This result was a notable forecasting achievement, since the orderbooks had shown a scheduled volume for delivery in 2016 which was almost twice the figure actually emerging. Much ‘educated’ guesswork had been required to calculate what percentage of slippage and postponements would be seen.

But other elements affecting the bulk carrier market last year were not foreseen so well, emphasising the essential unpredictability of key influences. Scrapping forecasts proved much less accurate. Soon after last year began, especially severe dry bulk freight rates weakness boosted sales to shipbreakers, leading to estimates of annual scrapping substantially exceeding the previous year’s total. After the middle of 2016 though, the freight market revived and demolition sales receded, causing the annual total to decrease. The outcome was no further deceleration in fleet expansion.

While the absence of bulk carrier fleet slowing in 2016 disappointed optimists, largely unexpected additional volumes of cargo in several key trades emerged. In particular, imports of iron ore and coal into China were much stronger than expected. Iron ore import growth accelerated rapidly after a relatively small rise in the previous year. Coal imports seemed set to continue falling, but the trend reversed and a large increase was seen. These changes provided substantial freight market support.

Shaping the future market balance

Recently diminished new ship ordering unequivocally provides a sizeable contribution to future market rebalancing and restoring profitability. The impact and timing will differ from sector to sector but, assuming no resurgence of interest in newbuilding orders over the next twelve months, the result could have a powerful influence eventually.

Looking at the size and profile of current orderbooks, and likely delivery volumes in the next twelve months and further ahead, it is clear that these were partly shaped by the heavy ordering which occurred before the recent reduction. Consequently the timing effects of changes in newbuilding deliveries are likely to vary.

Bulk carrier newbuilding deliveries appear set to decline very sharply in 2017 and quite possibly again next year if ordering restraint continues. By contrast in the tanker sector, deliveries may remain high this year before decreasing, again assuming continued ordering discipline. Container ship deliveries also could remain large and it is currently unclear whether any meaningful reduction will be seen in the following twelve months.

Interactions among market forces will determine how large an impact on tonnage supply/demand balances unfolds. In the somewhat unlikely circumstances of a strong revival in global economic activity and rising expectations for trade expansion, market psychology may change. Scrapping could plummet, although that may be limited by new regulations on ballast water treatment and fuel-burning emissions due to be introduced, rendering many existing ships uneconomic. Newbuildings may again be more widely seen as an attractive investment. This illustration highlights the imponderables.
Source: Article for Hellenic Shipping News by Richard Scott, visiting lecturer, London universities and MD, Bulk Shipping Analysis

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