Numerous signs suggest that restraining influences on the newbuilding orders trend could persist. But within this broad view changing perceptions about prospects for individual segments of the world merchant ship fleet continue to result in contrasting patterns. Recently tanker orders became much more prominent while container ship orders retreated. Among influences freight market and earnings expectations motivate newbuilding decisions.
When compared with previous phases of vessel ordering – typically encouraged by substantial freight market strengthening and shipowners’ greater confidence about the future – evidence emerging in the past few years points to a mostly more cautious stance by many owners. One restraint is the prevailing uncertainty about what alternative fuels and technology to adopt, to ensure compliance with tightening regulations and mounting stakeholder pressures to decarbonise shipping activities over the years ahead.
Accompanying this conundrum are the doubts surrounding longer term prospects for some global seaborne energy commodity trades. Several large volume components – especially oil and coal – currently employing a major part of the world merchant ship fleet, seem set to experience sustained downwards pressures because of the global shift towards cleaner energy sources. The result may be slower overall trade expansion, or perhaps even reductions eventually.
Orderbook trends unfolding
In 2023 and the past two years, merchant ship newbuilding orders (for bulk carriers, tankers, container ships, gas carriers and other types) have been higher than seen in the previous four years, when there was a revival after the unusually low volume seen in 2016, as shown in the graph. Annual newbuilding orders in the 2021 to 2023 period (this year’s figure is based on tentative calculations) averaged 117 million deadweight tonnes, an increase of 39% compared with an average 84m dwt annually in the 2017 to 2020 period.
During earlier years up to 2015 higher ordering levels sometimes were a feature. Subsequent more disciplined ordering has been influenced by various extended periods of subdued freight rates, and the perceived necessity of reducing imbalances between vessel demand and supply causing market weakness. Reducing new capacity entering the market is seen as a major contributor to achieving a tighter balance, enabling higher vessel earnings. But when market conditions and expectations improved for long enough, many more newbuilding orders resulted.
Over the past several years an additional influence on shipowners’ newbuilding order decisions affecting the fleet’s evolution has come to the forefront. There has been an intensifying focus on decarbonising the world merchant ship fleet, and the fuels and technology required to achieve this aim. Some owners have decided to use a specific alternative fuel in new ships, or at least to include the option of using it in the future. By contrast many other owners apparently have been deterred from or at least have hesitated in placing orders, because of extreme uncertainty about the fuels that will be acceptable over a typical vessel lifetime of up to twenty five years.
Looking at historical newbuilding order patterns, an exceptionally high peak in annual orders was seen in 2007 towards the end of a long freight market boom. In that year 264 million deadweight tonnes of merchant ships were ordered. Coupled with high totals in both the previous and following years, the three-year 2006-2008 order total was 660m dwt, equivalent to almost three-fifths of average existing fleet capacity during those years.
The graph below shows variations in annual newbuilding orders placed during the period from 2009 to 2023. Totals are shown for ships in the four largest categories – bulk carriers, tankers, container ships and gas carriers (liquefied natural gas LNG and liquefied petroleum gas LPG). Data compiled by Clarksons Research is accompanied by Bulk Shipping Analysis estimates for 2023, incorporating ten months provisional data combined with guesses for ordering in the remaining two months.
Recent ordering patterns
Since reaching a recent peak of 141m dwt in 2021, annual merchant ship newbuilding orders at shipyards around the world declined to 103m dwt in 2022. Based on tentative estimates and assumptions the annual total for 2023 could be similar at around 105m dwt.
The 2021 upsurge reflected strong growth in container ship, bulk carrier and gas carrier orders, while tanker ordering diminished. Increased container ship orders, rising to an exceptionally high level, resulted from elevated demand for these vessels and the extraordinarily high freight rates and profitability experienced, encouraging additional investment to expand fleet capacity. Orders rose over fourfold from the previous year to 50m dwt (container ships are usually measured by twenty-foot equivalent unit or teu, but deadweight is used here as a common measurement).
Among other notable changes in 2021, bulk carrier orders doubled to 52m dwt when the freight market tightened amid rebounding trade and stronger vessel demand that raised earnings and boosted shipowners’ confidence in prospects for future market trends. Gas carrier orders for both LNG and LPG tonnage increased as the market and outlook for both segments improved. But tanker ordering, by contrast, remained subdued as a consequence of low freight rates and limited expectations for any sustained improvement in freight market conditions.
In 2022 the overall 27% downturn in ordering from the previous year reflected decreases in the three largest segments – bulk carriers, tankers and container ships – partly offset by an increase in gas carrier orders. The container ship orders reduction of 37% to 31m dwt accompanied the end of the boom in that sector after mid-year. Bulk carrier orders, down by 32% to 36m dwt and tanker orders, down by over half to 10m dwt were affected by periods of adverse markets. By contrast gas carrier orders were 75% higher at 19m dwt, due to LNG carrier contracts rising by 150% to over 17m dwt amid firm signs of longer term growth in trade volumes.
Another more general influence restraining orders, continuing into 2023, was the persisting uncertainty about alternative fuels and propulsion technology enabling new ships to remain compliant with environmental regulations. Rising prices for newbuildings also became a more pervasive influence and, for some ship types especially, an evolving shortage of shipyard newbuilding slots in the next few years became a prominent aspect.
Orders placed in world shipbuilding yards during the first ten months of 2023, when combined with ‘guestimates’ of volumes likely to be seen in the remaining weeks, suggest that the 2023 annual total will be similar to that recorded last year. Container ship and gas carrier orders are expected to show large declines while bulk carrier ordering has remained fairly steady. By contrast tanker orders have accelerated, and the total in the January-October period is already up by 150% compared with last year’s annual figure.
Shipyard prices for newbuildings have risen steeply, with implications for ordering activity. In the period of five years from 2016 to 2020 the Clarksons Research newbuilding price index averaged 127 and was 126 in 2020. During the next twelve months the index rose by 22% to 154, followed by another 5% rise to 162 in 2022, further increasing by 9% to 176 at end-October 2023. These increases show that, amid rising steel, equipment and labour costs coupled with diminishing slot availability, yards have raised prices by two-fifths within the past three years. For example, the price of a standard size 174,000 cubic metres LNG carrier has risen by 42% since 2020 to $265 million at October 2023.
A large part of the merchant vessel orderbook is now comprised of ships incorporating ‘green’ technology designed to reduce or eliminate carbon emissions. Half of all current orders measured by tonnage will be able to use alternative fuels or propulsion. The majority is capable of LNG fuel use, accompanied by some using LPG. Limited numbers will use methanol, ethane, biofuels, hydrogen, or battery/hybrid propulsion.
Current orderbooks as percentages of existing fleets provide indications of potential for future world fleet expansion. At end-October 2023 the 259m dwt world merchant ship orderbook was equivalent to 11% of existing tonnage. This total is about two-fifths above the recent 181m dwt orderbook low point at end-2020. The percentage of the existing fleet in each category currently varies widely. Tankers and bulk carriers are low at 6% and 8% respectively, while container ships are high at 25%. Calculations for LNG carriers show an even greater 55% proportion.
Implications for the future fleet
How are recent ordering patterns likely to affect deliveries of newbuilding vessels in the period ahead? Up to 2025 deliveries of completed ships will largely reflect what has already been ordered for completion in that period because most shipbuilding yard capacity has been reserved for those contracts. From 2025 onwards deliveries could be boosted by an unknown and difficult to predict volume of further new orders.
Shipbuilders’ order ‘backlogs’ – the length of their orderbooks – as well as investors’ preferences, usually determine the length of the interval between ordering and delivery. This interval varies with market circumstances, and may be as long as three or exceptionally even four or more years. Occasionally the interval is described inaccurately as the construction period. Generally ships are constructed in a shorter period (except for more sophisticated or technically complex types) and construction work begins much nearer the delivery date.
Within the current 259m dwt world orderbook for merchant ships about 13m dwt is scheduled for delivery by the end of this year, according to Clarksons Research calculations as at end-October 2023. This figure augments about 73m dwt delivered in the first ten months, resulting in a total (after adjustments) of 85m dwt in 2023 as a whole, similar to the totals seen in the past three years averaging 86m dwt annually. Despite the larger current orderbook (a third of which represents orders for distant delivery from 2026 onwards), deliveries are expected to remain fairly stable over the next couple of years.
Fleet growth in 2024 depends greatly on scrapping volumes that are hard to predict. Assuming that newbuilding deliveries are similar to the current year’s total, and scrapping as widely expected increases, the resulting fleet expansion will be restrained. But changes next year among individual sectors are likely to vary. In the container ship segment for example higher deliveries even when accompanied by more scrapping, as assumed, seems set to prolong the rapid fleet expansion already prevailing.
Ordering restraints persist
Despite upsurges in container ship and gas carrier newbuilding orders in the past couple of years, ordering patterns generally have been characterised as restrained, compared with many historical episodes. A continued generally restrained approach could contribute to supporting freight markets in several sectors. Such a trend may promote a tighter balance between vessel supply and demand than seen in some preceding years. Shipowners’ collective self-discipline in augmenting fleet capacity with new vessels has been especially evident recently within the bulk carrier and tanker markets.
The incentives for more hesitant and restricted ordering have changed. When this attitude arose in the past, a prominent influence typically was over-supply of tonnage, sometimes massive. Excess tonnage caused a widening freight market demand/supply balance, resulting in lower freight rates, often accompanied by shipowners’ reduced market confidence and expectations for the future trend. Although uncertainties about asset decisions are usually intensified when heavy capital investment is involved, shipping markets were especially prone to this influence.
Over the past few years doubts about how the future shipping industry will evolve have been amplified and have become more focused on the long-term outlook. Currently this uncertainty is still high, and signs point to it remaining magnified over a prolonged period ahead. Because of the global energy market transition in response to the decarbonisation imperative, there is limited visibility of both operational and employment aspects of a newbuilding ship during its typical twenty to twenty-five years lifespan. Consequently many owners have been reluctant to invest in new tonnage until some of the obscurity recedes.
A perplexing panorama
Elevated uncertainty about the global shipping market outlook reflects the conundrum of how the industry’s commitment to greatly reducing greenhouse gas emissions will be fulfilled, in a process extending up to a target date of 2050. Substituting bunker oil, the predominant fuel for the world fleet, with alternative fuels – such as ammonia and methanol or many others – and modifying ship technology to use these is a massive changeover. Numerous theoretical perceptions of how decarbonisation can be achieved, and various pathways to reach the objective have been suggested and modelled.
The practical aspect of which alternative fuel and what technology to adopt in any new individual ship ordered is often not yet obvious. Shipowners prefer to ensure that the most competitive fuel type used in a ship’s early life remains attractive throughout its remaining existence. Future tightening of international regulations on emissions, with implications for fuels, is not altogether clear either in extent or timing or both. Hence decisions about how to respond to the energy transition, except in some parts of the world fleet, are still complicated.
Seaborne trade prospects, with adverse implications, are another pervasive uncertainty arising from the global energy transition. Pressure and policies to drastically reduce global greenhouse gas emissions have already affected world seaborne trade unfavourably. Greater negative effects on bulk commodity volumes over the years ahead are widely expected. Although the impact on the trend direction seems clear, the pace of future change is not distinct. This outlook affects shipping market sentiment and decisions on fleet capacity and newbuilding requirements.
Fossil fuel consumption around the world is set to decline amid the switch to cleaner energy sources. Cargoes of fossil fuels – especially coal and crude oil – on long haul routes, comprising a large proportion of employment for bulk carriers and tankers, seem certain to diminish. But the extent of decline during the next ten to twenty years and further ahead is hard to forecast. Signs suggest that increases in other cargo volumes to offset this weakening portion may be limited, implying a slowing trend of overall sea trade growth. Such perceptions imply that a cautious approach to new capacity required for fleet expansion is justified.
These features of the longer term outlook for shipping markets are profoundly puzzling. It is not altogether surprising that decisions on investments in new cargo-carrying ship capacity have become more difficult for owners. Ongoing uncertainty about how the influences will unfold in the future points to relatively restrained ordering activity persisting.
Source: Richard Scott, FICS, member of London and SE Branch committee, Institute of Chartered Shipbrokers