Earth Day commitments flag need for decades of change in ocean shipping

The global logistics industry is entering a significant upswing in investment in new shipping vessels. Orders for South Korean yards remain strong, with HMM Co. Ltd. expected to commission 156,000 20-foot equivalent units, or TEUs, of new container ship capacity by June, according to Container News.

New orders received by Chinese shipyards reached 10.4 million dry weight tons, or mdwt, in March, Panjiva's analysis of official data shows. That was the largest single month of orders since the first quarter of 2014, a period that had followed a rapid run-up in orders that was followed by the industry bust of 2016, which culminated in the bankruptcy of Hanjin Shipping Co. Ltd.

This time may be different. The extant order book for new vessels at China's yards is 78.5 mdwt compared to a peak of 153.6 mdwt in May 2014. New orders are being placed by container lines, though these are still only equivalent to 13.8% of outstanding capacity for the top 25 liners — as discussed in Panjiva's research of April 20 — with deliveries likely to be spread over at least three years.

In simplistic terms, global shipping growth may run at 1% to 2% per year while the 20- to 25-year life of vessels requires a 4% to 5% replacement rate annually. That suggests current orders might not drive a sustained oversupply.

Additionally, the shipping industry faces the need to start the decarbonization process. The policy background is shifting rapidly, with the Biden administration's Earth Day summit acting as a spur for new initiatives.

The U.S. government plans to join an effort to ensure the shipping industry reaches zero emissions by 2050, Reuters reported. Meanwhile, the EU will include shipping in its emissions trading scheme from Jan. 1, 2022.

The industry is also looking to become more proactive. A group of industry associations including the International Chamber of Shipping has called for the United Nations' International Maritime Organization to bring forward discussions to create market-based measures (e.g. carbon pricing) and implement a $5 billion research and development budget to bring technological solutions to maturity.

The shifting policy landscape combined with a degree of uncertainty as to how long current, elevated shipping rates will last has led some companies to take a more cautious approach. A.P. Møller - Mærsk A/S, for example, has said it will only place orders once zero-carbon emission technologies become available, S&P Global Platts reported.

While the changes in policy are being driven at the global level, the implementation and benefits will likely come at the local level. The Maritime and Port Authority of Singapore, for example, has launched a $90 million fund to support maritime decarbonization, according to MarineLink, which is notable given Singapore's centrality to the bunker fuel business.

The shipyards of course will be the beneficiaries of a sustained wave of new orders. Panjiva's analysis of macroeconomic data for China, Japan and South Korea combined shows shipyards' exports climbed 27.9% year over year in the first quarter of 2021 and by 20.2% compared to the first quarter of 2019. While optically a rapid recovery, the total exports of $12.0 billion is still only a fraction of the $22.0 billion reached in the second quarter of 2017 and the $20.7 billion reached in the first quarter of 2015.

Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.