The container ship order boom: growth or overcapacity?

I certainly think that when we look at the second half of the next decade or somewhere around 2040, that's going to be a real alternative for especially bigger ships. When you can sail on nuclear, then all of a sudden fuel and speed get a very different dimension. There is no reason why you cannot sail again 24 or 25 or maybe even more knots and a search you then need actually less ship. Straight talk with Ralph Habenjansen. Welcome everyone to this latest episode of Straight Talk where Ralph and I will be discussing the Containership Order Book. Now I've been doing some research, I've been reading through Margaret reports and talking to brokers and to be frank I've been astonished by what I've discovered. I've found that the size of the Containership Order Book is equivalent to 4040% of the existing fleet capacity, which is already a record high, so that's an incredible number. But that was at the end of August, and since then there has been an ordering bananza. If anything the rate of contracting new ships has accelerated and this includes many 24,000 T.E.U. ships. So that has pushed the order book up to at least 15 million T.E.U. or 45% by late October, perhaps even more. So Ralph, I have to ask you, is this sound business sense? Is the Containership industry suffering from collective madness? What's driving this ordering frenzy? Good question. We of course also see everything that's happening out there and we admitted also a fair number of ships on order ourselves. But it's clear the order book is big these days. On the other hand, if you look at what's happened over the last couple of years, we have seen that the need to add more ships into the water has been quite a lot. We have seen a lot of growth, especially on the dominant legs in the last three years, probably 25% or so. And that means that the order book, which was already perceived to be big a number of years ago, has actually been so far, been fully absorbed by demand. So I guess the biggest question out there right now is probably demand and dependent on how debt will develop in the end. I think there will be some over capacity or there may be more. This is always the problem in a way because you're looking at effectively short term demand trends and yet you're ordering new ships that might last 25, 30 years. So how do you balance those two equations? I mean, you just said they could be over capacity. So are you looking at freight rate, charter rate slump? Could there be lay ups coming down the line? You know, in fairness, if you look at what we are today, I mean, today there is basically no idle fleet. The fleet is aging. The capacity that's over 25 years is growing every year. But the biggest question out there remains demand. You know, we've seen a decade between 2010 and 2020 with relatively slow growth. If we look at what we've seen the last three years, then especially on the head holes or the dominant legs, growth has been very strong. And of course, the one million dollar question is what is going to happen in the upcoming couple of years and how much capacity will actually be required? Well, yes. I mean, right now is sort of about the demand is strong in the head holes you mentioned before that is really what you're focusing on. But at the same time, right now, for example, we're seeing ships going back through the Suez Canal. So that frees up capacity, doesn't it? So do you think in the short term, there might be over capacity? I don't expect at any time soon, to be honest, because we've seen that most of the capacity is actually back through Suez. We're still sailing very fast and all of those ships are still required. So there's actually a fair bit of demand. And, you know, again, if you go back to that question of demand, that to me is the biggest single question mark that's out there. And probably in any scenario, we will have some over capacity at some point in time because this is a cyclical industry and that has not changed contrary to maybe what some people think. And of course, we've been in an up cycle for a long time. Question is what's ahead of us in the upcoming couple of years. If you look at, I mean, not so much the order book because some of that's only going to be delivered in the early 30s. You have to look at what's going to be delivered next year and the year after that. And if I'm not wrong, then next year we have about 8% deliveries the year after that. We have about 12 and then another 9 or so. And if you look at next year, I would expect growth on the dominant legs next year again to be similar to what we've seen in the last couple of years. So that could easily be 5% or maybe even a little bit more. And then, of course, even if we go back through Suez, we, with today's fuel prices, should anyway, sail slower. So I don't see a big risk for over capacity in 27. 28 is probably a little bit more of an open question because then we get 12% new capacity and the likelihood that that will be absorbed by demand growth fully is probably less than 50%. Well, you mentioned then about speed and that's always been one of the levers for adjusting capacity. I thought ships are still going quite slowly, but you're saying they've speeded up. So you could actually reduce speed if you needed to rather than put ships in to lay up. Today we sail faster than we actually shoot. In most cases, we sail faster than the performers because there's congestion left, right and center and we try to stay on schedule. So normally, if there would be enough ships, then we would probably, in most cases, sail one to one and a half knots slower, certainly with today's fuel price. And that would, of course, mean that in a typical Asia-Europe loop, you would have to add one ship, which you go from 12 to 13 or from 10 to 11. And of course, that's a considerable amount of additional capacity that you then need for that if you look at it a bit broader. But it definitely makes economic sense at today's fuel price, and even if the fuel price is a bit lower. Yeah, I remember the days when it was just 8 ships in a Asia-Europe loop, so that's changed quite a lot, hasn't it? Can you tell me who is ordering these new ships? Now, in the past, obviously, as you know, there's been a lot of speculative ordering, especially when you had the KG system, which was tax-driven, which really did add to massive over-ordering. But who's ordering now? Is it the lines? Is it the tonnage providers? Or is there any speculative ordering as well? I mean, in fairness, I think you could almost say that everyone is buying. Yeah. Lots of people have lots of cash and strong balance sheets. Also from the COVID days, we see stronger growth than a lot of people have anticipated. I think there are some reasons to assume that there may be even more growth coming. So that's when you typically see this type of bonanza in ordering. It's mainly the liners, I would say, at this point in time. But there's clearly also a number of non-operating owners that are ordering. There's still not a lot of speculative shipbuilding, actually. So the non-operating owners are mostly ordering on the back of charge of commitment, are they? Yes. And many of them have learned their lesson from the first decade of this century. And there was a lot of speculative ordering. And then at some point in time, the market changed and they got stuck with all of that. Or had to accept extremely low charge rates for a long period of time. The whole type of speculative deals, there's not that many out there. What about the lines themselves? Do you feel there's a certain amount of peer pressure? There's one particular line which has got such a massive order book. So do you feel under pressure to keep up with your competitors, really? We don't necessarily feel that pressure. I mean, I think it's very clear that for some people, the money seems to be burning in their pockets. And because of that, they want to spend it on whether it's on terminals or on boxes or on chips. I think our philosophy has been that we want to grow with the market or sometimes maybe slightly faster, but that also means that we should not add capacity, add a rate that's much beyond, say, four or five, six percent per year, which is also what we have planned over the upcoming couple of years. Because in the end, it's super critical that you also turn and use the assets quickly. Because otherwise, in the end, you end up with a huge balance sheet and then it becomes very difficult to make a return on capital, certainly when markets normalize. Because the imbalance that we see today between supply and demand is for sure going to be less if we look ahead into the next three years. Maybe not so much in '27, but certainly in '28, '29. I sort of follow up about the amount of money that's being spent. I think class and research estimated that last year, $66 billion was spent on new ordering and it's going to be even more this year. How is that being financed? Is it through debt, is it through long cash? I mean, you've all earning a lot of money at the moment. So is that what's driving it partly? You need to spend that money. I mean, I think that's going to be less of a driver going forward, also because we see interest rates going up. Most people would still find the combination between debt and equity financing. Of course, cost of debt has gone up, cost of equity in a way as well. So I think that will also, when you look ahead over the next 18 or 24 months, I think that will have a little bit of an effect also on this new building activity. You know, I'll see again, a wave and certainly not impossible that there is going to be a bit more, but at some point in time, that will typically also slow down again. Because it tends to come, as you say, in waves, which is probably typical for shipping. The other thing about ordering a new ship, you don't just order one new ship, it has to be a series. And I believe that of, say, 24,000 to you ship now, it's about, correct me if I'm wrong, 250 million, something like that. You would have to order series of five or ten. I mean, that is a huge amount of money, isn't it? You have to commit. And you've got to make those decisions on the spec and the design. How do you do that? I think all of us have a fair bit of experience meantime in ordering new ships. These ships have all been built also. in many series already. So normally one would take a design off the shelf from one of the yards and try to maybe improve it a little bit, but then take it forward from there. And as you said, you know, market is very transparent, so everybody buys the ship set at more or less the same prices, unless you got really lucky, like we got, for example, in 21, when we ordered our 24k's, those were way below the 200 million at that point in time, but that's a lucky punch that you will not be able to repeat every time and everyone will have that every now and then. About yard capacity as well, because it's not just containerships, which are being orders in such numbers, but tankers as well. So is it hard to find the yard capacity and find them and get a delivery date that you want? Yes, I know. I mean, there's of course, there's quite a lot of yards that have invested in additional capacity over the years, because as you rightfully say, you know, at the end of the last decade, there was a huge backlog in new building activity in pretty much all sectors and everybody now tries to catch up. And that's also why I believe that if you want to order new ships, you know, you better stay calm and don't get too hung up on whether this will be delivered in 29 or 30 or 31, because you buy those ships anyway, as you said, for 25 or 30 years. So whether they come six months earlier or later, it really doesn't matter all that much. Some people would see that probably a little different, but that's certainly the way I look at it. And, you know, we'll have to work through it. But compared to a couple of years ago, I'm still more optimistic today than I was at that point in time. I recall when we did our strategy towards 2030, then we anticipated to have fairly severe over capacity in 24, 25, 26, because we anticipated significantly lower growth rates than what we have seen actually. And today, capacity is still quite tight. There doesn't take a way that to your point. I mean, 45% of the order book is, of course, a lot. Even if you take into account 5% growth every year, you take into account additional scrapping and you take into account sailing slower, then that's probably still a risk left that in 2829, we'll see a few too many ships coming into the fleet. So is that when they could perhaps be a risk of layups that were the cold or warm layups because for that very reason, good to have too much capacity? Yeah, totally. I mean, that is what will have to be done because in the end, if you see rates coming so much under pressure that you don't even cover your variable cost, then of course you need to take out capacity. And I don't really know what an eight profile of the fleet is, but is there plenty of all the ships that could actually be sent to scrap yards and that would help balance things out? Yeah, I think if you look at all the ships, let's say, beyond 25 years, then I believe it's close to 4 million TU of capacity until 2030 and actually quite rapidly climbing after that as well. So I mean, people think that it's normal, you know, the ships do not get scrapped, right? If you look at the last 10 years, I think scrapping on average was half a percent of the global fleet. If it would say like that, it would mean that you need every ship for 200 years. I think it's pretty clear that that's not going to happen. So scrapping is definitely going to go up back to four, four and a half percent. Whether that'll happen in two years, three years or five years, very difficult to predict and will also depend on how the market develops. Of course. It's going back to when you're ordering a new ship. So much talk at the moment about the fuel of the future. How do you make that decision about propulsion systems and fuel? Can you design dual fuel ships that have to account for fuel you don't yet know about? That's of course tricky. I mean, when you look at fuels of the future, there's a lot of unclearity. I guess today, most people bet on LNG, which could be also emithane or bio-LNG. If you want to be completely green, but LNG availability, when you look five or 10 years out, still seems to be quite good. So that's the bet that most people make. Of course, one can also think about methanol. There's some methanol ships that are being built. We are also building some. You also have ammonia. I'm personally a little bit skeptical because it's so toxic. And then you of course have nuclear, which is not for today. But I certainly think that when we look at the second half of the next decade or somewhere around 2040, that's going to be a real alternative for especially bigger ships. I also believe that that will be a huge game changer because that will change the industry as when you can sail on nuclear, then all of a sudden fuel and speed get a very different dimension because there is no reason why once you can use nuclear power, when you can not sail again 24 or 25 or maybe even more knots and a search you then need actually less ships. And you also completely change those supply chains. So I think that's quite an exciting development that I'm at least looking forward to even it will still take probably 10 plus years before it will be commercially available. But something to think about when you think about, you know, ordering ships for the next 25 or 30 years. Definitely. I didn't realize that nuclear was a sort of viable option. I know it's been talked about for years, but it's definitely being researched. It is. And I also think that that research makes progress. And because the technology is very different from the nuclear that we know from power plants. And if that can be done in a safe way, it's a real alternative. And I'm not saying that it's the only solution to all of our problems. But I am saying that in the end, before we decide that it's not an option, we should just, you know, do the research and validate whether it can be an option. Because as I said, that would mean we require less ships. That would mean pollution goes down very significantly. But of course, we must be able to do this in a safe way. But I believe that looking at what you see out there was a research that looks very, very promising. On that, supposing that happened, would you have to design a pit in new ships or would you somehow be able to retrofit existing ships with nuclear capability? You should never say never provide in reality. You will have to do that with new ships. I don't see us retrofitting ships into nuclear. But other types of fuel you would be able to order them now and perhaps retrofit them at a later stage, if it seems economically viable. I think when you look at, you know, LNG and methanol, you couldn't, some of that you can retrofit into ammonia, but it's not cheap. I recall when we did the first, I think the ship was called LNG ready when we acquired it in the middle of the last decade and then we tried to convert one ship to LNG. We thought that it would cost 25 million and would take 60 days. I think in the end, it cost 43 million and it took 125 days. That was not a great project, but it was a good learning. So, you know, all those that retrofitting these ships is not trivial. Now we're doing some of that retrofits into methanol. At the moment, that seems to be going well. That stays within budget. It's also much cheaper. So, that's a possibility. I think retrofits into methanol are feasible, retrofits into LNG or ammonia or nuclear for that matter. I see it's very, very complicated. On the ship sizes that are now being ordered, a lot of them seem to be the 24,000 TEU. I think I may have asked you this before, but do you see them getting even bigger than that? Could you see 27,000 TEU? I mean, theoretically, everything is possible. I think right now, we stick to the 400 meters and that needs that you can still go a bit higher. Is parlon higher, don't you? Yeah, yeah, or you're making a little bit broader. That's still possible as well. I mean, it's been actually quite some time now since we are at 24 since quite a while. I certainly won't rule out that it will be a bit bigger if we fast forward 5 or 10 years, but of course, the incremental benefits of going bigger have come down quite a lot. There's been a lot of ordering in the last years, in the, say, the, you know, 12 to 17-ish category, and now you see again, some more 20-case. That makes sense if you want to run a network like we do in Gemini, then you need some more big ships. So I guess the fact that others are also looking at it is an indication that they also think in a similar direction. And of course, the problem with all these things is the port capacity. I mean, we've already got port congestion now. If you've got even, a bigger fleet, more capacity coming in, do you think the ports can adjust quickly enough and cope? I mean, the point we discussed earlier, which is the demand growth being stronger than a lot of people anticipated, is a challenge for the ships, but it's an even bigger challenge, of course, for the ports, because they now need to expand capacity much faster than they originally anticipated. And that clearly results in some bottlenecks and some vulnerabilities which we have seen. I mean, look at what happened in Asia, for example, in Shanghai over the last couple of months. That's not because they don't run a good port, but that's because the culmination of a bad weather and strong growth and a lot of additional demand makes it almost impossible for them to cope with that growth in volume. I understood Shanghai port did 57 million to use, I think, does this year, even if you compared it with a couple of years ago. That's a huge growth. And I mean, 5% growth in Shanghai means that you have to add 2.5 to 3 million to use of capacity. I mean, that's a very big port that you have to add every year, and that's of course not so easy. So clearly, there we also are running into the limits of what can be done. I think what surprises me and probably many other people is the resilience of global trade rarely in this era of tariffs. And far from when it has disrupted trade, but it hasn't dampened it, it seems to me, the volumes are going up and up. And is it because it's more diversified, more spread around? I think if you take a step back, then, you know, we come from a world whether we're not all that many trade barriers. And as such, trade was flowing quite logically. If you look at what we see today, then you have a lot of trade barriers. But trade will always be there. It has just become a bit more complicated. And in the end, for us, that means more growth. I mean, simple example, you saw a lot of Chinese companies that used to export to the US. Now they provide components to people in Morocco, Egypt, Thailand, Indonesia, or wherever. Those put then the stuff together and exported to the US. That creates more, yeah, rather than less transport. And that effect is just very, very significant. And I think a lot of people have underestimated it. I mean, if I go 20 years back and then, you know, we saw something similar in the pharmaceutical sector, where because of all the different text regimes and trade barriers, the supply chains became very, very complex. And that's something we now see on the much broader scale. So if you look ahead over the upcoming couple of years, then there are some factors that a lot of people underestimate when it's about demand. One is the effect of trade barriers or in wisdom being trade will go down. Reality is the number of container movements actually goes up. Second thing, if you look at some of the markets, the multiplier to GDP is still quite high. If you look at Africa, container volume growth is stronger than GDP growth with effect or two. Those are markets that grow very fast, something similar can be said about India or Latin America. And finally, people think that we have reached the end of containerization, which is probably true for China and probably true for the US and for most of the European markets. But it's probably not true for a number of secondary and emerging markets like Africa, India and Latin America. So I believe that's also where we still have a hidden source of growth. And as such, looking into the remainder of this decade, planning with maybe 5% or maybe even a bit more growth on the dominant legs is probably fairly prudent. And in that case, coming back to the beginning of this talk, yes, there will still be some over capacity at some point in time, but it will not be comparable to what we saw after 2009. So if my final question, we started off by saying the order book has gone up from 40% at the end of August to 45, 46% now. Do you expect it to keep growing? Do you think the orders are going to keep pouring in as they have done the past few weeks? So is it now going to tail off a little bit? It's a very good question. I personally think we're still going to see a little bit more, but I do think that if we will talk again in a year from today, that the order book is not materially bigger than what we see right now. All right. Thank you very much indeed. Always good to talk to you. You're welcome.