The Forgotten Shipping Market Making a Killing



Comments (3)

  1. Cherry Wang says:

    Hi Matt,

    Interesting points you raised on the container leasing companies.

    One of the pitfalls of the BDI is that much of the drop we have seen recently can be attributed to the overcapacity of vessels in the dry bulk sector, which is also true for containers and the tanker shipping industry. So the overcapacity and the structural problems on the supply side is distorting the index immensely. The global benchmark appears to be the Shanghai Containerised Freight Index, which is a weekly index tracking the freight rates on fifteen trade routes ex-Shanghai.

    The increase in imports we saw in the Port of LA in December 2011 was not seasonally adjusted. Chinese New Year came much earlier this year than previous years (Jan 23rd) and many shippers were rushing to have their cargoes shipped out of China prior to the two week factory closures., hence one of the reasons for the significant increase in import volumes. If you look at how volumes at Port of LA did in 2011, they were only up 1.39% and according to Alphaliner, Transpacific volumes shipped in containers actually fell by 0.2% last year on 2010 volumes.

    The GDP multiplier effect we have witnessed previously no longer sticks either in the container shipping sector. Both the US and Europe markets have matured and the rising costs of outsourcing in China over the past few years has eroded the significance of this metric.

    Also, China manufactures approx 97% of containers and speaking to the two largest container manufacturers, there appears to be quite a lot of inventory sitting in the warehouses waiting to be picked up. If the container leasing companies only own/lease 40% of global containers and return a profit margin of 107%, I wonder why the carriers aren’t doing the same given that they have been writing losses for the year as they were all so caught up in the market share/rate war they self-created.

    The container leasing companies operate in a different way to other parts of the container industry and appear to be the only ones in the industry to be making any form of profit right now!

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  2. Matt Weinschenk says:

    Thank you for the knowledgeable and in-depth color on some of those statistics.

    Data on Chinese inventory of new, unsold containers was unavailable, but would be very valuable. Based on the rising prices of both new and used containers, it seems that if there is a pile-up in inventory. There’s a problem getting it to market.

    One minor clarification, the 107% doesn’t refer to profit margins for shipping companies. Analysts consensus estimate for earnings growth is 107% for CAI International.

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  3. Lou Roll says:

    Thanks for this article.

    It should be noted that some of the key drivers for the improved profitability of container leasing companies are:

    . Shipping lines are relying more on leasing cos since 2008, because their own financial challenges make it more difficult for them to ourchase the containers.

    . With the 2008 recession, as well as the high cost of bunkers (i.e. heavy fuel oil for ships engines), lines have considerably slowed down their services so as to save on fuel, typically down from 23-25 knots to 15-18 knots. As a result, container “turn around times” are longer on any given trade (Asia-Europe, Asia-USA…etc), which results in higher container fleet requirements for a given service 9typically weekly, fixed day sailings).

    . Capital costs to finance new investments in containers have remained relatively low.

    There is also more market concentration in container leasing than in ship leasing and shipping lines.

    It should also be noted that the Shanghai Container Freight Index covers new rate filings, but it does not reflect the actual total evolution of lines’ revenues, since about 60% of the lines’ volumes are covered by so-called “service contracts”, i.e. contracts under which shippers (= exporters or importers or freight forwarders/logistics services providers) commit a significant part of their volumes for a quarter or even a full year to a given line, which in turn grants discounted volume rates which are fixed for the duration of the contract, at the exception of a couple of cost based variable factors which adjust monthly or quarterly, mainly the Bunker Adjustment Factor (“BAF”) which varies with actual bunker costs, and the Currency Adjustment factor (“CAF”) which varies according to the US Dollar rate of exchange versus several currencies of reference on each trade lane (freight rates are mostly expressed in US Dollars).

    These operational and commercial factors are important to know, as well as others, if one wishes to understand how container shipping markets work.

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