Archives for posts with tag: charter market

There are a number of key differences between the ‘liner’ shipping business (largely served by containerships) and the world of ‘tramp’ shipping (much of tanker and bulker activity, for example). One of the most obvious is the ‘dual’ nature of the container shipping markets, with separate ‘freight’ and ‘charter’ markets connecting to keep the liner network going. But do they always move in harmony?

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Idle capacity has been a feature of the containership sector since the economic downturn in 2008-09. Prior to that, box freight rates tended to vary according to fairly macro factors, and liner companies appeared less inclined to resort to micro supply management to address imbalances. But in recent years, there have been clear phases of containership ‘idling’, each highly reflective of conditions in the sector.

The Worst Of Times

Global box trade dropped by 9% in 2009, and liner companies were left with little option but to idle significant levels of capacity to resurrect freight levels from rock bottom levels (Phase 1 on the graph). By the end of 2009, 1.5m TEU, or 11% of total fleet capacity stood idle. This did at least help push freight rates back up.

Not The Best Of Times

It did of course have a negative impact on the charter market, leaving owners, with an easy supply of laid up ships lurking in the background for charterers to access, unable to bid up rates. But, with some believing the world economy to be recovering quickly, substantial amounts of idle capacity were soon reactivated and by the end of September 2010, there was only 1.6% of the fleet idle (Phase 2). However, with freight levels having dropped again, further lay-up followed, and by end March 2012, the position had been reversed and 5.9% of the fleet was idle (Phase 3). Charter owner tonnage accounted for around 70% of the total by the summer of 2012, and most of the idle capacity was in classic charter market sizes, with only 3% above 5,000 TEU, putting pressure back on charter rates.

Better Times?

In the next phase, market conditions very slowly appeared to become more helpful, and idle capacity gradually fell, with the winter peak receding each year (Phase 4); idle capacity peaked at 6% of the fleet in early 2012, 5% in 2013 and 4% in 2014. But the charter owners’ share stayed high, keeping pressure on the charter market. It took until well into 2014 for rates to see much positive traction. By the end of 2014, idle capacity was finally more limited, at 1.3% of the fleet, reflective of the improved environment.

Time For A Change (Again)?

Today, despite severe freight rate pressure, idle capacity is still fairly limited at 2.5% of the fleet, but it is on the rise and the charter market is softening, ceding some of its gains. Larger ships had begun to account for a greater share of the idle pool (24% over 5,000 TEU in May) but recent weeks have seen a return to increased smaller ship idling.

So how will Phase 5 play out? There are a range of scenarios. Liner companies might continue to compete aggressively on the mainlanes with an apparent surplus of big ship capacity, and endure freight rate pain without idling too much more capacity. Or to protect freight rates they might start to idle a greater number of larger ships. Alternatively, they might once again pass down the pressure to the smaller ship arena, leaving more significant levels of capacity there to impact on the charter market. Much might depend on the flexibility of tonnage. Either way, once again, the development of idle boxship capacity will be a sign of the times. Have a nice day.

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In today’s container shipping market, the presence of a group of ‘charter owners’ who account for a significant part of the fleet is an accepted part of the landscape. But this has not always been the case; it has taken a number of phases of investment to bolster the capacity of this important part of the boxship ownership spectrum, and in today’s environment it’s worth taking a closer look at the past.

An Equal Share

Container ‘liner’ operators deploy tonnage owned by themselves and also capacity provided by independent ‘charter owners’. In today’s fleet there are 5,126 boxships, and charter owners account for 2,722 of them, equivalent to 53% of the units and 48% of the TEU capacity. However, this wasn’t always the case. Back in the early 90s the liner companies owned 75% or more of the capacity, and the charter market was embryonic.

Phases One & Two

A key driver of change was increased investment in boxships in Germany backed by the ‘KG’ finance system, allowing ship owners and managers to access private investment, offering investors a tax break in the form of accelerated depreciation in return. 285 charter owned ships in today’s fleet were built in 1996-98 (Phase 1), 139 (49%) of them owned by German companies. By 1999 charter owners accounted for 35% of global TEU. Though the benefits of the KG system were eventually limited to tonnage tax gains, the early 2000s saw renewed German investment. Of today’s charter-owner fleet, 700 units were built in 2000-05 (Phase 2), 424 (61%) owned by Germans. This took the charter owner share of TEU to 47% by 2006. Some Greek and Japanese owners had also become established but Germans led the way.

Fast Then Slow

Phase 3 followed. During the great ordering boom, German owners invested even more heavily, swept along by positive sentiment and earnings, as well as the availability of ‘easy’ finance. Of today’s charter owner fleet, 1,113 units were delivered 2006-10, 701 (63%) of them German owned. By 2011, 51% of global TEU was charter owned. But with the credit crunch in 2008, the KG system collapsed and charter owner ordering slowed.

Time For New Phases?

Of today’s charter owner fleet, just 402 units were built in 2011 or since (Phase 4), with only 178 of them German owned (44%). The charter owner share of TEU began to fall. Although others entered the charter owner arena, including Greeks, Chinese and ‘new’ shipping money, nothing as yet has quite replaced the volumes provided by the Germans. Charter owners account for 68% of capacity on order today, but the average number of charter owner ships built in the last 5 years is half the number built in the previous 10.

So, with steady demand growth a reasonable bet, and an apparent gap in the investment profile, market watchers await to see who might step forward. Despite operators focussing their firepower on very large ships, today’s orderbook stands at a relatively modest 18% of the fleet. For investors looking to become a fixture, might boxship charter ownership offer opportunities for new phases?

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SIW1155In the famous novel a young Oliver Twist pleads in vain with Mr Bumble at the workhouse “Please Sir, I Want Some More”. In early 2014, containership owners would have been looking for the opposite of the young Oliver – anything but more of the prevailing conditions. Yet once again challenging markets prevailed, and by the end of the year boxship players had probably “had enough”.

Anything But More

After five years in the doldrums, 2014 was essentially more of the same for the liner sector. With the global economic downturn having cut harder into demand in the box sector than almost anywhere else, half a decade on and containership operators were still found wrestling with the need to find ways to absorb potentially surplus capacity. The fully cellular containership fleet expanded by around 6% to 18.2m TEU in full year 2014, and trade growth in the same ballpark was not enough to push the market balance back into a more positive direction.

Fed Up Yet?

Box freight market conditions remained extremely volatile with liner companies in an ongoing battle to manage incoming capacity. Average spot freight rates for the year were up a little (7%) on the Far East-Europe route but down a little (3%) on the Transpacific. Few liner companies (except the market leader) made substantial profits, although towards the end of the year falling bunker prices at least started to reduce liner company costs.

If anything, the story was even worse on the charter market. Earnings remained depressed for yet another year, with only limited gains on historically low levels. Cascading of capacity from the mainlanes, allied to idle capacity, kept the pressure on charter owners, although later in the year there was some relief in the Panamax sector where unexpectedly robust redeployment onto intra-regional trades and a declining fleet provided more substantial support for rate levels than in other size sectors. Panamaxes also bucked the trend against generally falling asset prices in the boxship sector, with end year 10 year old secondhand prices up over 20% on end 2013 levels.

Ready For A New Twist?

So, if everyone has “had enough” and can’t take any “more”, what might change? Well, the industry consensus suggest things are getting a little tighter now. Plenty of capacity has been absorbed by slow steaming (with no sign yet of lower bunker prices changing things, though this needs to be watched carefully), much less capacity is idle (around 1.3% of the total fleet today) than in previous winters and the orderbook looks much more manageable at 18% of the fleet. Demolition remains historically high, with 0.4m TEU scrapped in 2014. Meanwhile, port congestion, most obviously on the US West Coast, may start to soak up significant amounts of capacity.

More And More

This might be enough to convince some investors that there’s no more (pain) to come and it’s time for a change in fortunes. But at the same time, liner companies still have plenty of big ships scheduled for delivery (and look set for another spending spree, placing orders for a new wave of ships of 20,000 TEU and above). Whatever the view of the optimists, extra capacity to be added, allied to economic headwinds in a number of parts of the world, will certainly pose challenges for the sector. Containership market players will have to artfully dodge the obstacles if they don’t want to be asking why they have had more of the same this time next year. Wish them luck. Have a nice day.

SIW1104Last week our review of the bulk sectors speculated on when the ‘fat lady’ might sing to mark a turn towards better times. In 2013, the same old song played in the liner shipping sector. Global container trade, led once again by intra-Asian volumes, grew by 5.0%, whilst fully cellular capacity expanded by 5.5%. But whilst fundamental growth rates were roughly in kilter, the industry was still dealing with the capacity surplus created by the downturn, even if widespread slow steaming across the liner network continued to absorb significant amounts of surplus capacity.

Down The Scales

Across 2013 container freight remained volatile as liner companies continued to battle hard with capacity management in the face of significant containership deliveries of 1.3m TEU. Although at points in the year service withdrawals enabled liner companies to push through rate increases on a temporary basis, the SCFI index averaged 1,078 across the year compared to 1,254 in 2012, and liner profit margins remained restricted (or negative), with those able to drive fuel efficiency and work on their cost structure faring the best.

Same Old Song

The charter market remained in the doldrums with little separating timecharter rates across a range of sizes and earnings pushed down towards operating costs. The timecharter rate index increased marginally from an average of 43 in 2012 to 46 last year, but that’s still way below historical averages, and increasingly unpopular Panamaxes suffered further. With continued idling of boxships, and cascading of larger vessels into the traditional charter market arena, 2013 offered little respite for charter earnings (or asset prices).

New Tunes?

So, when will the liner sector dance to a different tune? Well, the orderbook, despite substantial ordering of 1.8m TEU in 2013, looks more manageable than previously at 22% of the fleet, and in many sizes is very thin indeed. Meanwhile, the fleet below 4,000 TEU has been shrinking since 2012. On the demand side, trade growth in 2014 could increase to surpass capacity expansion once again, with the Far East-Europe and Transpacific trades at last returning to positive trade growth territory in the second half of 2013.

Elevated levels of demolition (0.43m TEU in 2013) are also helping, and the likely slowdown in cascading in the medium-term should eventually offer the charter market some protection at last. But don’t expect a rapid change of key; there are plenty of risks out there, and current surplus and idle capacity will take some time to work through before the liner sector can sing a happier song.