Record Breakers: A Box Shipping Round-Up
I’ve had a number of questions recently about the state of the container shipping market. I thought I’d write down some of these and my shorter answers to them.
What is the state of the container shipping market across the globe at the moment?
2021 has been the best year ever for liner company profitability. All the big liners – Maersk, MSC, CMA-CGM, Hapag-Lloyd, Ocean Network Express, COSCO, and Hyundai Merchant Marine – have reported a huge rise in profits. Eleven container lines report their financial results, representing 65 per cent of global container ship capacity. Their 2Q 21 combined profit was USD 18.44 Bn. These are the best figures in history and are roughly ten times the result in 2Q 20 as the pandemic struck.
Shipping charges have gone exponential, with the cost of shipping a box on average rising sevenfold this year compared to last year. The Freightos Baltic Exchange Container Index stands at over USD 10,000 per TEU, having broken through USD 2,000 TEU in January this year.
Ship owners have, as is usually the case reinvested profits. By the end of August, around 290 container ships of 2.7 Mn TEU had been ordered this year alone, the biggest annual binge for years. Only around 22 per cent of these ships have low-carbon fuel capability, usually LNG dual -fuel engines, and a few have ‘future proof’ engines and fuel systems that can switch to e.g. ammonia or methanol later on.
In short, the liner companies and tonnage providers are in seventh heaven.
Liners want tonnage to take advantage of spot rates. According to the Shanghai Shipping Exchange.
liner operators added 23 transpacific services between July 2020 and July 2021, boosting nominal capacity by 33%. Vessels were diverted from services calling at India, Pakistan and the Persian Gulf to generate more transpacific capacity.
According to the consultancy Sea-Intelligence, all the liners are starting to lose out on TransPacific market share to non aligned operators- though it doesn’t say who exactly. Still, this is a trend worth following as it might indicate that the liners have reached a cost ceiling.
Where might derail the strong liner market?
Wobbles in consumer behaviour in response to the Covid-19 pandemic might affect demand in the 4Q peak season.
Ports congestion and the closure of Asian terminals, also related to the pandemic, might tie up tonnage and cause further disruption to sailing schedules.
Shipper reactions to the Ever Given blockage in the Suez Canal might encourage more long-term investment in supply chain resilience, for instance in moving some Asia-Europe boxes onto rail or even into airfreight.
How should we think about the COVID impact right now?
It’s been, as freight rates show, positive. Shipping markets like disruption, it causes inefficiencies in global supply chains, which generally reduces the supply of assets and drives up the rent on those assets.
The government infrastructure spending in response to the pandemic will continue to benefit demand, as will longer term trends like home working, suburbanisation of middle class workforces,
There will be no permanent economic recovery until the pandemic is over, which looks like being forever postponed. Regional lockdowns will continue to cause disruption. But once govts stop issuing stimulus cheques, consumer spending patterns may alter again, which could affect global demand for the kind of goods carried on container ships.
The balance of 2021 looks like it will go well, unless the current uncertainty in the US economy turns into e.g. a stock market rout or main street concerns about employment (shouldn’t) or inflation (might). Q3 and Q4 are the bumper seasons for container shipping. The end of this year looks as positive as the liners are painting it.
How should we think about the key liner companies at the moment?
They are all in a good place. They are all building up ‘hunting licenses’. The current M&A boom will surely lead to imaginative investment bankers thinking up way for them to spend their profits – and not on new, low-carbon ships, at least not yet.
Maersk has ordered eight 16,000 TEU container ships from Hyundai Heavy Industries in South Korea, all of which will burn methanol as fuel. The ships will cost USD 175 million each, about 15 per cent more than conventional fuel-oil designs. The total of USD 1.4 billion sounds big, but Maersk could spend six times as much and still have substantial change from the USD 9.1 billion EBITDA recorded in the first half of 2021 alone.
Hapag Lloyd earned more in 1H21 than in the previous decade. Net profit was Euros 2.7 Bn, up x10. Total net profit previous 10 years was Euros 977 Mn. AVg freight charge was USD 1,612 in 1H2 cos mostly on contracts, but the trans Pac rage was USD 20k per FEU on spot.
CMA-CGM is also predicting a bumper year and will use profits “to accelerate our logistics transformation and our investments in industrial assets.” As well as buying more ships.
MSC is buying up all the second hand tonnage it can find, even if it is relatively old and polluting – has bought over 100 ships in the last year according to TradeWinds newspaper.
COSCO Shipping Lines subsidiary OOIL has just ordered ten 16k teu ships total costing around USD 1.58 Bn, from NACKS and DACKS. The newbuildings are expected to be delivered between Q4 24 and Q4 25 and OOIL aid 60% of the cost would be financed by bank loans.
Zim posted a record net profit of $888m for the second quarter, from a 44% increase in its liftings. CEO Eli Glickman said he was “excited” about the outlook for container shipping and attributed Zim’s strong financial performance to its “proactive strategies” of “capitalising on attractive markets”. Zim has exercised an option for five more 7k TEU LNG fuelled ships from Seaspan. Ships to be built for USD 530 Mn with delivery from 3Q 24. Having been a potential target for years, Zim is now planning acquisitions
Ocean Network Express results perhaps a bit more exiting than hoped for with EBIT up 1,000 per cent from 242 to 2657 USD on a 16% increase in lifts to 3.104 Mn TEU.
What should we make of high Time Charter rates?
There is a rush for tonnage and that is pushing out hire dates both for the start and end of time charters. Higher input costs will motivate the liners to maintain high freight rates for longer.
German tonnage provider Ernst Russ says TC rates are up 50% year on year, averaging USD 12,930 / day for its units, nearly all sub panamax.
Ships that were demolition candidates a year ago are now gold mines. For instance, Maersk has reportedly extended the time charter of 4,253 TEU Synergy Oakland (blt 2009) for USD 51,000 / day. One container ship broker I spoke to suggests that rates for Panamax container ships are now well over USD 110,000 per day compared to a low of around USD 6,000 a day as recently as June 2020.
Danaos recently reportedly fixed an 8,073 TEU ship to PIL for two years with delivery in September next year for USD 55 k / day, while some brokers suggest rates for this size ship are now heading north of USD 150,000 a day for prompt delivery. These are unprecedented levels and expose the liner companies to significant risk should the freight market turn faster than one expects. On the other hand, if a black swan event were to wipe out the freight market gains experienced this year, the liners might use their considerable weight to try to rewrite the time charter agreements. Years ago, I was told by a senior shipping executive that a shipping contract is valid only on the day it is signed. Everything is always up for renegotiation.
Where are freight rates going for the balance of 2021?
We are into peak season and all the conditions that have existed for a year still pertain. There is a case for freight rates to rise even further, assuming recent trends in consumer behaviour and OECD fiscal policy are not interrupted. Let’s assume that freight rates will stay at their current level at least until supply recovers or demand falters. One should not forget Bunker Adjustment Factors which could be imposed if / as oil prices recover.
Is there really a shortage of ships or is it artificial ?
There is some truth in it, else TC rates would not be so high. Some cargoes are being shifted into break-bulk cargo ships and bulk -cargo ships suggesting a shortage of boxes and ships to put them on.
Deliveries are higher this year than last two years, but demand has grown faster than expected, while supply management (mostly slow steaming) is constraining supply of TEU mile days.
Plenty of ordering means that the market will self correct but this won’t start to bite until 2023. The table shows recent deliveries of container ships and the current orderbook in TEU and numbers of vessels. Deliveries did slow in 2019 and 2020 and will slow again in 2022, when there is little chance of getting a delivery now. It is quite possible that in 2023 and 2024, over 2 Mn TEU will deliver as plenty of cash is available for the liners and tonnage providers to invest in new tonnage.
22 per cent of the current orderbook will be LNG fuel capable – the surprise may be that the percentage is not greater.
There is a question about how much containership capacity remains at the shipyards of Asia. . Most of the big Koreans are holding back capacity for LNG. Japan is not v active in the sector, with limited capacity now. China is the market leader with a big step change up in 2023 dely, to over 1.5 Mn TEU. Eventually prices may get to a level where new yard capacity comes on stream. But tech is now a bigger barrier than previously, due to the decarbonisation agenda. So the newbuilding market is finely balanced just at the moment.
With nearly 300 ships being ordered this year, one would assume the normal market cycle would still happen and that by the end of 2023 if not before, supply over-response to demand in 2020 and 2021 would mean oversupply. Supply management techniques and decarbonisation mitigate this somewhat.
What are the top three things to know about the container shipping market thus far in 2021?
1. Even the Liner CEOs have been taken by surprise by how strong the market has been. But then it has always been hard to forecast policy, and nobody expected the kind of loose fiscal policy we’ve seen as a pandemic response – it’s not orthodox monetarism. Equally, we don’t know how long it will last – presumably no longer than necessary.
2. Corporate dogma insists that big profits have to be employed – as dividends, or as down payments on new ships, or in M&A. We might start to see more second-tier regional lines get hoovered up by the big 9. Or we might see big investments in smart shipping IT and low carbon tech.
3. Pandemic disruption rumbles on indefinitely. Nobody is safe until we are all safe.
What should we be on the lookout for?
1. It looks like we are in for a bumper peak season. But Has the US stock market just had a bout of the yips or is there more fundamental economic malaise there?
2. Look out for further disruption in the global supply chain, plus any further splitting of the supply chain – one for China, one for the US and its allies.
3. Any substantive agreements on GHG emissions at COP 26, but I’m not expecting any.