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Following several years of a more cautious approach to ordering, it appears that we have entered a new phase of cruise ship investment. This summer’s activity has lifted the cruise orderbook to record levels, and the sector is hoping to take advantage of the mobility of its assets to tap the enormous potential in emerging markets.

Looking Up…

The cruise industry today appears to have once again entered a phase of rapid growth. Since the start of last year we have recorded 24 firm orders for new vessels, including 15 with capacity in excess of 3,000 passenger berths. The orderbook now consists of 41 vessels with a combined berth capacity of 120,664, equivalent to 25% of the current fleet. In the 3,000+ berth sector the orderbook is equivalent to 73% of the current fleet.

A continued focus on “mega” cruise ships is evident from the orders noted so far this year. Royal Caribbean has ordered another Quantum-Class, 4,200 passenger ship for delivery in 2019. Elsewhere, Carnival Corporation has firmed the first four of a previously announced plan for a nine-ship order. These will be the largest ships contracted by Carnival at 180,000 GT, and while not as large as the Royal Caribbean Oasis-Class ships (225,000 GT), they will have a higher total passenger capacity (6,600), giving Carnival at least a claim to having the largest cruise ships afloat.

Looking Back…

In the past 20 years we have seen three distinct phases of expansion, with the orderbook exceeding 100,000 berths in early 2001, in 2007-08 and again in 2015. The two previous peaks were followed by a sharp drop as investment in new vessels was abruptly cut off by economic slowdown in the established key markets in North America and Europe. What factors will determine whether the current phase is similarly short-lived or a more sustained phase of investment?

Looking East…

In the short-term the performance of the cruise sector will remain closely linked to that of the major “western” economies. Last year North American and European passengers accounted for 55% and 29% of the global market of 22 million respectively; these markets will continue to exert an important influence. However, the outlook may be shaped by developments further east. Thus far, relatively few of Asia’s rapidly growing middle class have been exposed to cruises, but the cruise lines believe they can develop significant demand growth in this region. In 2015 the number of mainland Chinese tourists cruising is expected to pass 1 million for the first time, and according to industry sources in 2014 the number of cruises based at a Chinese ‘home port’ grew by 9% y-o-y to 366, while another 100 cruises called at a Chinese port (up 41%).

So, the cruise sector once again seems to be in rapid expansion mode. This time, the question is whether the establishment of new Chinese brands, the deployment of vessels specifically designed for Chinese operation and further investment in Asian cruise ports could drive a more sustained phase of ship investment. Finding the answer will certainly make for an interesting itinerary. Bon voyage!

In late 2014 and early 2015 port congestion has been hitting the headlines in the container shipping sector, with queues of boxships lined up outside ports on the US West Coast. The news stories focus heavily on the labour relations aspects, but for market players it’s important to examine why this pressure at the ports happens and how it can impact shipping fundamentals.

What’s In The Queue?

There were recently reported to be around 32 containerships of around 215,000 TEU queued up outside key ports on the US West Coast. Most of this capacity is tied up at Los Angeles-Long Beach, but there are also ships waiting to enter port at Oakland and Seattle-Tacoma. The graph shows how this has progressed, growing from less than 40,000 TEU at the end of November.

How has this come to bear? Well, the most prominent news focus has been on the labour disputes between the unions and the employers (terminal operators and carriers) at the US West Coast ports. But these issues have been allied to a range of other underlying factors.

An A To B Business

Container shipping is part of an ‘A to B’ logistics chain, moving goods in boxes from producer to consumer, and bottlenecks at any point in the chain can force congestion back along the system, often ending up at the ports (a key transition point). Labour disputes may have grabbed the headlines but other issues in the US have included a shortage of equipment for the onward movement of boxes from the ports, and congested yard space, with larger ships making bigger cargo exchanges at ports (much less manageable to port operators than more regular calls from smaller ships).

Port capacity has often come under pressure in container shipping. One only has to look at the historical growth in global port lifts (inset graph) to see how ports have had to battle to keep up with demand. Global container port handling has grown from an estimated 17m TEU lifts in 1975 to 649m TEU lifts in 2014, at a CAGR of 9.8%. This has placed port capacity under pressure to expand but that takes time and investment.

A Big Box Issue?

Does the congestion matter? Yes; 215,000 TEU is equivalent to about 1.2% of the fleet. It’s almost as much as the currently ‘idle’ boxship capacity (around 1.3% of the fleet) which has attracted so much attention. It can mean the difference between a fairly even balance between supply and demand growth or a tightening of market fundamentals. In the mid-2000s, US West Coast port workers went on strike, locking up 2-3% of fleet capacity for a substantial period, boosting vessel earnings as capacity tightened.

So, there you have it. Box shipping needs operational port capacity but when problems occur it can actually help tighten the market. Such congestion as currently seen in the US might offer some support to beleaguered owners. Having said that, extra capacity is needed in the long-run to keep the system running and drive demand for ships, so be careful what you wish for. Either way the challenge isn’t over yet. Have a nice day.
Graph of the Week