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Major container ship newbuilding unlikely despite record freight rates

Newbuilding orders for container ships could remain stagnant despite freight rates surging to record high levels this year as shipping firms pursue a strategy of limiting capacity.

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As the economic outlook for the sector remains uncertain and environmental regulations place new requirements on ships, it makes more sense for container lines to charter or buy existing ships rather than build new ones, according to a panel at the New York Maritime Forum virtual event on Oct. 15.

"Over the next two-three months, there is immense uncertainty and we will see more time charter deals emerging," said Jerry Kalogiratos, CEO of Capital Product Partners, owner of 13 container ships. "Today's order book around 8% is one of the lowest we have seen. Order books of 30%-40% in the past of came after periods of strong rate growth."

Platts Container Index, a weighted average of 12 container rate assessments covering major shipping routes around the world, climbed to the highest level since the index was launched in 2017 at $1,759.48/FEU on Oct. 1 and was only slightly lower at $1,731.04/FEU on Oct. 15.

But limiting container carrying capacity, along with resurgent demand in the second half of 2020, allowed for these rates to be achieved, said George Youroukos, executive chairman of Global Ship Lease, owner of 43 container ships.

"When companies make so much money by controlling capacity, it's not something that will go away. This strategy of not ordering new ships will keep capacity under control," Youroukos said. "They should keep the strategy that brought these amazing returns."

The cost of building ships has increased alongside fresh scrutiny of carbon emissions from the shipping industry, making it difficult to determine the viability of a new ship over its lifetime. This is especially true as more LNG-power ships hit the water with hydrogen-power container ships being theorized on the horizon.

"Technology is a very big issue right now. You don't want to spend $100 million-150 million to build a ship and find out in 10 years that it is obsolete," said Evangelos Chatzis, CFO of Danaos Corporation, owner of 63 container ships. "Right now it is way better to acquire a modern second-hand ship. We are quite bullish on charter rates for the next few years and even if new orders are placed next year, they will hit the water 2023-2024."