Pre-COVID, the bull case for shipping rates was all about plunging newbuild orders. A drop in orders in 2019 pointed to rising freight rates in 2021, given the lag between contract signing and delivery. Mid-COVID, the bull case for rates is even more about plunging newbuild orders than before. There will be a lot fewer vessels on the water in 2021, 2022 and beyond than previously thought.
New data provided to FreightWaves by U.K.-based VesselsValue confirms that 2020 is shaping up to be an exceptionally weak year for tanker, bulker and container-ship orders.
New data from Alphaliner shows that container-ship newbuild capacity is down to just 9.4% of capacity on the water. “For the first time in more than 20 years, the global newbuilding pipeline fell below the 10% threshold,”reported Alphaliner on Wednesday, calling it a “historic low.”
Tanker and bulker orderbooks
According to VesselsValue, the tanker orderbook has fallen to 9% of the operating fleet in terms of capacity (measured in deadweight tons or DWT) as of July. This is down sharply from a high of 23% in January 2016.
The dry bulk orderbook is only 7% of the on-the-water fleet. This is down from 24% in January 2015 and an even higher peak — 27% — in January 2010.
The number of ship orders year-to-date is extremely low. VesselsValue data shows just 134 tanker orders through July, 28% below last year’s pace, despite historically high spot rates. Only 88 bulkers are on order, 31% below last year’s pace.
Clarksons Platou Securities has released data for specific tanker and bulker segments. For very large crude carriers (VLCCs, 200,000-plus DWT), the orderbook is only 7.4% of the on-the-water fleet. For Suezmaxes (120,000 – 199,999DWT), it’s 11.3%.
In the products sector, the ratio is just 6.5% for medium-range (MR) tankers (30,000 – 59,999DWT). It is 0.8% for long-range 1 (LR1) tankers (60,000 – 79,999DWT) and 9.6% for LR2s (80,000 – 119,999DWT).
In the dry bulk sector, Clarksons puts the orderbook-to-fleet ratio at 10% for Capesizes (120,000-plus DWT). It is 8% for Post-Panamaxes (85,000 – 119,999DWT) and 6.8% for Panamaxes/Kamsarmaxes (65,000 – 84,999DWT).
According to Alphaliner, the container-ship orderbook is down to just 2.21 million twenty-foot equivalent units (TEUs). This contrasts to a high of around 7 million TEUs in 2008. In that year, orderbook capacity was more than 60% of on-the-water capacity.
Of ships on order, virtually all are in the 10,000-plus TEU category or the 3,999-TEU-or-less category. There are effectively no orders in the midsized 4,000 – 9,999TEU category.
As Star Bulk (NASDAQ: SBLK) President Hamish Norton explained during a Marine Money virtual forum in June, “What may be legal today may not be legal in five years. In the old days, ships were grandfathered in until the end of their useful life. Given the political situation, people are afraid — I think with good reason — that a ship they order today will not be grandfathered in, and will become obsolete.”
The second reason for the orderbook shortfall is COVID-19. Travel restrictions in the first half of the year made newbuild contracting extremely impractical. Furthermore, current and future economic fallout make it much tougher to pull the trigger on orders and get financing. “If economic uncertainty can be measured by ship-ordering activity, then shipowners must be feeling completely lost at the moment,” wrote Stifel analyst Ben Nolan in a recent research note.
The pricing of secondhand ships is also undercutting the case for newbuilds. Newbuild prices are at too high a premium to secondhand prices for most orders to make sense.
Stamatis Tsantanis, CEO of Seanergy (NASDAQ: SHIP), explained during a Capital Link webinar last week that a secondhand 5-year-old Capesize costs around $30 million, whereas a newbuild costs $50 million. “The price differential is not justified by the incremental earnings [of the newbuild],” he pointed out.
Risks to rate upside
The IMO2050-coronavirus one-two punch sounds like a guaranteed recipe for future freight-rate strength. But there are no guarantees in ocean shipping. Following is a devil’s advocate list of things that could go wrong:
Cargo demand could slump —A multiyear virus-induced recession or depression could cut cargo demand as much or more than vessel capacity. This would erase owners’ future rate-negotiation advantage.
Another demand risk relates to GHG emissions. If the world’s governments are serious about forcing GHG cuts by shipowners, wouldn’t they also force cuts of fossil-fuel consumption? And if so, wouldn’t this reduce future demand for tankers, bulkers and gas carriers?
The coronavirus changes the equation. One theory is that the cleaner post-lockdown skies and waters will drive momentum for environmentalism and GHG regulation. In this scenario, shipping decarbonization is more likely.
Another theory is that the outbreak will spur an extended period of economic pain and geopolitical unrest. In this scenario, countries would focus on rescuing economies and keeping transport costs cheap, making shipping decarbonization less likely.
If owners believe GHG regulations face significant delays, or may not happen at all, they could lose their fear of ordering.
Orders may go forward regardless of IMO2050 and COVID headwinds—If rates jump in 2021 – 22 due to lower vessel supply, owners could decide to order regardless of the premature-obsolescence risk, on the belief that they’ll earn sufficient returns before obsolescence strikes. This would limit the duration of the upcycle.
Alternatively, if there is a deep economic slump due to the coronavirus and owners do not order ships, there could still be newbuilds — a lot of newbuilds.
Commercial shipbuilding is almost entirely based in China, South Korea and Japan. Asian governments could fill yard slots with orders by state-controlled shipowners tapping state-backed financing.
This would not only preserve Asian shipbuilding jobs, it would also depress freight rates — a plus for economies that benefit from cheap transport of raw-material imports and finished-goods exports. Economies like China’s.
Talk to a shipping veteran who has been around since the 1980s and the conversation will often turn to the infamous Sanko orders. In 1983, Japan’s Sanko Steamship Co. placed a $1.25 billion order at Japanese yards for 103 dry bulk newbuilds totaling 4 million DWT. The order helped Japanese yards but crippled rates for years.
The fear, if orders don’t pick up, is that an Asian shipbuilding nation will “pull a Sanko.” Most likely, China.
Judging by recent statements out of Russian media, the Kremlin has been closely monitoring just where the Pentagon intends to send the some 12,000 troops ordered to permanently depart Germany, after the Trump administration slammed Berlin for not shouldering its fair share of NATO defense spending.
While its believed the majority will be returning home, with a little less than half to return be redeployed around Europe, on Friday Poland indicated some will be deployed right near Russia’s doorstep. As the Defense Postreported:
Washington will deploy at least 1,000 soldiers in Poland and oversee forces on NATO’s eastern flank, Defense Minister Mariusz Blaszczak said Friday after the US announced a massive troop pullout from Germany.
Blaszczak told a Polish public radio broadcaster, “At least 1,000 new soldiers will be deployed in our country,”
“We will have an American command in Poland. This command will manage the troops deployed along NATO’s eastern flank,” he said.
“It will be the most important center for ground forces in our region,” he said. “We will soon sign the final pact with the Americans.” The Trump administration has long been in negotiations as part of an ongoing deal with Warsaw which cements closer defense ties, something which has riled Moscow.
Further angering the Kremlin is that Secretary of Defense Mark Esper last week said the Germany withdrawal will reinforce NATO’s south-eastern flank near the Black Sea, due to the redistribution of American forces. It’s expected that many could go to Baltic countries as well as Italy.
Meanwhile, last month it was reported that the Polish proposal to rename a base “Fort Trump” — which would host US troops in the East European country - has crumbled over disagreements over funding and precisely where the soldiers would be garrisoned.
Workers at a popular safari park are on edge after baboons were spotted wielding tools like knives, screwdrivers, and even a chainsaw. And to make matters worse, the primates are having a blast using the tools to terrorize visitors’ cars.
The baboons at Knowsley Safari Park in Merseyside, England, have long enjoyed the ignominious reputation of being extremely destructive mischief-makers who were previously infamous for nabbing objects from the cars of visitors, including side-view mirrors and windshield wipers.
One mechanic in nearby Sale said that he’s had two customers this year alone who needed work done after the monkeys went to town on their cars.
“The kids start chirping up saying they want monkeys all over the car, and the next thing you know, you’re driving home with no registration plate,” the mechanic said.
However, some local workers worry that the creatures are possibly being given the weapons and power-tools “for a laugh” by equally mischievous park-goers, reports the Sunday Times.
“We’re not sure if they are being given weapons by some of the guests who want to see them attack cars, or if they’re fishing them out of pick-up trucks and vans,” one worker said.
Given the primates’ history of thievery, it would make sense that the baboons themselves are taing it upon themselves to find goods hidden in toolboxes scattered across the 550-acre safari park.
“One of the baboons was seen lugging around a chainsaw,”the worker added.
However, given the frequency with which the baboons have been sighted walking about with knives or screwdrivers in-hand, suspicion has been raised about how they are suddenly so well-supplied to wreak havoc.
“The baboons have been found with knives and screwdrivers. I do wonder if it’s some of the guests handing them out,”a source told Daily Record.
The safari park, which hosts a range of individual creatures including rhinos, lions and tigers, reopened last month after being closed due to the coronavirus pandemic. Aquariums and other zoos were also given the green light by the U.K. government to resume operations following the lockdown.
On the park’s website, potential visitors are assured that while proper public health measures are in place and people are restricted to their cars, a similar guarantee can’t be made about the problems caused by the baboobs.
“If you take a drive through our Baboon Jungle, we’re unable to return any car parts that our cheeky baboons may take,” the website noted, adding that a “car friendly route” is also an option.
Managers at the safari park are skeptical about whether the tales of knife-wielding baboons stalking park grounds is true, shrugging it off as an urban myth.
“We believe many of these stories have grown in exaggeration as they’ve been retold, with embellishment to make the objects that are sometimes found in the enclosure seem more exciting and unbelievable,” the park said.
Corona Virus Bill tabled in Jan 2019 — OVER1YEARAGO!
On Friday, U.S. President Donald Trump signed into law the CARES Act, a massive $2 trillion USD bailout intended to mitigate the economic impacts of COVID-19 on the United States economy.The legislation will ship payments of up to $1,200 to millions of Americans, bolster unemployment benefits, offer loans, grants and tax breaks to businesses large and small and flush billions more to states, local governments and the nation’s all but overwhelmed health care system.
The House approved the sweeping measure by a voice vote, as strong majorities of both parties lined up behind the most colossal economic relief bill in the nation’s history. The U.S. now has 85,996 confirmed cases, according to a count kept by Johns Hopkins University. Italy, the U.S. and China account for nearly half the world’s more than 550,000 infections and more than half of the roughly 25,000 reported virus deaths.