Sunday, December 12, 2010

A Trade Rebound Launches Bigger Boats

By Kyunghee Park

Megavessels—ships longer than the 1,063-foot-high Eiffel Tower—are in demand again. These days, Choe Yong Seok of Daewoo Shipbuilding & Marine Engineering in Seoul has been getting calls and e-mails from clients asking whether the company can build ships that can carry 20,000 20-foot containers, more than double the capacity of today's most common vessels. "We were totally caught off guard because we thought the interest would be for smaller ones," says Choe, the company's business vice-president for marketing. "There had been so many orders for large ships a few years back" that it led to excess capacity, he says.

No more. Shipping lines are preparing for the completion of the $5.25 billion expansion of the Panama Canal and the recovery of global trade. In the 10 months through October, orders valued at $6.3 billion were placed for ships that can carry a total of 516,600 containers. That's more than a sixfold jump from a year earlier, says London-based Clarkson, the world's largest ship broker. Most orders were for big, big ships: Vessels that can each move more than 8,000 containers made up a record 80 percent of the volume, surpassing 2007's previous peak of 66 percent. That was the year that work on the canal's expansion began.

It typically takes more than three years to fill an order for a new vessel, so shippers are rushing to prepare for the unveiling of the gussied-up canal when it is completed in 2014. Currently, only ships loading fewer than 5,000 containers can use the 50-mile waterway connecting the Pacific Ocean and the Caribbean Sea. Once new locks are constructed and the canal is deepened, it will accommodate vessels carrying about 12,600 containers. The canal is expected to see an increase in cargo of about 5 percent a year, according to Rodolfo Sabonge, director of marketing for the Panama Canal Authority.

The revival of international trade is the main driver behind big-ship demand. Global trade may expand 11.4 percent this year and 7 percent in 2011, recovering from an 11 percent drop last year, says the International Monetary Fund. A push by the International Maritime Organization, a U.N. unit charged with controlling ship pollution and safety, to toughen rules on ship efficiency and emissions is also spurring demand for newer, larger ships, says Lee Jae Won, an analyst at Tong Yang Securities in Seoul. There are 61 ships in operation worldwide that can each carry more than 10,000 boxes, and an additional 144 on order that will gradually begin service after 2014, according to Um Kyong A, an analyst at Shinyoung Securities in Seoul. All except 12 come from a South Korean shipyard, she says.

Since July, Taiwan-based Evergreen Group has ordered 20 ships valued at a total of about $2 billion from Samsung Heavy Industries, the world's third-largest builder. Neptune Orient Lines, Asia's second-largest container shipping company after Evergreen, signed a $1.2 billion contract for 12 ships from Daewoo Shipbuilding last summer. Lee says orders for container ships may more than double, to $19 billion, in 2011. And growth for ships that carry more than 8,000 containers is expected to hit 25 percent by the start of 2012, seven times the increase for smaller ships, says Clarkson.

Manufacturers who ship from several continents—think consumer electronics or appliances—like using the big ships because they hold more and can lower the cost of transporting cargo. One 20-foot container box can move 1,000 or so 42-inch liquid-crystal display TVs. The four largest ships currently in service, built by Daewoo Shipbuilding, can carry 14,000 such containers; nine more are under construction. "LG is currently studying the advantages of larger capacity ships...and so far the data looks promising," says Choi Young Seon, head of the logistics transformation division at LG Electronics. "Although sea transport is already the most energy-efficient mode of transportation, we are constantly studying enhancements and efficiencies that reduce fuel consumption [and] save money."

South Korean shipbuilders are likely to be the biggest beneficiaries of the big-ship craze because they have the expertise that comes from producing 90 percent of the vessels that can each carry more than 10,000 containers, says Lee Sokje, an analyst at Mirae Asset Securities in Seoul. "The trend is big ships. It's not a choice but a must," Lee says. "It's going to be a fight of who can carry more at lower costs, and South Korean shipyards will have the advantage."

The bottom line: As trade increases along with the strengthening global economy, demand for very large container ships is booming.

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