Making Sense of the This Year’s 222 Containership Newbuild Orders

A recent round of newbuild orders has created quite a stir as many wonder if this will spell inevitable doom for the entire container segment. It’s a legitimate concern because just this year, as of June 2, there have been a total of 222 newbuild orders placed for container vessels of all sizes.

For context, let’s take a look at the entire container fleet orderbook to see just how much has changed.

Source: Data from Clarksons SIN – Chart by Value Investor’s Edge

While a jump up to nearly 18% isn’t ideal, there are a few factors at work which may serve to justify and accommodate such a move, meaning things may not be as dire as they first appear.

So, before we get carried away, we need to understand the dynamic of cascading which has and continues to sweep through the entire fleet. In past reports at Value Investor’s Edge we have described how the quest to maximize economies of scale led to the development of the modern 24,000 teu vessel.

Furthermore, we described how these behemoths pushed smaller vessels, which once served the ULCV confined Asia to Europe trade lane, into other trade routes. Those pushed out vessels found the next best trade lane where they achieved superior economies of scale relative to the smaller vessels serving those routes, who were then pushed out – and so on and so forth.

Now, consider the inevitable route that achieving economies of scale would follow after having the Asia to Europe trade lane successfully filled out with the most efficient ULCV tonnage. That economies of scale driven investment would likely work from the top down, meaning the next largest vessels would be the logical target for the market at large regarding newbuilds.

Therefore, it is noteworthy that 96 of these recent orders fall in a very specific size range, from 12,000 teu to 16,000 teu. Meanwhile, the once popular ULCV class, where owners had been hyper-focused for years, has taken a back seat with only 10 orders this year, all being around the 24k teu mark.

Of those 96, only 8 are scheduled for 2022 delivery, 44 scheduled for 2023, 24 in 2024, with five stragglers occurring in 2025, six in 2026, six in 2027 and three in 2028.

Source: Data Courtesy of VesselsValue and Clarksons – Chart by VIE

The staggering deliveries will help the market digest these latest orders as they hit the water over several years. However, it now raises concerns for 2023 as the ULCV orderbook is set for another burst of activity that same year.

Source: Data Courtesy of VesselsValue and Clarksons – Chart by VIE

This means 2023 presents challenges in terms of larger tonnage being delivered, but it also could present opportunity as it allows the cascading being dictated by economies of scale to take the next logical step.

What would be needed to accommodate a smoother transition for this cascading would be thin orderbooks for the smaller classes coupled with ample demolition prospects, and fortunately we have that.

Currently, the 3k teu to 7k teu orderbook stands at just 4.09% with the sub-3k teu orderbook at 8.03%. Both figures are considered extraordinarily thin by historical standards.

Furthermore, there is good news in that just over 20% of the 6k teu and under fleet, numbering 807 vessels (1,555,509 teus), is over 20 years old, presenting ample demolition opportunities over the next few years.

For some context, only 108 of 2021’s newbuild orders, which presented a radical shift from previous norms, were for vessels under 6k teu. Given the high number of vessels on the water for these sub-6k teu classes collectively (3,747 total) newbuild interest there is still lackluster to say the least.

With the smaller classes’ miniscule orderbooks these latest orders in no way present a threat to the smaller classes. In fact, these smaller classes continue to face the prospect of not being able to provide ample tonnage, which would allow the market to amicably digest this cascading of larger vessels.

Finally, and most importantly for this cascading argument, let’s recognize that when 2023 comes around the market for mid to smaller containers will likely be engaged in an even more desperate struggle to catch up. The cascading of the current New-Panamax and Post-Panamax fleet to alternate trade lanes was previously unable to take the pressure of these mid to small classes as evidenced by the historic rate highs. However, perhaps another round of deliveries can have a cascading effect throughout the chain and bring order to the red hot mid/smaller classes.