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Riding the wave of obsolescence

Riding the wave of obsolescence
Why would anyone in their right mind order another medium sized container ship in view of the cascading threat posed by the prospective delivery of ultra-sized vessels with fuel-saving engines?

Prompting the question is the recent announcement by Ship Finance International (SFL) that it was ordering four 8,700 teu vessels at Daewoo for delivery in 2014-15. The nearly timing collided with the imminent arrival of Maersk's first (of 20) 18,000 teu E-ships, and the current rush to redeploy existing smaller tonnage on the world's trade routes.

Unlike most owners, SFL is a finance company that is not on the operating firing line as a ship operator and in fact could be excused for not ordering containerships at all. The US-publicly traded company controlled by John Fredriksen has long functioned as the financial arm of Frontline's tanker fleet, accounting for 30% of its revenue, and receives approximately half its income from drill rig leases for Seadrill. But, the company has also strayed into the realm of container ships, and has four 4,800-teu newbuildings on order. Dry bulk and container assets now split the remaining 20% of revenue.

Ole B. Hjertaker, SFL's ceo, laid out an explanation in the company's quarterly report stating that the vessels will be "much more efficient than most vessels on the water today."

First, he said, the 9,000 to 10,000 teu size vessel is regarded as the new Panamax size post the Panama Canal's expansion in 2015. "This size is expected to have more flexibility in container ports throughout the world."

Second, newbuilding prices are at historically low levels.

Third, the primary reason for the order is fuel efficiency, particularly in light of environmental regulations due to kick in at the end of 2014 and thereafter. Overall service speed has changed fundamentally since 2009, he said and the new vessel designs are optimized for lower speed and better actual cargo intake. The newbuildings will have 2.5 times the capacity of present panamax ships. By his comparison, a similarly sized ship built in 2010 would consume 49% more fuel than the SFL newbuildings, and an existing 5,100-teu ship 103% more.

The ships do not have charters, but the company said it intends to fix them long-term before delivery. The company expects to invest $25m equity in each ship as part of arranging bank financing.

Obviously, Hjertaker believes he is riding the wave of obsolescence, not to be submerged by it.

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