High oil prices may boost demand for vessels

Alphaliner had projected in March that the idle containership fleet could reach more than 4 Mteu within the next three years. That prediction was based on the expected influx of new capacity from the known orderbook at that time.

The situation has changed significantly as the delivery of almost 700,000 teu of new vessel capacity has been deferred for up to two years or more in some cases, according to latest Alphaliner records. A further 330,000 teu of containership orders have been cancelled or converted into other ship types.

In addition, 380,000 teu have been scrapped since the crisis started to unfurl in October 2008. Scrapping activity should continue if scrap steel prices remain firm. The effect of all these new developments is that the idle fleet projection has shifted downwards. Nonetheless, the idle fleet could still reach 3 Mteu by the end of 2011, based on the revised delivery schedule and a demand growth of 5% per annum over the next 2 years. Even with demand recovering progressively to 12.5% by 2014, it would still take 5 years for the idle fleet to be cleared.

However, fuel oil price increases could provide some respite to shipowners as extra slow steaming would absorb additional capacity. If fuel oil prices rise further from the current $450/ton to $650/ton, this could bring the containership supply and demand to an equilibrium 6 to 12 months earlier, all other factors being equal. This is due to the impact on additional ship demand created by extra slow steaming.

On the flipside, however, the impact of oil prices at the $100 per barrel level or higher would have an adverse impact on the global economy. This may lead to a slower demand growth as world trade slows, which could offset the positive impact of high fuel prices on the idle containership fleet. This uncertainty renders fleet employment projections rather difficult as the impact of higher oil prices has opposite effects on ship employment.

Together with the slippage from this year, the total expected deliveries in 2010 currently stand at 415 ships for 1.833 Mteu. This is a significant 14% increase from the fleet expected at the end of 2009. More orders could however be deferred while some small ships planned for delivery in 2010 or 2011 may not be built.

Some small shipyards, such as those in Vietnam for example, have already been affected by significant delivery delays and may have already lost some container vessel orders. Meanwhile, a number of major carriers have announced that they will defer or cancel some of their orders. The carrier however did not provide any details yet. Any such large scale cancellation would further dampen the impact which newbuilding activity has on the overall idle fleet.

Deferrals should continue to bring down the medium term excess capacity. A number of carriers and owners began negotiations with shipyards to delay the delivery of vessels on order as early as September 2008. Despite initial reluctance, the shipyards have increasingly shown flexibility in accommodating the requests.

Furthermore, some 20 ships fully completed since the beginning of the year have not been handed over. This is related to disputes over the final delivery payment or funding shortages. The ships deliveries are likely to slip to 2010.

Based only on the reported deferrals and cancellations, owners will already receive a 1.91 Mteu relief from the reduction in forecasted deliveries and deletions in 2010-2011. This figure takes into account a provision for scrapping a total of 500,000 teu of capacity during the next two years.