You won’t find Gerry Wang lamenting the financial roller-coaster ocean container lines and their shipping customers have ridden in recent years.
“We need bad times to get the innovations we want,” the founder and CEO of container ship owner Seaspan said. “In good times, when you ask the builders for the innovations in design you want, they’ll say, ‘Who’s next?’ ”
“It’s like the Seinfeld episode about the Soup Nazi,” Seaspan co-founder and Managing Director Graham Porter says. “If you even say anything wrong, he says, ‘Get back to the end of the line or don’t come back at all. In the good times, all we see is the accountant and the production guy. In the bad times, we see the salesmen and the head of designs.”
In less than seven years of business, the chiefs of Seaspan have some heavy experience through good times and bad. Launched as a public company in 2005 in the midst of a shipping boom, the business now is one of the anchors of a ship charter field many industry experts believe is growing in importance as big-brand carriers seek greater flexibility and financial leverage to get into markets and, perhaps just as important, get out of them.
The financial design is half of the two-pronged structure that Wang says makes Seaspan sail. The other half, the part that gets Wang and Porter speaking energetically about the possibilities in the shipping industry, is in the design of the ships themselves. Wang says his greatest focus is on working with shipbuilders on big new container ships with the most efficient designs possible, both in the structure of the vessels and the way they operate in networks, to change the underpinning of shipping economics.
Wang said the economics of the shipping market are working in Seaspan’s favor. Interviewed in New York this month, he and Porter show no signs they’re hunkering down for a slow period, but instead look ready to tap into the financial markets they’ve used to create the business and now want to use for new growth.
Carriers that have been ordering scores of big ships in the last few years stopped ordering after the second quarter as the flood of new deliveries undermined freight rates on the major east-west trade lanes. The shipyards now are begging for orders, cutting prices and will custom-design ships to get them.
“That’s why recessions are not necessarily bad things,” Wang said. “A situation like today is ideal for new ideas to materialize. Shipyards are listening now because they need new orders.”
Wang can say this because, unlike shipping lines that depend on the ups and downs of freight rates for their revenue, Seaspan’s revenue is largely immune from industry tides. Charter leases lock in daily charter rates for 10 to 15 years with many of the world’s largest container lines, including China Shipping, Cosco, Mediterranean Shipping, MOL and CSAV.
It’s a compelling structure, although the recent financial reports belie Seaspan’s suggestion that it can sail beyond financial shoals.
The company has been on an enormous growth track — it had 10 vessels in operation and 13 on order in August 2005, totaling 116,950 20-foot equivalent units, and now has 65 ships in operation, and the seven on order alone have more than 84,000 TEUs of capacity. But the company, based in Hong Kong with offices in Vancouver, British Columbia, also lost $106.9 million in the first nine months of 2011, including consecutive losses in the second and third quarters. That was better than the $229.3 million net loss in the first three quarters of 2010, however, and a 41.6 percent improvement in revenue over the period to $409.5 million this year raised confidence enough to trigger a $150 million stock buyback offer last week.
Seaspan’s expanding fleet and the contracts it has in place with carriers, experts say, may be more important than the last quarter or two. “A lot of their deals were done in fairly good times at good daily rates, so they are protected from the current downturn,” said Neil Dekker, container research director at London-based Drewry Shipping Consultants. He said Seaspan has been one of the more aggressive independent owners in recent years leveraging strong relationships with top liner companies and up-and-coming Chinese yards.
“Gerry Wang has championed the progressive design of super-post-Panamax ships and in doing so has managed to obtain competitive newbuild rates from Chinese yards that are hungry for business even in the current environment,” Dekker said.
Sidebar: Heavy Losses, Light Worries.
Seaspan is pushing shipyards to incorporate new engine and hull designs that cut ship weights and fuel consumption. With fewer orders and yards completing the spate of orders placed during good times, the shipyards are cutting prices to win the orders.
When bunker fuel prices soared past $700 a ton in 2008, carriers had to reduce ship speeds to cut fuel consumption, but most ships weren’t designed to operate at slow speeds. “We knew the design at that time was not good enough,” Wang said.
Wang insists he coined the term “slow-steaming” to describe the new industry practice. Actual historical verification of that remains vague, but his attention to the engineering behind ship design is precise.
As a graduate of the Shanghai Maritime Academy in 1984, Wang has an engineering background that serves as the foundation of his approach to the business. “I don’t want a Mercedes; I just want a good Toyota,” he said. “We’re moving boxes from Point A to Point B, so what’s the point of having a complicated Mercedes with a high operating cost?”
For years, Wang said he pressed shipyards to adopt more efficient designs, including curved hulls and electronically controlled engines that could achieve efficiency at slow speeds. “Now, during bad times, the shipyards are incorporating those ideas into their designs,” he said.
With bunker prices still exceeding $600 a ton and ship operating costs escalating, carriers can’t afford to operate anything but the most efficient ships. New computer-controlled engines automatically adjust fuel consumption to enable ships to steam from 10 to 25 knots at the most efficient rate of fuel consumption.
Seaspan took delivery of three new container ships during the third quarter, which brought its operating fleet to 65 vessels. Two of the three new ships have capacities of 13,100 TEUs, the largest vessels in its fleet. They are on 12-year charters to Cosco, where they became the carrier’s flagship vessels. Four more 13,100-TEU ships are scheduled for delivery in 2012, all ordered in 2007 for long-term charter to Cosco. They are of an older design that Wang said was tweaked so that they have electronic engines, but don’t have the curved hulls that reduce drag.
“They are not as good as the latest design but still better than the vintage design,” he said.
The three 10,000-TEU ships Seaspan has ordered more recently, to be delivered in 2014 on 10-year charters to Hanjin Shipping, will have hulls that will make them at least 10 percent more efficient than those delivered next year, Porter said. “The previous ships were designed for a top speed of 25 knots, which meant that they were not efficient at 18 knots. The new designs are more efficient at 18 to 20 knots,” he said.
“You can still do high speeds, but they are not as efficient at the peak. You have to do one or the other.”
The structural engineering is the foundation of the financial engineering: The cost of fuel used during the lifetime of a container ship is four times the capital cost of a new ship, so fuel efficiency is becoming increasingly important. “If you can save on bunker, it’s substantial compared to savings on capital,” Porter said.
Even with the older design of the charter ships leased to container carriers, Seaspan has among the lowest ship-operating costs in the industry. According to an analysis by global accounting firm Moore Stephens, Seaspan’s daily weighted rate for total operating costs is “significantly below industry norms.”
Moore Stephens compared Seaspan’s operating costs against industry averages provided by Drewry and by Opcost 2011, its own ship-operating benchmarking tool.
Like many of the major carriers, Seaspan turned to new sources of capital for its ship orders after the 2008-09 recession caused traditional ship finance banks to slash ship loans. European ship finance banks had financed 70 percent of all ship orders for all shipowners globally. Now, with the European debt crisis and limited sources of dollar deposits, those banks have a shrinking capacity to finance new shipbuilding, which is conducted in dollars.
“There is no natural substitute yet that has developed. We are trying to find it,” Porter said. Chinese banks have the potential to fill the void, but their capital remains costly.
And finding capital for new ships has always been central to Seaspan’s success.
The company was formed to fill the needs for new ships by China Shipping, whose chairman Li Kelin, was an earlier graduate of the Shanghai Maritime University. China Shipping didn’t have the funding to buy new ships and wasn’t able to charter ships.
“The Germans wouldn’t charter to them because they didn’t know them,” Wang said. As part of the university’s “old boy network,” Wang also knew Li from his time at China Merchants in Hong Kong during the Asian financial crisis in the late 1980s. Wang followed his wife to Vancouver, where he and Porter conducted a management buyout of the international arm of a Canadian tug company, giving them 75 percent of a Seaspan business they transformed into an international container ship charter company.
“With the price of new ships so low during the Asian financial crisis, we came up with this long-term charter idea and used the Korean Export-Import Bank to provide financing and ordered 47 ships from Samsung,” Wang said. “That helped China Shipping become what it is today, and we’ve been growing with them and later expanded into Cosco.”
The Washington Group later acquired the remaining 25 percent of Seaspan, which went public in August 2005 and is traded on the New York Stock Exchange.
Seaspan now is tapping traditional shipping banks and new ones entering the shipping business. It’s also using banks that other shipowners have never approached for ship finance. It taps banks in Europe, Asia and the U.S. for lines of finance. It also is using new issues of preferred shares. And it’s using private equity funding and banks that finance private equity, such as those that work with Carlyle Group, the large U.S. private equity fund.
It also gets financing from export credit agencies in China, South Korea and Japan that want to support their countries’ shipyards. “We need equity, we need debt, we need money halfway between debt and equity, so we are trying to get into different forms of capital to fit in with our capital structure,” Wang said.
Wang is bullish on the future of container shipping, which he calls the “ocean highway” that supports globalization. “Without container shipping, there is no globalization; there’s no just-in-time delivery,” he said.
Seaspan is talking to shipyards now about new orders, but Wang isn’t moving quickly to signing any contracts. “We’re discussing, we’re looking. Going through a down market you want to be very patient, so we’re taking our time.”