Whither Container Shipping?

IMIF BUFFET LUNCHEON

Date: Monday January 16 2017

Venue: Norton Rose Fulbright LLP, 3 More London Riverside, London, SE1

Host: Harry Theochari, Global Head of Transport, Norton Rose Fulbright LLP

Speaker:  Ian Webber, Chief Executive Officer, Global Ship Lease Inc

Subject: Whither Container Shipping?

 

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Report by James Brewer

To the surprise of some in the large audience, Mr Webber said he would subtitle his talk Reasons to be Cheerful. This was a change of tone from the gloom and merger mania that has characterised the last few years in the containership sector.

It turned out that his modest optimism was particularly related to specialist trade growth expected to remain strongest in non-mainlane and intra-regional routes, which are served by mid-size and smaller tonnage. Mr Webber was further encouraged by ship demolition trends, albeit in his opinion still too weak, and the slowdown in the newbuilding order book.

Mr Webber has led Global Ship Lease, which was listed in New York in 2008, since its formation a year earlier. Global Ship Lease owns 18 vessels with total capacity of 82,312 teu and an average age, weighted by teu capacity, at end-September 2016 of 11.8 years. All the vessels are on time charter: 15 to CMA CGM and three to OOCL. The ships range in capacity from 2,207teu to 11,040teu. The average remaining term of the charters at September 30 2016 was 4.1 years or 4.2 years on a weighted basis. There is scheduled to beno exposure to the spot market until September 2017.

Contracted revenues total $680m, said Mr Webber.The company – market capitalisation $77m – is owned 45% by its lead charterer, CMA CGM, with public shareholders 34%, and directors and executive officers 21%. Global Ship Lease was spun out of the CMA CGM group, when it acquired 17 ships for $1bn, scrapping two and then buying three.

Mr Webber contrasted the metrics highlighted in a presentation by CP some years ago (that said that “in only four years since 1980 has containership demand grown at less than 4%”) with the more sober outlook that has dampened much of the sector recently.

He cited projections that world GDP growth for 2017 would be around 3.4%, and trade growth around3.8%. Growth forecast for containerised trade was in the region of 4%. “Near-term risks remain weighted to the downside and include: limits to scope and stimulus of Central Bank activity/monetary policy in developed economies; and continued socio-economic and geo-political uncertainty,” was the message.

There followed some brighter statistics. According to Alphaliner, at the end of 2016 the order book was “only” 3.19m teu – 15.7% of the fleet. This was down from 20.5% at end-2015. New orders – “not a record low, but close to it” – were 82 ships of 292,000 teu, down 87% on 2015.

Overall orderbook-to-fleet-ratio for mid-size and smaller segments ranged from 1.3% to 7.1%, as against a “quite substantial” 49.6% for vessels of 10,000teu or larger. Some 2.8m teu of new capacity was scheduled for delivery in 2017 and 2018, adding to existing oversupply of 1m teu. Newbuilding deliveries were concentrated in the larger segments, but would place continued pressure on the size cascade. All fleet segments below 8,000teu had shown either contraction or net neutral growth (based on data up to September 2016).

Fleet size at 5,107 ships (20.27m teu) was up 1.5% year-on-year and thus “the lowest percentage rise in a generation.”

Scrapping had risen to a rate twice that of the previous year, and involved 200 ships. Idle units totalled 344 ships(predominantly small and mid-sized)of 1.42m teu, which was 6.7% of fleet capacity versus 6.8% at end-2015. Scrapping volume was three times that of 2015, but he stressed that “more was needed.” Mr Webber added: “Scrapping activity continues to be concentrated in mid-size and smaller tonnage; youngest vessel scrapped to date was a seven- year-old Panamax.”

Mr Webber referred to consolidations of big players in the liner sector – 2016 was a record year for such moves – and said that the failure of Hanjin Shipping meant that claims and losses would percolate throughout the liner industry.

Liner consolidation and mega alliances would lead to improved conditions for operators, and reciprocal to that tonnage would be redelivered to the charter market, which will lead to higher levels of scrapping.

The impact of consolidation was expected to be “net-negative for containership lessors exposed to the spot charter market in the near term, but more positive over time.” It meant more efficient capacity utilisation by liner operators, and a negative impact on the supply/demand balance for lessors. He foresaw a less fragmented lessee market and likely negative impact on the bargaining position of lessors.

This implied a more disciplined approach to vessel ordering, and positive impact on supply/ demand balance over the long term. Stronger liner company credit profiles would bring a positive impact on lessee counterparty risk over the long term.

Although tonnage supply growth was moderating, the starting point was one of significant over-supply. Trade growth was expected to remain strongest in non-mainlane and intra-regional trades, served by mid-size and smaller tonnage: the supply-side dynamics were Improving in those segments.

The Global Ship Lease chief insisted that mid-size and smaller ships remained key to most trade lanes.While the container trades from Asia to Europe and North America commanded most headlines, these trades amounted to only 30% of global movements.

Most trades were served by ships smaller than 10,000teu, he said, stating that almost 30% of ships in the global fleet were deployed on Intra-Asia trade alone. He quoted a report that ahead of the opening of the new Panama Canal locks around 80% of Intra-Asia vessels were sub-2,000teu.

“We believe firmly that there is a good future for smaller tonnage. Undoubtedly there is a challenge, but there are better prospects for the liner sector this year than last year.”

Mr Webber said that newbuilding prices continue to soften as the yards come under pressure across most shipping sectors. Spot market charter rates remained close to all-time lows, fluctuating around operating expenditure for most size segments; spot rates for some segments (for example “old” Panamax ships) were now materially below covering expenditure.

Second-hand prices were expected to come under increasing pressure, with charter-free values for ever younger tonnage anticipated to converge on scrap levels over the coming months. Relative value of charter coverage (on a cash-accretive basis and with quality counterparties) should continue to rise. Distress in the sector was expected to catalyse additional scrapping and generate attractive counter-cyclical purchase opportunities.

The speaker was asked what might be the effect internationally of the reported $26bn five-year financing deal (the biggest ship finance transaction in history) with China Development Bank to back restructuring and marketing at China Cosco Shipping Corporation.  “The short answer is nothing,” replied Mr Webber.

Would there be any replenishment of industry capital by such schemes as the once-mighty German KG investments? “Probably not.”

Should Global Ship Lease broaden its counter-party base in order to spread its risk? The company was very happy with both its charter partners CMA CGM and OOCL which had performed 100%, and “yes we are very happy to expand our portfolio as well” if new charters offered met the right criteria.

Another questioner championed the advantages of container bulker tonnage which could “smash the market” with cheaper freight rates. Mr Webber referred in answer to the speed flexibility of 20,000teu ships which had the ability to save money through slow steaming, although when oil prices fell they had not speeded up.

Mr Webber was from 1996 to 2006chief financial officer of CP Ships until that company’s acquisition by Hapag-Lloyd. Earlier, Mr Webber, a chartered accountant, was at PriceWaterhouse, from 1979 to 1996, the last five years as a partner.

At the IMIF event, members and guests were welcomed by Peter Glover, a shipping, marine insurance and trade lawyer with Norton Rose Fulbright, and Michael Parker of Citigroup. Alan McCarthy, who chaired the meeting, expressed thanks to the speaker and to members of the law firm for their hospitality.