Financing container shipping’s ‘me-too’ arms race

Orders for ultra large containerships (ULCs) continue to pile up, postponing for at least another two years any likely meaningful recovery in the market.      
That is according to Alphaliner and raises the question of how the carriers will be able to carry the inevitable debt load engendered by an historic expansion of ship sizes, and the accompanying obsolescence of much of the existing fleet. Ships can still be financed, and many carriers are selling off collateral corporate assets to cover their losses and the costs of financing for the brave new world of 18,000-plus teu vessels.       
The me-too arms race suggests that Maersk’s first-mover advantage in building the E-ships will soon be covered by competitors, thus exacerbating overcapacity in the major trades. If it seems risky to presume eventual economic returns from container shipping, the argument for the upside resides in two areas.
First, the global movement of containers continues to grow, maybe not at the high single-digit rates of yesteryear, but at a solid pace. Drewry assumes 5% into the future, while actual numbers for July from Container Trade Statistics point to 3% year-to-year. Total exports from Asia, including intra –Asia, to all overseas markets have been strong, and imports into Asia continued to contract. 
Second, the operation of container terminals continues to be profitable and flows are expected to grow in line with overall traffic. In fact, low shipping rates that devastate the operating results serve to stimulate additional business—and terminal throughput.
Some carriers have used their interests in terminals, plus any other assets deemed non-core, as a source of funds to carry the overall financing load.  But this is with some reluctance because terminals may continue to be where the profits are.
One fly in this ointment is that independents are increasingly controlling the terminal business, and competing for new developments as they come to market.  Modern terminals to serve the larger ships also become expensive, and the rise of the ULC increases the overall risk that a given terminal may be bypassed.
This suggests that the industry’s strategy, whether articulated or not, accidental or not, is to use shipping operations as a loss leader.  It is a cousin to, but far more risky, than the plan of Levi Strauss to sell shovels and jeans to miners in the California Gold Rush of 1849 (and make a fortune) while forgoing the sluicing for gold.
Source: Seatrade Global