The Zhitong Finance App learned that the world's largest shipping company is investing unexpected money brought about by the pandemic into new vessel orders on an unprecedented scale, making this industry, which has an obvious boom and bust cycle, seem even more vulnerable in the recent economic downturn.

Container shipping companies such as Mediterranean Shipping Company S.A. (MSC), A.P. Moller Maersk A/S (A.P. Moller Maersk A/S), CMA CGM SA (CMA CGM SA), and Hapag-Lloyd AG (Hapag-Lloyd AG) have all received support from European billionaires, and they are investing the record profits they earned during the pandemic crisis to invest in new ship types, mainly from South Korean and Chinese shipbuilders. This has pushed the global order channel to an all-time high — estimated to be close to $90 billion.

However, as tariffs hovered below the break-even level and concerns about overcapacity resurfaced, the situation in this highly cyclical industry changed.

“Too many large container ships have been ordered,” said Erik I. Lassen, CEO of the Danish Ship Finance Company, which provides ship financing. He pointed out that the initial delivery is now at a point where the supply chain is running more smoothly and freight demand has returned to pre-pandemic levels.

In an interview, he said, “There will be shipowners — tonnage providers (tonnage providers, meaning shipowners who don't participate in the specific container transportation business and only provide chartered ships for shipping companies) — will be overwhelmed there. Although the shipping industry has been profitable for the past few years, the accumulated earnings are far from enough to fund new technology and ship investments over the next decade.”

A bleak outlook

The outlook has certainly gotten bleaker for these big companies. The companies have also begun making a series of negative predictions for the next few months. On Friday, billionaire Rodolphe Saade and the French spacecraft controlled by his family warned that market conditions were deteriorating and that new ship capacity “could drag down freight costs.”

Earlier this month, ZIM.US (ZIM.US) lowered its financial outlook for 2023 due to lower freight volume growth rates than expected and weak freight rates. Danish shipping giant Maersk predicts that global container traffic may shrink by up to 2.5% this year, and warned that there will be supply-side risks in the second half of the year. Germany's Hublot said that supply this year and next two years may exceed demand.

Matson Inc. (MATX.US) — a smaller competitor — said on July 20 that it expects a “weak peak season” in the coming months as “retailers will continue to carefully manage inventory levels in the face of declining consumer demand.” According to reports, Matson announced plans to buy three new ships at a price of about 1 billion US dollars in November last year.

Overall, the International Monetary Fund (IMF) predicts that this year's trade volume will only grow by 2%, a sharp slowdown from the 5.2% forecast for 2022.

In this context, a new container ship order from Drury Marine Research shows that as of July 1, the number of orders placed by the industry was 890, accounting for 28% of current global capacity in 20-foot equivalent container units (TEU).

According to Drury Marine Research's latest “Container Shipping Market Forecast” (Container Forecaster), deliveries this year alone are expected to increase by 1.75 million TEU, accounting for about 6.6% of the total fleet before ship scrapping and adjustment. Net additional capacity is expected to increase by a record 1.82 million TEU next year and 1.4 million TEU by 2025 to reach 30.5 million TEU (an increase of nearly 55% over ten years ago), a record high.

John McCown, founder and industry veteran of Blue Alpha Capital, said: “We are facing the biggest order in the history of the container shipping industry. They've cleaned up their balance sheets and are now reinvesting.”

He estimated that based on the cost of building an average-sized ship, the construction of a new ship would cost shipowners about $89.5 billion.

Increase order momentum

Despite this, mitigating climate change is driving these companies to order new vessels and upgrade existing ship engines. The International Maritime Organization hopes that the industry will achieve net zero greenhouse gas emissions by 2050 and establish checkpoints in 2030 and 2040. So far, however, the industry has hardly used zero-emission fuels.

Maersk ordered 6 methanol-powered container ships last month, bringing the total to 25. As of the end of last year, Herberot had orders for 15 new vessels, which will be delivered between 2023-2025.

Industry analyst Alphabliner said that the number of orders for the Flyship Flyship has reached 1.24 million TEU, the second highest in the world, which makes the French company's capacity expected to approach or even surpass Maersk in 2026.

Alphabliner said in a report this month: “In recent years, Delta Flyship has been very active in new shipbuilding orders.” He expects the company to have 122 vessels and 1.24 million TEUs. The expansion of the Mediterranean shipping fleet, which has the largest number of orders in the world, is partly due to the purchase of used ships.

Ramon Fernandez, chief financial officer of Da Flyship, said the company has orders for around 100 ships, most of which will be fueled by liquefied natural gas or methanol. He declined to give further details, but acknowledged the possibility of overcapacity.

“The balance between supply and demand may be under pressure for some time to come, as capacity growth will exceed trade growth,” he said. It added that scrapping and decommissioning of older, more polluting ships and measures to reduce engine speed to contain emissions may curb this impact.

This plan to build a fleet is a reminder of the industry's past decline. In 2009, when the global financial crisis paralyzed the deal, Da Flyship was on the verge of default. This time, though, their treasury is more substantial. The slump in demand for credit to date reflects this.

Petrofin Research said in its annual report on global ship finance that bank loans (traditionally one of the main sources of funding for the industry) did not increase with the number of orders last year and are likely to remain the same in 2023. Furthermore, a double-tier credit market has emerged, with lenders offering more favorable terms to ships with lower emissions.

Lassen of Danish ship finance company said, “Shipowners are becoming more and more like banks, using the risk mindset you see in banks. The industry is becoming more complex, and it is no longer the common opinion of the old days of 'buy cheap, sell at a high price'.”