Boxship Contracts Keep Coming

Friday, November 12, 2004
As Howe Robinson’s Container Index smashed through 1750 points this week, leading container carriers announced yet another round of new orders, leaving analysts once again torn between jubilation and concern as they struggle to understand mad markets and which way they are heading.

Amongst new contracts reported this week is an order for the first super post panamax container ships to be built in China. China Shipping Container Lines is continuing its dramatic expansion with an order for four, option one, 8,500 teu container carriers at Shanghai’s Hudong-Zhonghua shipyard, a division of the China State Shipbuilding Corporation. With a length of 334 metres and deliveries of the $93m-plus ships scheduled for the last quarter of 2007 and 2008, these vessels will place yet more strain on the relatively small number of repair yards with capacity to accommodate this latest generation of mega-carriers. But the new contracts do not stop there. According to reports from Hamburg, container ship contracts surged once again during the July to September quarter with German interests accounting for more than 60 ships of total capacity 153,000 teu over the period, almost two fifths of the total contracts signed. German tramp owners were particularly busy, the reports indicate, as KG investors seek to maximize their present unprecedented returns on investment. Post panamax vessels are proving popular with the rich doctors and dentists, who can offset tax by investing in ships. German interests account for about 37% of new post panamax tonnage of more than 5000 teu.

However, barely a day goes by without reports of new contract negotiations taking place. Earlier this week, it came to light that the United Arab Shipping Company is opting for a series of new post panamax vessels for deployment on its main global and Middle Eastern routes. Negotiations are now understood to be well-advanced for an eight-ship contract for container vessels in the 6-7,000 teu range. United Arab Shipping is talking to a range of yards both in Europe and the Far East on construction of the vessels but, with many principal Far Eastern builders now full into 2008, there is likely to be a considerable lead time when the contracts are actually placed.

Meanwhile warnings came recently from New York broker Poten & Partners on the sustainability of China’s present economic expansion. According to Poten, the Chinese economy expanded by a staggering 9.5% during the first nine months of the year, implying an annual rate of well over 12%. The Chinese economy appears set to double in size over just the next six years. “China is not just driving the shipping markets to historical highs”, Poten declared in a recent report. “Its demand for raw material imports has driven up the prices of oil, steel and copper to record levels. China has become the world’s largest exporter of consumer goods”, says Poten, a fact that explains why almost every container ship leaving the Far East, bound for the US or Europe, is chock full. But Poten also points to the Far East crisis, now a distant memory, in 1997/8. Nobody was expecting that economic downturn, Poten points out, which came like a “bolt out of the blue” and followed decades of spectacular economic expansion.

According to a subsequent IMF analysis into the crisis, it was caused in part by weaknesses in the financial system, poor governance and supervision and too much borrowing of foreign currencies that were invested in poorer-quality assets. Does any of this apply to China, the broker asks rhetorically.

Straight-line extrapolation in economic development is dangerous and Poten stresses the peaks and troughs of economic cycles. China, the firm believes, is unlikely to be able to sustain the present rate of development and could be in line for a period of retrenchment. “China’s infrastructure to produce consumer goods is growing by leaps and bounds”, says Poten.” Much of this is being financed by debt. Is it possible that China, in becoming the world’s largest manufacturer of consumer goods, may saturate the market as its neighbours did in 1997?” the broker asks.

But the Far East crisis, though fatal for some, was more short-lived than many expected. Only Thailand suffered more than one year of negative growth. Economies were down, but not for long, says Poten. “Retrenchment may not be a long term affair”.

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