Global ship or­ders may take a decade to mend as cri­sis builds

BusinessMirror - - News Sunday - By Krys­tal Chia & An­nie Lee

THERE’S hardly any­one buy­ing new ships, with or­ders plung­ing to a 20-year low due to a po­tent com­bi­na­tion of un­cer­tainty over en­vi­ron­men­tal reg­u­la­tions, the eco­nomic fall­out from the coro­n­avirus pan­demic and a lack of fi­nanc­ing.

“The IMO has brought in sig­nif­i­cant, am­bi­tious and im­por­tant tar­gets around emis­sions,” said Clark­sons Re­search’s man­ag­ing di­rec­tor Stephen Gor­don. It re­mains un­clear what the ex­act poli­cies and reg­u­la­tions might be

in­tro­duced and what tech­nol­ogy will be adopted, he said. Ships are long-term in­vest­ments, and buy­ers run the risk that their ves­sels will be­come ob­so­lete.

The global ship­ping in­dus­try is in the midst of one of its big­gest changes in a gen­er­a­tion af­ter stricter en­vi­ron­men­tal rules kicked in at the start of the year.

Ship own­ers face pay­ing more for cleaner fuel, retrofitti­ng ships with pol­lu­tion-re­duc­ing scrub­bers, or even or­der­ing new ves­sels. Com­pound­ing the un­cer­tainty has been Covid-19, which has up­ended sup­ply chains and stalled trade flows.

“Covid-19 has be­come the most im­me­di­ate is­sue,” Gor­don said. While chal­lenges due to lock­down mea­sures are eas­ing, “the eco­nomic un­cer­tainty, dis­rup­tion to trade, and volatil­ity in freight rates” caused by the virus are driv­ing or­ders lower.

De­mand growth for con­tain­ers is ex­pected to fall this year due to Covid-19, ac­cord­ing to A.P. Moller-maersk A/S, which pre­dicts a re­turn to 2019 vol­umes in the early part of 2021. The world’s largest con­tainer line or­dered only eight ves­sels in the se­cond quar­ter, putting its or­der bookto-fleet ra­tio at 9.4 per­cent. Glob­ally, the rate is about 8 per­cent, mean­ing or­ders for new ships are at a two-decade low, ac­cord­ing to Clark­sons’ Gor­don.

“The virus is a fur­ther hit to de­mand that’s al­ready barely even there,” said Rahul Kapoor, head of com­mod­ity an­a­lyt­ics and re­search, mar­itime and trade at IHS Markit.

“With the pan­demic’s hit to eco­nomic ac­tiv­ity and sup­ply chains, or­der­ing new ships is now the low­est pri­or­ity for com­pa­nies. They’re con­cen­trat­ing on just try­ing to main­tain profit mar­gins.” The virus has also de­layed the com­ple­tion of ship­build­ing projects, he said.

Fi­nance crunch

SHIPOWN­ERS are also lack­ing the fi­nances to make pur­chases, ac­cord­ing to Ralph Leszczyn­ski, head of re­search at ship­bro­ker Banchero Costa & Co.

“Most ship­ping mar­kets are com­ing from a rel­a­tively poor decade, 2009 to 2019, in terms of earn­ings, so most shipown­ers do not have that much cash in their pock­ets,” he said. “Ex­ter­nal fi­nance is also in short sup­ply as banks are now largely steer­ing clear off ship­ping af­ter the de­faults they suf­fered af­ter 2008.”

Still, fewer or­ders and slower fleet growth will likely bol­ster ship­ping rates. Lines are likely to con­tinue to keep ca­pac­ity in check into 2021 to min­i­mize the im­pact from slow­ing global trade, said IHS Markit’s Kapoor.

That’s al­ready trans­lat­ing to in­creas­ing costs for trans­port­ing goods by ocean liner, with one bench­mark of trans-pa­cific con­tainer rates more than dou­bling since late May to a record.

Bulk-car­rier costs have also re­bounded from a four-year low. Maersk, which idled about 20 per­cent of its ca­pac­ity in April be­fore grad­u­ally re­in­stat­ing it in sub­se­quent months, saw earn­ings beat es­ti­mates in part due to im­proved freight rates.

Big ships, small ships

THE off­shore sec­tor has seen de­mand for oil rigs and sup­ply ves­sels ham­mered as en­ergy prices re­main low and there’s lit­tle in­ter­est in new ex­plo­ration in­vest­ments, said Leszczyn­ski. It’s a “gam­ble” to pur­chase an oil tanker amid un­cer­tainty over de­mand, he said. While oil con­sump­tion has grown in the past two decades, cli­mate-change mit­i­ga­tion ef­forts are spurring mar­ket ex­pec­ta­tions that ap­petite will de­cline.

While the coro­n­avirus adds to short-term un­cer­tainty, there’s a bet­ter medium-to-long term out­look. Qatar signed a deal in June worth around $19 bil­lion with South Korean ship­builders for more than 100 liq­ue­fied nat­u­ral gas ves­sels, Maersk ex­pects a pro­gres­sive re­cov­ery in vol­umes and port op­er­a­tor DP World said it’s pos­i­tive on fun­da­men­tals.

The ship­build­ing sec­tor is set to re­main sub­dued for the next few years, with a re­vival pos­si­ble eight to 10 years from now, said Leszczyn­ski. Ves­sels built dur­ing the boom years of be­tween 2007 and 2010 will re­quire re­place­ment, as most have a life­span of about 20 to 25 years, he said.

“The virus is a fur­ther hit to de­mand that’s al­ready barely even there. With the pan­demic’s hit to eco­nomic ac­tiv­ity and sup­ply chains, or­der­ing new ships is now the low­est pri­or­ity for com­pa­nies. They’re con­cen­trat­ing on just try­ing to main­tain profit mar­gins.”—kapoor

JAMES MACDONALD/BLOOMBERG

THE hull of a Royal Cana­dian Navy ves­sel sits sur­rounded by scaf­fold­ing at the Point Hope Mar­itime ship­yard in Vic­to­ria, Bri­tish Columbia, Canada, De­cem­ber 3, 2018.

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