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MSC orders 22.000 TEU vessels – will the dominos fall?

This morning Lloyd’s List reports confirmation that MSC has ordered a series of eleven 22.000 TEU vessels. This comes in the wake of CMA CGM having ordered 6 similar vessels recently with an option on another 3. What does this mean for the market?

First of all, if this is seen purely in isolation it does not really rock the boat. The vessels will be delivered during 2019-2020 where the orderbook is very slim presently. In and of itself the 440.000 TEU of capacity amounts to a 2% growth of the global fleet – and given the delivery spread on 2019-2020 is actually reflecting a 1% market capacity growth annually. Hence from this isolated perspective there is not much cause for alarm.

But there is also another perspective – and that is the perspective of competitor reactions. We have seen such reactions multiple times in the past, and recently in the wake of Maersk Line’s order of the first triple-E vessels. When just one or two carriers order a new vessel class with substantially lower unit costs, pressure mounts on the other carriers. Should they abstain from ordering to avoid a new excessive market injection of capacity and in the process fall behind in terms of competitiveness on unit costs? Or should they jump on the bandwagon and order enticing new capacity promising much lower costs, knowing full well that another bout of overcapacity is the likely result?

In a historical perspective, the answer to this question is very clear – the modus operandi has always been to follow the first movers and order similar new large vessels. And especially if such vessels can be acquired at a low cost, as is also currently the case.

Hence the interesting question about CMA CGM and MSC’s new orders is not whether the market can absorb this capacity – it likely can – but whether the other carriers decide to follow through with similar orders of their own. If they don’t, the French and Swiss carriers will increase their relative competitiveness in the market. If they do we are set for a repeat of the traditional cycle of overordering and a new downturn come 2020-21.
Source: Lars Jensen, CEO, Partner at SeaIntelligence Consulting

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