It’s a seemingly basic shipping formula: ocean liners operate a fleet of container ships, whether owned or chartered, with total capacity measured in twenty-foot equivalent units (TEUs). The more TEUs of cargo ships can load per TEU of fleet capacity, the higher their revenue.
This is where it gets tricky: freight revenues per TEU are now higher than they’ve ever been before – and the reason rates are so high is because the global shipping network has been overwhelmed by COVID-era consumer demand for goods. While rising fares increase revenue, line companies simultaneously lose effective capacity due to the same congestion that drives fares.
Sea-Intelligence CEO Alan Murphy told American Shipper: “We have an exceptionally high number of [canceled] departures, not for commercial reasons, but for operational reasons. If ships are stuck in a port for two weeks, they will not return to the rotation.
The situation is so bad that Maersk has had to involuntarily mask around 20% of its Asia-West Coast crossings since the start of the year, the same level it intentionally cut in the second quarter of 2020 due to the sudden collapse of import demand when US businesses were shut down nationwide. lockdowns at the start of COVID.
“It’s somewhat ironic that carriers have to cancel sailings just when those trips would bring them record revenues,” said Stefan Verberckmoes, marine analyst and Europe editor at Alphaliner.
Several liners specifically cited the negative effects of congestion on their first quarter volumes. With the fallout from the Ever Given crash extending from April to May, continued congestion at California ports in the United States and major European hubs, and COVID restrictions at Chinese export terminals in June, volumes of certain ships could be lower in the second quarter than in the first quarter.
“You could definitely see a reduction in volumes in the second quarter [versus the first]. Absolutely,” said Randy Giveans, analyst at Jefferies.
This has negative implications for cargo shippers – space could decrease and rates could increase – and positive implications for non-operating owners (NOOs) who lease ships from ocean liners, companies like Danaos (NYSE: CAD), Costamare (NYSE: CMRE), Global Ship Lease (NYSE: GSL), Euroseas (NASDAQ: EASA) and Navios Partners (NYSE: NMM).
“Very high” rates increase income
For the lines, the higher tariffs more than compensate for the effective capacity lost due to congestion, which leads to increased revenues. “The tariffs are so high that the overall revenue is very high anyway,” Verberckmoes said. “Even if carriers have to cancel crossings at a time when those crossings could bring them record revenues, their bottom line will still be excellent.”
Second-quarter results will benefit from new annual rates for transpacific contracts, up 50% or more year-on-year, as well as spot rates that continue to climb.
Spot rates from Asia to the West Coast reached $5,722 per forty foot equivalent unit (FEU) on Monday, up 198% year on year, according to the Freightos Baltic Daily Index, with spot rates l Asia to East Coast at $7,598 per FEU. , up 169%. These rates do not include additional fees, which can range from $3,000 to $5,000 per FEU.
Different fleet growth strategies
Revenue per TEU carried is only part of the ocean liner revenue equation. Another variable is the size of the fleet; the larger the fleet, the more boxes can be transported and the higher the overall revenue.
One of the ways to counter the negative effects of congestion on capacity is to increase the fleet. “Carriers obviously need more vessels and containers to continue transporting the same amount of cargo,” Verberckmoes noted. “The more capacity a carrier can deploy in the second quarter, the more profit it will make.”
Short-term fleet growth stems from newbuilds ordered in previous years that are being delivered, chartered vessels or vessels purchased on the second-hand market.
Some carriers do not increase their fleet much, if at all. At the end of the first quarter, Maersk’s fleet size was down 1.1% year-on-year, Hapag-Lloyd’s by 0.6%, ONE’s by 2.1% and COSCO’s by 2.1%. 4%.
Other carriers are rapidly increasing their fleets through second-hand purchases and charter contracts to capture more short-term profits.
“MSC and Wan Hai are very actively buying ships,” Verberckmoes said. Alphaliner reported that MSC was on an “unprecedented buying spree”, acquiring 49 ships since last August. MSC is simultaneously very active in the charter markets.
ZIM (NYSE: ZIM) is growing entirely thanks to charters. Between the end of Q3 2020 and the end of Q1 2021, ZIM’s fleet capacity jumped 34%.
As a result, ZIM outperformed its larger competitors in terms of volume growth. Its volume in the first quarter of 2021 increased by 28% year-on-year. In contrast, Maersk’s rose 5.7% and Hapag-Lloyd’s fell 2.6%
Balancing risk and reward
The problem with growth through second-hand acquisitions or charters is that the prices for both options are now extremely high, and in the case of charters, the durations are now multi-year. If freight rates drop sharply at some point in 2022-2025, it will be painful for future results.
“There is definitely an element of risk here,” Verberckmoes said. “Obviously 2021 will be a great year for carriers, but there is still no visibility on freight demand in the coming years. NOOs are now in the driver’s seat. Carriers who are desperate to charter additional vessels have no choice but to accept long charters with the risk that rates will be well above the market average within a few years.These vessels, however, will already provide a very large income in the short term. term.
According to Giveans, it makes sense for carriers to charter vessels at high rates for multi-year terms, even if they assume freight rates will drop in years to come. This, in turn, bodes very well for NOOs that lease vessels to ocean liners.
“For a liner willing to pay high fares for four years, it will make so much money over the next six months that it will pay off even if it loses money in subsequent years. This will be more than offset by the huge short-term cash flow,” he said.
“Watch some of these crazy edits for three to six month durations,” he said. (As previously reported by American Shipper, a 15-year-old 5,060 TEU vessel was recently chartered for 45-90 days at $135,000 per day.)
If operators are not willing to do a multi-year, six-figure daily charter, they will have to take a multi-year, five-figure charter. Giveans explained: “An ocean liner may think, ‘We really need the ship for the next 18 months,’ but nobody gives ships for 18 months. So if they want it for 18 months, they’ll say, “We’ll take it for 48 months.”
“And they’ll pay $48,000 a day for four years, like they did on one of the recent Danaos mounts, because they know they could probably pay $200,000 a day next year and still be profitable. They are going to have a period of super profits. And yeah, after that they can have a period of flat or even negative [returns]but that’s okay, because the super profits will far outweigh that. »
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