Image by Chris Pagan for Unsplash
June 3, 2024
The shipping world is entering a conflicting period. One fact is perhaps the most telling. In an odd reversal to market trends, it is now cheaper to acquire a new tanker ship than it is to buy a 5 year old one. That’s right, the used market for cargo ships is now booming—it’s, in fact, registering the highest costs for vessels in 15 years. But to understand this one figure, we must, in turn, understand the entire state of global markets.
So, how is this even possible?
For the last half a decade, shipping companies have come to expect increased growth in global demand. In great part, this was due to the COVID-19 pandemic and a general boost to e-commerce that resulted in a record high maritime transportation. By 2022, in fact, the cost of shipping a 40ft multimodal container was well over $8,000—not to mention a record high value of over $10,300 per container at the height of the pandemic.
The world, simply put, couldn’t keep up with the combination of intrased restrictions due to the pandemic and growing demand from people staying at home and increasing consumption while in lock down. This, in turn, pushed shipping rates up and created the potential for increased revenues.
Drewry World Container Index (2022-2024)
(Data from Drewry)
Reasonably for the time, shipping companies understood the trend as a shift in the market and responded to the increase in demand with a drastic growth in supply. The world’s largest shipping companies—now powered with drastically high revenues from this pandemic-boost—decided to spend their surpluses in buying new vessels. In turn, this resulted in a boost in the number of container ship orders registered. From 2020 to 2021 alone, orders for containerships with over 8,000 TEUs in capacity jumped from below 200 a year to roughly 450—more than double in number.
This, in turn, completely changed the dynamics at shipyards around the world. Whereas, before, the shipping industry had grown accustomed to delivering around 1.5M TEUs in capacity a year, by 2024 it had promised to deliver over 4M TEUs. Many still come from that pandemic-induced boom since building a container ship can take as long as three years for some manufacturers. So, simply put, most shipyards are building twice as many ships as before leading to a historic high number of ship deliveries—some even expect this could push the total size of the global maritime fleet to over 30 million TEUs this year.
Actual and Projected Container Ship Deliveries (2000-2026)
(Data from Zey Marine)
So, at the moment, most shipyards are building ships from the past. If one were to place an order today for a brand new container ship, it would take months if not years for it to be delivered. And that is not even considering the potential backlogs that could emerge from these increased orders.
The problem is that, in recent months, supply chains around the world have come under serious stress. A historic drought in the Panama Canal has significantly lowered the ability to cross from the Pacific to the Atlantic ocean. Meanwhile Houthi rebels have blocked the Bab el-Mandeb Strait by attacking incoming cargo vessels. Not to mention the prevalence of piracy in the Strait of Malacca, the rise of wait times in the port of Singapore, and potential labor disruptions from contact negotiations in the US East Coast. We’ve mapped most of these disruptions in our Auba Choke Points map:
Updated Auba Choke Points Map
(Data from Auba Research)
As a result of the above, shipping rates have reached the highest levels since the COVID pandemic and companies are seeking to increase their fleets to meet growing demand. At the same time, some shipping lines are dealing with aging vessels unable to keep up with rising demand, pushing them to seek a renewal of their fleet. However, as we mentioned above, most shipyards are still working through past orders, making it difficult for companies to find new vessels to meet rising demand. So, even though rates are high and there is a need for new ships to move products across diversions, it is difficult to find shipyards able to make them.
On top of the above, large shipping companies are unclear as to the future of regulations, making them weary of ordering more vessels. More so when the shipping industry might soon see drastic shifts, with the first fully electric container ship already sailing across the seas. So, at the moment, there is an added layer of uncertainty on whether the ships built today will be fit for the world of tomorrow.
While thus far, we’ve spoken mostly of containerized trade, all of the above is also true for tankers. As far as vessels go, they are also subject to the same choke points as container ships across the world. Perhaps even more so given that OPEC is expected to maintain high oil prices for the remainder of 2024, making oil a valued commodity and tankers hard to come by.
So, in summary, shipyards are still working on past orders and any new requests would take months to be delivered—not to mention that they might represent a large investment for a vessel that will soon fall behind regulations. Nevertheless, with increased disruptions and high oil prices, there is a growing need for tankers.
All the above, in turn, has made it so that shipping companies, desperate for new vessels, have begun looking at the used market as an alternative. As a result, Baltic Exchange just estimated that the price for a five year old Suez Max tanker—the largest vessel able to cross the Suez Canal—is currently $5.5 million more expensive than a brand new tanker.
Price of SuezMax Tankers (2024)
(Data from Baltic Exchange)
At the time of writing this piece, there is no clear sign as to when this pattern will end. The main choke points we report are likely to persist in following weeks maintaining shipping rates on the rise. For the time being, all the conditions making it cheaper to buy old tankers are likely to persist. But, in studying, we learn a number of key reasons why the shipping industry has been turned on its head.
