- Unprecedented demand for container ships will not end anytime soon, according to executives of companies that rent vessels to ocean carriers.
- Their overwhelming confidence is yet another ominous sign for beleaguered cargo shippers — and another signal that inflation could persist.
A recent news article published in the Freightwaves states states container ship owners see boom through 2022.
Container-ship leasing companies
Managers of container-ship leasing companies (so-called tonnage providers) spoke during Capital Link’s New York Maritime Forum on Wednesday. Execs on panels are notorious for “talking their book” — product-tanker panelists have been touting an imminent recovery for the past 11 years and it hasn’t happened yet — but container-ship lessors have the transaction history to back up their bullishness.
The price liners are willing to pay to lease ships reflects the degree they need vessels to carry cargo. For the rare ship still left to lease, rates are at stratospheric highs. And what tonnage providers see in recent deals strongly implies that liners do not expect a market decline in 2022.
George Youroukos, CEO of Global Ship Lease
According to George Youroukos, CEO of Global Ship Lease (NYSE: GSL), “Back in November of last year, I used the term ‘super cycle’ and my co-panelists were laughing. But I really think that this is now playing out. This is not going to be some short-term strong market. We see continued strength for at least the next couple of years, save for a black swan event.”
Evangelos Chatzis, CFO of Danaos Corp. (NYSE: DAC), said, “Our customers [liners] are faced with fantastic freight rates and they see the depth in the market in terms of cargoes that are going to need to be transported.
“They see this is a market that is going to remain strong and they need the assets to carry those cargoes because they’re making huge amounts of money. Paying $40,000, $50,000 or $60,000 a day to charter a ship is actually a blip compared to what they’re making.”
Indicators of 2022 strength
Executives cited three pieces of evidence showing liner confidence in high freight rates through at least 2022.
First, liners are “fixing forward” — not just piecemeal, but in very high numbers. Chatzis explained, “Liners are rushing to fix [charter] tonnage even a year before the current charters expire for four or five years [duration]. They understand the trade flows much better than anyone else and this shows their view on the market.”
Graham Talbot, CFO of Atlas Corp. (NYSE: ATCO), the owner of Seaspan, disclosed, “We’ve done 58 forward fixtures already this year, nearly half of our current fleet on the water. We have no roll-offs [expiring charters] left this year and only a couple next year and a few the following year.”
Second, it’s not just lease deals getting done early, it’s vessel acquisitions. According to Aristides Pittas, CEO of Euroseas (NASDAQ: ESEA), “Not only do we see charterers fixing ships one year in advance for four years out, we’re even seeing them buy ships with a delivery a year after today.”
Third, liners are frontloading lease payments in the first year of multiyear charters. According to Constantin Baack, CEO of MPC Containers (Oslo: MPCC), “We have in certain instances been able to frontload the charter component, so while the charter is $40,000 a day on average, you get it frontloaded into the first year.”
Chatzis confirmed: “We have also done frontloaded deals where, for example, the charter rate is $45,000 per day but we’re making $80,000 per day in year one and then there’s a gradual step-down over the coming years. We were not the ones to suggest this. This came from our charterers. They want to match the charter payments with their visibility on the tremendous earnings at this point, [given that] they don’t know how it’s going to be one, two, three years down the road.”
Vessel supply: No risk until 2023
On the vessel-supply front, tonnage providers see no threat to the market boom from newbuilds in 2022. While the current orderbook is now 23% of the on-the-water fleet compared to a low of 8% last year, the vast majority of ships on order in larger vessel sizes will not be delivered until 2023-24.
“Deliveries in 2022 are going to be extremely minimal,” affirmed Pittas. Furthermore, global supply chain disruptions and issues in China related to power outages and COVID don’t just impair the global trade in goods. They also affect shipyards. “I think there will be delays in newbuilds being delivered,” said Baack.
The vessel-supply risk doesn’t begin until 2023, said Talbot.
“It’s a big lump,” Talbot conceded, referring to new ship deliveries in 2023-24. “You would expect that it would have some sort of softening effect on the market, so we’re trying to make sure we’re locked in [with charters that extend through then] to minimize our exposure to the 2023-24 period as much as possible.”
Vessel demand: Backlogs backing up
On the demand side, said Youroukos, “We see a lot of manufacturing disruptions and a lot of backlogs of orders. And now we have the power outages in China, which will create even further backlogs. That might seem negative for us as an industry but I see this as very positive.
“Why? Because right now we have a completely jammed system. Adding more fuel to the fire doesn’t really matter. It’s far better that we shift some cargoes into the next 12 months so we continue to have very strong demand in the pipeline of cargoes, by pushing all this backlog backwards.”
COVID-related supply chain disruptions
Youroukos also expects COVID-related supply chain disruptions on the export side to continue, further extending backlogs — and thus vessel demand.
“We might be very close to dealing with COVID in the U.S. and Europe, but we’re very far from dealing with it in Asia, South America and other countries. If anybody believes we’re going to be done with COVID globally in the next 12 months, then yes, congestion will slowly but steadily subside. But I do not think anybody believes we’re going to be done with COVID in the next 12 months globally.”
Pittas pointed out that unlike past shipping cycles, current market strength is not purely a matter of vessel supply versus demand.
“The biggest problem is not the ships, it’s trucking and containers and factories. It’s everything,” said Pittas. “So for this to stop, we would have to see a significant drop in global growth. That possibility exists, but I don’t think it’s very possible. I’m pretty sure that the next two or three years are going to be extremely good [for shipping].” Until the 2023-24 newbuild wave arrives, added Pittas, “I cannot imagine any real correction.”
Recent dip in spot Freight rates
When asked about the recent dip in spot freight rates off record peaks, Youroukos said it was a positive, explaining that freight rates need to be strong enough for liners to afford high rent payments to tonnage providers, yet not so strong that vessel demand is destroyed.
“Freight rates have softened a bit and I think that’s healthy,” said Youroukos. “We want consumer confidence. We want consumers to be able to spend. And we all know inflation is going up.
“If, because freight rates are very high, consumers have less money to spend, that is not good. That is shooting ourselves in the foot.”
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Source: Freight Waves
