Gremlins returning to haunt container market

This year market a remarkable turnaround in container shipping. In 2009, major container operators took massive losses, 10% of the global tanker fleet was laid up. Projections were for two more years of losses before recovery. Ultra slow steaming soaked up surplus tonnage capacity together with robust economic recovery in Asia. Resumption of exports to EU and US head haul trades have led to a resurgence of profits. Basic over supply of tonnage remains. Head haul routes are weakening again.

Maersk is cutting its Asia-Europe capacity by 10% for the winter period in line with changing market demand. Volumes are expected to remain weak throughout the coming four months, as the seasonally weak winter period approaches.

Conversely, Singapore's NOL Group has posted net profit of US$ 282 mio for the third quarter, turning around a US $138 mio loss last year. Revenue to 30 September grew 55% to US$ 2.4 bn. Its cumulative nine-month profit is now US$ 283 mio. It lost US$ 530 mio during the same period last year. Revenue for liner shipping improved 60% to $2.2 bn in the third quarter. Containership unit APL’s core pre-tax and interest earnings were $301 mio, compared to a loss of $130 mio in 2009. Average revenue per feu was $2,799, up 21%, while volumes grew 29% to 2 mio feu.

Container port operators in mature economies face strong cost competition from emerging markets due to excess capacity and slowing growth rates as this year's sharp rebound in container shipping cools off. Port congestion was returning in the fast growing emerging markets, but sluggish growth in the mature markets meant continued excess capacity in many ports, including New York/New Jersey and Antwerp. Customers seeking the over-capacity are starting again to squeeze the liner operators and there is increasing cost competition.

This has not discouraged more asset-oriented shipping players to move into the containership sector. A number of Greek operators like Paragon and Diana have bought container vessels at current price levels and put them on charter, looking to build up a presence in the sector. More established operators like Seaspan have continued their aggressive CAPEX plans, absorbing all newbuildings due this year, putting them on charter with increasing reliance on major Chinese liner operators.

There remains a lot of optimism in financial circles that pre-2008 growth levels will return rather than a prolonged 'new normal' scenario or at least this appears to be their story to investors in these companies to back their large deals and aggressive asset expansion financied by bank debt and plans for follow-on share offerings. They argue continued robust Asian growth regardless of Western economies. Also, attractive is the long-term employment by liner companies with strong balance sheets or sovereign risk that are considered too big to fail and unlikely to renegotiate rates downwards in poor market conditions. Tanker and drybulk sectors charters are generally for shorter period of time and more prone to renegotiation.

Seaspan's share price has outperformed this year from US$ 8 levels to the present US$ 13.20 despite the weakening conditions in the underlying container freight markets. Seaspan remains highly leveraged but it has long-term employment not subject to these market fluctuations. Still its share price remains very far from the lofty US$ 30 pre-2008 levels, but this is the same pattern for nearly all shipping stocks since the meltdown.

The basic problem is that there is still a large order book overhang of tonnage and even some new ordering. The slow steaming has been masking the existing over capacity and some are even calling for these measures to become permanent. The sector would be exposed to the effects of trade rebalancing when and if this every takes place.