Liner companies have announced a positive set of results, by and large, this earnings season. Anyone who watched the slump in container trade in the first half of this year would be surprised that the industry has weathered the Covid storm so well.
According to Container Trade Statistics data, global container imports fell 9% in the first half of 2020 compared the second half of 2019, while they also fell year on year by 6%. The biggest year on year falls in the first half of this year were on imports to Latin America, which were down 13%, matching up with a 10% fall in exports from North America. Meanwhile, imports to the Indian Subcontinent were down 10% year on year, matching up with a 10% fall in exports from Europe.
Global container imports peaked at nearly 15.0 Mn TEU in April 2019, before slumping to just 11.o Mn TEU in February this year and settling midway at 13.5 Mn in June, basis CTS data.
In spite of the disruption to trade which exacerbated an economic downturn in the second half of 2019, freight rates on the Asia-US West Coast trade have reached all-time heights of over USD 3,000 per FEU, basis data from Freightos.
The positive sentiment has fed into the charter market as earnings for post-Panamax container ships have risen above USD 20,000 a day, basis the recent fixture of Tokyo Bay (6,612 TEI / 2013 / scrubbers) for five to seven months at around USD 23,000 per day, reportedly to Hapag Lloyd. There is talk of a shortage of post-Panamax container ships for hire, driving charter rates up as the liners prepare for the Asia-Europe peak season.
How have the liner companies managed this? Take one example: Hapag Lloyd announced a first half fall in volumes of 4% year on year for 1H20. But revenues were down only 1% year on year, while group profits rose year on year from USD 285n Mn in 1H19 to USD 1.39 Bn in 1H20. The CEO Rolf Habben Jansen has said that “We benefitted from the sudden drop in bunker prices, adjusted capacity to lower demand and took additional cost-cutting measures as part of our Performance Safeguarding Programme.”
Mr Jansen hits the nail on the head. The liners have learned supply side discipline. In the 12 years since the global financial crisis, they have practiced and perfected a number of supply management techniques.
Slow steaming is the first to be introduced. Container ships are built to sail at around 17kts on average, though some can zip along at over 20 kts. But slowing them down to 15 kts cuts the equivalent of 2/17ths of supply, nearly 12%. To maintain capacity on a loop, an extra vessel can be added at the slower operating speed, further cutting effective supply. Average container ship sailing speeds peaked in mid-2018 at nearly 17 kts, before troughing out at around 15.5 kts in March 2020. Since then they have recovered to around 16 kts.
Recently the liners have introduced blank sailings to further manage supply. If there aren’t enough boxes to fill a ship, then it doesn’t call at the port and the boxes are rolled over to the next scheduled service. Roll-overs can happen at short notice but shippers seem to cope, so the liners have got away with this repeatedly.
Despite the changes to accounting standards covering how leases are reported, it still makes sense for the liner companies to own only around half their assets. This reduces the amount of capital they need to raise and gives them greater flexibility to hire in or return assets to meet cycles, seasonality and short term trend changes in demand. So when Coronavirus struck, the liners could opt out of extensions on chartered-in tonnage and return ships at the end of their charters, passing the pain onto the non-operating owners.
And when things get really bad the liner companies can lay-up surplus ships for a while. Modern vessels are far easier to restart than older ships, so this can be done on a short-term basis. Lay-ups bottomed out at only around 200 k TEU in mid-2018 and peaked at over 2.6 Mn TEI in March this year. Currently they are falling to around the 1.0 Mn TEU mark and the charter market suggests they will fall further.
The liner trade used to be all about market share. After a decade of consolidation which has resulted in the top ten liner companies moving about 80 per cent of all boxes by sea, there is a greater focus on profits and shareholder return. This maturing business has been to school in the last decade. It doesn’t need an algorithm to deduce its exam results – it’s pass grades all round.