Peter S. Shaerf, Managing Director, AMA Capital Partners

https://amausa.com/
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Peter S. Shaerf

In a world turned upside down in 2020, it is incumbent on the entire global trade industry to try to step away from the prevailing noise and take a rational view of the path forward, not just for 2021, but for the much longer journey that awaits.

From the perspective of container ship owners and operators, the impact of the COVID-19 pandemic will be felt for a considerable time; it will not only change behavior going forward but arguably change our views on forecasting and predictions. Nothing will ever be quite the same again.

The container shipping market is to a large extent driven by consumer demand, which has for the most part been on a steady upswing but has turned negative twice in the last two decades: first during the 2008–09 global financial crisis and again during the early days of the pandemic.

Going forward, making predictions is extremely dangerous; even now at the time of writing, the “second wave” of the pandemic is decimating parts of Europe while governments wrestle with whether the economic pain of the “cure” is worse than the suffering caused by the illness itself.

As such, the economic recovery will be lopsided at best and will likely occur in waves that build and then recede. Restocking of inventories was an early driver of the recovery that seems to have peaked for now, but in several key trade lanes, spot freight rates are at all-time highs and, in many cases, there is no spare ship capacity. All the ships over 5,000 TEU are gainfully employed, and even in the smaller sizes, demand is easily outstripping supply.

For the liner companies, business is picking up and the storms appear to have passed for now. Maersk recently raised its earnings forecast for the year by over 10 percent, Ocean Network Express recorded a fourfold year-over-year increase in profit for the third quarter, and COSCO saw its net profit rise 210 percent year over year for the quarter.

So where does this take us in the year ahead?

For the carriers, we expect to see a continued emphasis on the ownership of large vessels. OOCL recently expanded its March order from five 23,000-TEU ships to 12 such vessels. With a length of about 400 meters and a breadth of 24 container rows, these ships cost roughly $157 million each. But OOCL is not alone; Mediterranean Shipping Co. (MSC) also ordered five similarly sized vessels at a cost of about $152 million per ship.

The current global fleet of vessels over 18,000 TEU comprises 129 ships with a total capacity of 2.6 million TEU. A further 28 ships are on order that will increase that total by more than 20 percent. By comparison, the rest of the large vessel fleet — i.e., ships with capacities of 7,500 to 18,000 TEU — numbers just under 1,000 ships with only 65 new vessels on order. The trend lines are clearly pointing toward larger ships, and this will continue in the coming year. And as the ships plying major trades get larger, parallel growth in the feeder ship market will continue as well.

We have seen a significant recovery in ship sales after activity plummeted during the height of the pandemic to levels not seen since the financial crisis of 2008. In fact, almost 200 transactions have taken place so far in 2020, with considerable activity in the larger vessel sizes. Panamax vessels have seen their prices rise by as much as 25 to 30 percent as charter rates for such vessels have hit levels not seen since 2011. Interestingly, the average age of ships sold has also risen from about 11 years to over 13 years.

With the firming of charter rates and a continued reduction in the inactive fleet, which stood at just 1.6 percent of total capacity as of late November, prices should continue to increase as the appetite of the tramp owners — i.e., non-liner companies — increases and the need for ships accelerates.

But booms follow busts and busts follow booms, so inevitably, the liner companies will not be able to sustain the profit level trajectory now in place. Still, they will have the capacity to handle sustained growth if it returns in earnest.