The collapse of the German KG ship financing system has left a hole in the small container vessel market which still needs to be filled, particularly as much of the fleet needs to be made more fuel efficient and environmentally friendly. Only 4% of the existing fleet of ships below 3,000 teu is on order. Though small, the vessels are the workhorses of intra-regional services, so the issue is concerning. They account for approximately 25% of the total cellular fleet capacity but, in terms of cargo carried, their share is far greater due to the shorter transit times of the shuttle services they provide.
The sector remains dominated by German tramp vessel owners/charterers, but market conditions are no longer attractive enough for private investors, such as doctors and dentists, wishing to take advantage of the German KG tax incentives attached to vessel ownership. As one prominent German shipbroker recently lamented: ‘The crisis of the last five years has eaten into much of the reserves of these owners who would like to order anti-cycle, but can’t since their money is committed to [just maintaining] existing vessels.’

Orderbook of containerships below 6,000 teu, May 2013

Although there is no shortage of capacity today, much of it is neither fuel efficient or environmentally friendly, which is why so much is being scrapped. Last year, as many as 151 vessels (all between 1,600 and 3,000 teu) with a total capacity of 353,149 teu were demolished, amounting to around 8% of the existing sub 3,000 teu fleet, and the average age was as young as 25 years. In 2011, only 86 vessels (all between 1,000 and 3,000 teu) with a total capacity of 100,190 teu were scrapped, and the average age was 31 years.
The implication is that alternative sources of finance need to be found to fill the gap, providing an opportunity for new players to step in whilst the market remains down. It will be interesting to see who steps in apart from the Greeks, because few have an appetite for speculative trading these days.
As charter owners and small regional carriers are not ordering sub-3,000 teu ships, will the top 20 take over? If so, it will not be straight forward. The sub-3,000 teu short-sea sector has been well defended by niche market specialists over the past five years, as shown in the following chart, although this includes the container capacity of non-cellular vessels, such as ro-ro’s, con-ro’s and reefers, where most of the top 20 container carriers are week.
Even in the next size ranges up, from 3,000 teu to 3,999 teu, and from 4,000 teu to 4,999 teu, which includes only cellular tonnage, the top 20 containers carriers lost market share, from 89% down to 82%, and 99% to 92% respectively.
Moreover, it has long been the policy of major carriers not to order ships below 3,000 teu, as they prefer to source tonnage of this size from the charter market, or through the cascading of redundant vessels out of deep-sea tradelanes.

Top 20′s market share of vessel size categories up to 5,000 teu

However, ships are getting larger to gain much needed economies of scale, which is where the top 20 are the strongest. Hardly a week goes by these days without new short-sea services being announced by deep-sea players, underlining the escalation of their interest in the sector. Analysis of recent developments in this respect is beyond the scope of this article, but these new schedules are not just aimed at transhipment cargo; intra-regional and door-to-door services are also involved, which are the toughest nuts to crack.
The opening of the Panama Canal’s new locks in the middle of 2015 will be a further game changer in this respect, as panamax vessels up to 5,000 teu will be replaced by bigger vessels going up to 13,000 teu – which may explain why only 6% of the existing capacity provided by vessels between 5,000 teu and 5,999 teu is on order.
Our View
New investors must be attracted to the short-sea sector, but they will want more financial security, particularly for fuel efficient newbuilds.
In this respect, it is unlikely that all existing short-sea specialists will be able to match the financial muscle of the top 20 players, particularly as bigger vessels are cascaded out of their deep-sea services.