Cancellation risk approaching? Shipowners "madly" building ships: spending money to buy tomorrow

“When you make money, be sure to save it for tomorrow.” said former Evergreen and Yang Ming chairman Xie Zhijian.

Although container ship order books continue to hit record highs, high charter rates have not stopped shipping companies with ample cash from investing in shipbuilding. However, with continuously falling freight rates, risks in the container shipping market are accumulating, and the shadow of order cancellations in the newbuilding market is beginning to appear.

Buying instead of chartering! Shipping companies' 'crazy' shipbuilding plans continue

According to the latest data from Clarkson, the current order book for container ships has reached 930 vessels totaling approximately 6.96 million TEU, equivalent to 28% of the existing fleet. At the same time, the price of container ships continues to rise. In June, the price of 22,000-24,000 TEU ultra-large container vessels increased by US$3.5 million to US$209 million, 13,000-13,500 TEU vessels increased by US$1 million to US$149 million, and 6,600-6,800 TEU vessels increased by US$0.5 million to US$85 million.

Alphaliner's data shows that the company with the largest order book is currently the world's largest container shipping company, Mediterranean Shipping Company, with 118 new vessels under construction, adding more than 1.54 million TEU of capacity; followed by CMA CGM, with 68 new vessels under construction and more than 640,000 TEU; COSCO SHIPPING Group with 34 new vessels under construction and more than 580,000 TEU; Evergreen Marine with 57 new vessels under construction and more than 540,000 TEU.

Over the past two years, container ship charter rates have skyrocketed. The Howe Robinson Container Ship Charter Rate Index (HRCI) shows that after the outbreak of the COVID-19 pandemic, the index fell to a low of 497.5 points on June 10, 2020, and reached a high of 5821.5 points on March 23 this year. As of July 13, the index is still at 5596.4 points, 11.25 times the lowest point, exceeding the increase in container shipping rates.

With current market charter rates, the operating costs of owned vessels are significantly lower than chartered vessels. For example, the daily cost of an 1800 TEU container ship is approximately US$13,000-14,000, while the daily charter rate for a 2-3 year charter is as high as US$35,000, and even higher, reaching US$62,000 for a short-term charter of one quarter.

Xie Zhijian, former chairman of Evergreen and Yang Ming, said that shipping companies must take advantage of this boom to use their cash to buy instead of chartering, increasing the ownership rate of ships, containers, and other assets to reduce long-term costs and enhance competitiveness.

Among the top 10 global shipping companies, those with a chartering ratio below 50% include Maersk (41%), COSCO SHIPPING Group (46%), Hapag-Lloyd (39%), Evergreen Marine (45%), ONE (48%), and HMM (32%).

According to International Ship Network, HMM (formerly Hyundai Merchant Marine) recently announced that it will invest 15 trillion won over the next five years to expand its fleet and related facilities, increasing its container shipping capacity from the current 820,000 TEU to 1.2 million TEU.

Risk Accumulation! Too Many Container Ship Orders Lead to Cancellation Risk
     Although the order book has reached record highs, more and more shipowners are preparing to place orders for newbuilds. Recently, a shipping consultancy has warned of increasing risks of order cancellations from shipyards, with differing opinions on this matter.

Some industry insiders point out that shipping companies have made a lot of money in the past two years and now have plenty of cash on hand, so they naturally want to continue building ships to replace previously chartered vessels. Furthermore, new energy-efficient ships comply with new environmental regulations, significantly reducing future operating costs. In the past, due to insufficient cash, shipping companies often had a chartered vessel ratio of 53% to avoid huge loan pressures. However, the situation is different now, with each company having a large amount of cash, and naturally wanting to invest in shipbuilding as much as possible. If the market really turns bad, the pressure will be greater on ship leasing companies.

Zheng Wenlong, chairman of Taiwan Shipbuilding Corporation, believes that order cancellations or abandonments did occur after the 2008 financial crisis, but at that time, shipping companies were truly unable to pay for the ships. Now, shipping companies are making a lot of money, and ship prices have not fallen. Currently, the market is scrambling for ships and continuing to build ships. The demand for container ship construction may cool down, but there are bulk carriers to take over orders, so shipowners have no reason to cancel orders. In addition, shipowners who cancel orders will also bear losses, so it is more likely that they will negotiate to postpone delivery.

An executive of a shipping company told International Ship Network that cancellations involve compensation issues, mainly depending on the contract content. If the order was placed recently and only 5-10% of the order has been paid, and the market reverses and the price falls, it may choose to forfeit the deposit. However, if the shipyard has already ordered materials and the contract has clear conditions for cancellation compensation, the shipowner is unlikely to choose to cancel the order, and it is even less likely to cancel an order that has already started construction.

However, some shipping company executives pointed out that some domestic shipyards have very lenient order acceptance conditions. Shipowners who are not financially sound enough, having only made some money in this wave of market conditions, follow the trend and order new ships without considering their own capabilities. Once the market reverses and subsequent funding cannot be sustained, they may choose to cancel orders.