The consensus of analysts’ opinions is that the short-, medium- and long-term outlook for the container market is one of uncertainty from slowing global growth, increasing slot overcapacity, and ongoing concern over US-China relations. But smaller players find profitable niches
The global outlook for container shipping rests on projections for demand for cargo, and unfortunately, the projection for manufacturing growth is weak. The Global Manufacturing Index reported by IHS Markit has shown four consecutive months of negative growth to the end of August and global investment bank JP Morgan paints a similarly gloomy picture of trade in manufactured goods falling to 2012 levels.
The IMF has downgraded its year-end projections for global growth by 0.1% to 3.2%. Its projections for 2020 are also down by 0.1% to 3.5% growth. Bimco’s head of shipping research, Peter Sand, points out these projections do not consider the latest escalation of the trade war, in which the US President announced 10% tariffs on US$300Bn worth of US imports from China.
China still maintains a strong level of economic growth (over 6%), which is slowing but has been the driving force behind a 5% rise in exports from the Far East into Europe. That has not resulted in higher rates: Bimco reports that as at 30 August spot rates are down 24% from the start of the year and 18.8% from the same week in 2018.
The China–US East Coast trade is another relatively hot spot, with Bimco’s own data showing trade growth of 7.2%, compared with 7.4% and 10.6% in the first six months of 2018 and 2017 respectively. The disconnect is that spot rates have fallen 22.7% year-on-year, so that as at the end of August, it cost US$2,691 per FEU to ship a container from Shanghai to the US East Coast.
This analysis is echoed by other observers. According to Xeneta’s indices, which uses crowd-sourced shipping data covering over 160,000 port-to-port pairings with over 110M data points, long-term rates have followed a pattern of decline since Q3 2018, excluding an unexpected rise in May.
Xeneta chief executive Patrik Berglund says “There are a number of factors creating unease. “Some are of the industry’s own making, while others certainly are not. For example, we have Evergreen pushing ahead with an order for 10 23,000-TEU vessels in a market that is already awash with overcapacity. This is understandable when The Ocean Alliance, of which it is a member, wants to challenge 2M for ULCS strength – and therefore economies of scale – in an ultra-competitive market, but it does not help rebalance the supply-demand scales.”
He continues “Then we have the ongoing saga that is the trade war. The US recently announced a delay in its next wave of tariff increases, but there is no certainty of what comes next for industry players. For example, will there be more front-loading of cargo to avoid further tariffs – bolstering demand and rates – or has the necessary stockpiling already transpired? And we have the IMO-regulated move to more expensive 0.5% low sulphur fuel oil for 2020. This will have obvious bottom line ramifications.
“It is, without doubt, a high-pressure situation for carriers at present. But, as we have seen in the past in this dynamic sector, things can change very quickly.”
In terms of September’s activity, the XSI Public Indices shows mixed regional fortunes.
The European import benchmark recovered some of the ground lost last month, when it fell 1.4%, increasing by 0.2%. However, the export index declined by 1.1%. Nevertheless, European exports remain 4.2% up year-on-year and are up 3.5% since the end of 2018.
Imports on the Far East XSI registered their third consecutive month of declines, falling by 0.8%, but the export index showed signs of improvement, edging up by 0.3%. It has now risen by 5.1% since the end of 2018.
Developments in the US were contrasting, with the import benchmark rising by 0.3% and the export figure falling by the same margin. Both benchmarks are up year-on-year however, with imports up 20.3% and exports rising 3.7% against September 2018.
On the supply side, the continued upsizing in the sector is having a negative long-term effect. In 2000, an 8,000-TEU container ship was considered a very large vessel. The equivalent vessel today is 20,000 TEU. According to Clarkson Research Services, the fleet of container ships on the water greater than 8,000-TEU is increasing. In 2010, less than a quarter of the container ship fleet consisted of vessels over 8,000 TEU. In less than 10 years, this has grown to 50% of the fleet.
But few, if any of the operators of these mega-ships racing to reduce costs per TEU are reporting profits. There is profitability to be found in the container ship industry, providing ambitions to be the biggest liner or operate the largest ships are scaled back.
Cyprus-based Synergy Marine is a financial investment venture operated by Andreas Papathomas which is investing in Panamax container ships. He told the audience for the container panel at the 12th Annual Capital Link Shipping & Marine Services Forum held during London International Shipping Week (LISW) that the container ship industry has completely altered due to the influx of the mega-size ships.
“The challenge is to find profitability. That, in our view, lies in focusing in the Panamax and smaller vessels that are priced at scrap price and where the depreciated value of the vessel is significantly greater than the pricing of today’s (value). We are making a decent profit, without generating enormous revenues,” says Mr Papathomas.
Speaking on the same panel, VesselsValue’s chief operating officer Adrian Economakis was in accordance with Mr Papathomas, citing the potential for asset appreciation from such a low base: “Values in the Panamax sector have risen 18% in the last 12 months to US$20M. This is still a long way below the long-term median of US$29M. According to the VesselsValue forecast model developed with Viamar of Norway, we expect Panamax values to climb by 53% by 2021,” Mr Economakis told the delegates assembled at the Institute of Directors, one of the many venues being used during London International Shipping Week.
According to VesselsValue, the estimate for a five-year-old Panamax container ship is currently US$20.3M. There are 718 Panamax container ships in the container ship fleet. This sector has been overtaken by the new Panamax container ships (also known as Neo-Panamax) which cover vessels built to the beam of the new Panama locks.
One niche player investing in the new Panamax container ships is Seamax Capital Management, whose managing partner Cao Deambrosio explained that these vessels were the new workhorses of the global fleet. The company operates 10-15-year-old vessels fixed on long-term charters grossing, he says, around US$20M per annum. This strategy has made a return on investment of 20% per annum. “We have found this to be positive and an area we will continue to focus on,” says Mr Deambrosio.