When Mediterranean Shipping Co. chartered the 7-year-old HS Humboldt in August, the deal sent shockwaves through the ocean container industry not because MSC was adding new capacity but because the deal’s cost came at a breathtaking discount. Only a little more than a month after the market was commanding $27,000-plus, the world’s second-largest container ship operator took the 2004-built, 5,000-TEU ship for six months at a daily rate of $17,000.
But that was only the first shock.
A couple of weeks later, MSC had the Panamax charter market reeling with reports the carrier had fixed another 2004-built, 5,000-TEU ship for six months at just $12,000 a day.
The container ship charter market is in full retreat against an increasingly bearish backdrop of sliding ocean freight rates and rising overcapacity that has blunted carriers’ appetite to take on extra hired tonnage.
Charter rates for all sizes of vessels up to 5,000 20-foot equivalent units have plummeted since July after holding steady through the second quarter even as the container shipping market already was heading south.
The benchmark 12-month charter rate for a 3,500-TEU gearless Panamax ship fell to $15,500 by the end of August from $20,000 in June, according to London ship broker Clarkson.
The average daily rate for a standard gearless 4,250-TEU vessel on a two-year charter had fallen to $18,729 in early September from $23,459 at the end of July, according to the Hamburg Shipbrokers Association, while a 1,100-TEU ship is going for $7,958 a day, compared with $8,644 a month ago.
The HSA’s closely followed ConTex index sank to 561 in the first week of September, down more than 10 percent from 625 a month ago and more than 20 percent since early June.
Charter rates face further downward pressure as ocean carriers cull capacity in response to a flat peak shipping season by re-letting surplus tonnage and letting go of ships when their charters expire. CSAV’s successive service closures led to the Chilean carrier removing some 100,000 TEUs of chartered capacity by the end of August that will be looking for new employment, according to industry analyst Alphaliner.
That’s not necessarily an immediate problem now with only 1 percent of the world fleet unemployed. But when carriers start cutting capacity in the coming months as cargo growth slows, they will put chartered ships on the dole first rather than their own vessels. Alphaliner expects the idle fleet to reach as much as 400,000 TEUs by the end of the year, up from 120,000 TEUs in July.
The leading charterers — Maersk Line, MSC and CMA CGM — are taking advantage of a buyers’ market to snap up ships at attractive rates and for much shorter hire periods than was possible in the recent past. For the carriers, the sagging charter rates mark the flip side of the impact of the stumbling container shipping market: With demand weaker than many had expected, the cost of chartered capacity appears to be falling even faster than spot container rates.
MSC has been among the most active charterers in recent weeks, with its series of market-deflating fixtures that have set lower benchmarks for future negotiations between carriers and owners.
The Geneva-based carrier also extended the charter of a 1997-built, 3,094-TEU ship for $16,000 a day, a 30 percent discount on the rate just a month earlier.
Although rates are slipping, most charter ship owners aren’t sinking financially thanks to a cash cushion from bumper profits amassed in the container shipping bull run of 2007-08, when a 3,500-TEU vessel was earning close to $30,000 a day.
And even after the late-summer slide, current rates remain comfortably above levels of the past two years. The 3,500-TEU ship earning $15,500 today made an average of $13,250 through 2010 and just $6,575 in the 2009 slump, according to Clarkson. MSC first chartered the HS Humboldt in 2009 for just $7,000 a day with an option for an extra year at $10,000.
Even as charter and ocean freight rates fall, the industry has been spending lavishly on new tonnage. A total of $20.6 billion was invested in container ship orders in the first seven months of the year, according to Clarkson.
This investment, dwarfing the $1.1 billion spent in 2009, has soaked up the aggregate $17 billion profit the industry is estimated to have made in the 2010 rebound. And there are more orders in the pipeline as ocean carriers scramble to keep up with Maersk’s twin orders for twenty 18,000-TEU ships.
Most of the orders, especially for vessels of more than 10,000 TEUs destined for the Asia-Europe trade, have been placed by ocean carriers rather than charter owners. However, Seaspan, the New York Stock Exchange-listed charter owner, is said to have had negotiations with carriers about 18,000-TEU ships. Still, 13,000 to 14,000 TEUs are the most popular size.
This suggests there may be a diminishing role for charter owners, who account for approximately 50 percent of the world fleet, at least at the top end of the market. Shipowners can’t afford to gamble on speculative orders for the latest generation of ships costing as much as $150 million apiece without secure time-charters in place.
Industry watchers are divided over the medium-term outlook for carriers and the likely spinoff on charter owners.
Alphaliner warns the industry is heading toward a prolonged slump that could last longer than the 2009 downturn as cargo demand lags fleet growth because of weak economic growth in the U.S. and Europe at a time of rising ship capacity. This could lead to a replay of 2009, when cash-strapped carriers led by CSAV forced shipowners to slash their charter rates by up to 30 percent.
But some industry observers, including some charter owners, are more sanguine about the surge in ship orders over the past year. According to Gerry Wang, CEO of Seaspan, carriers are ordering ships to modernize their fleets with energy-efficient vessels, not to boost their market share.
And Nils Andersen, CEO of Maersk Line parent A.P. Moller-Maersk, said overcapacity is only a temporary problem for a “good” longer-term market.
The charter market’s longer-term attractions were underscored by the decision of the Carlyle Group, a private equity firm, to set up a joint venture with Seaspan in March to invest up to $5 billion in new container vessels. That the largest ever private equity investment in the shipping industry went into containers rather than tankers or bulk carriers was a welcome development as the industry braces for tougher times ahead.
Charter owners aren’t panicking — at least not yet — although they are adopting a more cautious stance over fleet expansion.
Germany’s Reederei Claus-Peter Offen, the world’s biggest charter ship owner with 98 ships aggregating nearly 515,000 TEUs, has halted new orders for now following a rapid expansion of its fleet.
But newcomers that entered the market in the past few years are more bullish — NYSE-listed Box Ships plans to boost its seven-ship fleet with 1,700- to 7,000-TEU vessels employed on short- to medium-term time-charters of one to five years with staggered maturities.
Charter owners’ optimism is buoyed by the resilient demand for tonnage in emerging markets in the north-south and smaller east-west trade lanes that are growing faster than the giant east-west trade lanes that are plagued by rising overcapacity, declining utilization and weak freight rates.
Traffic on the north-south and non-mainline east-west lanes will grow approximately 11 percent in 2011, compared with 6 percent on the main east-west routes, according to Clarkson. The smaller trades likely will grow 9.4 percent in 2012.
This will prop up carriers’ demand for vessels, owned and chartered, in the 3,000- to 7,000-TEU range, especially on the trades to South America. Smaller vessels also will be needed to operate feeder services for the giant boxships that will call at a smaller number of ports on the Asia-Europe trades.
Meanwhile, charter owners are seeking new sources of finance as inflows into the tax-efficient KG funds that bankrolled the growth of Germany’s charter ship fleet, the world’s largest, have slumped since the 2008 global economic crisis. The funds, which have more than 400,000 private investors and own more than 1,700 ships, raised just over $1 billion in new equity in 2010, down from $3.6 billion in 2008.
German shipowners have approached Korean and Chinese banks to help finance their orders and have explored the possibility of teaming up with U.S. private equity firms as they acknowledge the decades-old KG system will never recover its former prominence.
The demise of the KG system and the bankruptcy or restructuring of some 200 funds, also has reduced German owners’ charter market share. Claus-Peter Offen remains the largest owner, and there are six German firms in the top 10, according to Clarkson. But London-based Zodiac Maritime, a part of Israel’s Ofer Group that also owns ocean carrier Zim, has climbed from fifth to second place, Seaspan is seventh, and Greek owners Danaos and Costamare fill the ninth and 10th spots.
The increasing Greek presence in a container charter market long spurned in favor of more speculative tankers and bulk carriers and the imminent arrival of U.S. private equity funds testify to the attractions of the sector.
But they are all in for a bumpy ride in the coming months as nervous ocean carriers reassess their exposure to the charter market.
-- Contact Bruce Barnard at email@example.com.