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Containership oversupply is 'here to stay': McKinsey

Containership oversupply is 'here to stay': McKinsey
The oversupply of tonnage in container shipping is here to stay, raising concerns for the long term profitability of liners and the increasing likelihood of bankruptcies, according to consultant McKinsey & Co.

Boxship owners have displayed a continued interest in ordering new vessels despite the oversupplied market due largely to low newbuilding prices and the attraction of more fuel efficient ships, according to Steve Saxon, principal in the Beijing office of McKinsey.

“This means that it makes sense for owners to order new ships even when they themselves don't need the new capacity,” Saxon told delegates at the World Shipping (China) Summit 2013 held in Ningbo on Thursday.

Saxon warned that the continued oversupplied market will see shipping lines struggle to breakeven at best amidst depressed time-charter rates. McKinsey expects more liner companies to exit the business or even be declared bankrupt due to the unresolved core challenge of oversupply. In the main Asia-Europe boxship trade, for instance, fleet capacity rose by 25.9% from 2003 to 2013.

With bunker fuel prices at “stubbornly high” levels, eco-design ships with fuel savings of 20-25% are considered very attractive for owners, Saxon noted. “Coupled with this, new vessels are now much cheaper than they have been for a long time,” he said, pointing out that newbuilding prices have fallen by 25% from their previous peak.

“Owners may only need 10 years to pay off the capital cost of the new eco-ships, so liners will continue to order and this is depressing for the market but good news for shipyards. We see a more positive operating condition for yards in 2014-15 than we do for liners,” he said.

The result of such an over-ordering of new ships will lead to a “dramatic increase in lay-ups and vessels that are just 10 years old may become obsolete”, he believed. The potential significant increase in lay-ups will be followed by scrapping as owners realise their vessels will become obsolete much sooner than their operational lifespan is up.

A vessel ordered now may not see an economic lifespan of 15-20 years, which is probably the payback time, in view of rapid advancement in technology as owners play catchup, he added.

“The factors that can stop the industry hurting itself are oil prices falling back to $50 a barrel and real liner consolidation leading to more rational behaviour with fewer players per trade,” Saxon said.