Mid-Sized And Small Vessels Steer Container Market Growth

On December 7, 2023, prominent figures in the container shipping industry delved into the intricacies of the market’s supply and demand fundamentals, their own company’s strategies, and their outlook on the segment’s outlook during Capital Link’s recent webinar focused on container shipping.

Highlights:

• Container shipping remains a critical element of global trade, facilitating the transportation of approximately 80% of the world's manufactured goods.
• Container market shifts after a two-year rate boom, yet rates remain above pre-pandemic levels.
• Despite economic challenges, signs indicate strength in the container segment, especially for mid-sized and small vessels, driven by factors like a smaller order book, increased scrapping, and environmental regulations.
• Large vs. mid-sized/small container vessels face different realities.
• Companies in the mid-sized and small segment invest in new buildings for fleet renewal, focusing on modern vessels with advanced technology to enhance efficiency and reduce environmental impact.
• The industry's commitment to sustainability is highlighted, with a shift towards investing in technology, innovation, and green fuels, aligning with regulatory changes and meeting evolving customer needs.
• Container shipping companies balance shareholder rewards and fleet investment

Webinar Participants:

Mr. Chris Robertson, Vice President of Deutsche Bank, served as the webinar’s moderator. He was joined by:

• Mr. Evangelos Chatzis, CFO of Danaos Corporation DAC
• Dr. Anastasios Aslidis, CFO of Euroseas Ltd. ESEA
• Mr. Thomas Lister, CCO & Head of ESG of Global Ship Lease GSL (The day after the webinar, it was announced that Mr. Lister will become CEO as of March 31, 2024)
• Mr. Constantin Baack, CEO of MPC Container Ships MPCC

The full webinar can be accessed here.

Sustained Strength In Global Container Trade

Coming down from the boom in rates in the last two years, the container market has experienced a softening, although current rates are still higher than pre-pandemic levels. Container shipping makes up a critical element of global trade. As Global Ship Lease’s GSL Chief Commercial Officer, Mr. Thomas Lister noted, around 80% of the world’s manufactured goods are transported by containers. These goods total about 200 million TEUs, which are carried by nearly 6,000 container ships each year. Despite the weakened economy and what seems to be a large orderbook, there are signs that the container segment will remain strong, particularly for mid-sized and small vessels, where a smaller orderbook, increased scrapping, and environmental regulations will make supply and demand fundamentals more dynamic.

This incredibly complex segment is made up of liners, who connect producers of goods with consumers by arranging the transportation of goods, as Mr. Evangelos Chatzis, CFO of Danaos Corporation DAC, noted, and owners, who provide the vessels for transportation.

Typically, liners own about 50% of the vessels they employ, and charter in the rest. Usually, they prefer to own the large vessels measuring over 15,000 TEU, while opting to charter the smaller tonnage. However, this varies from company to company, as some liners own all their tonnage, while others charter all of it from owners. Owners and liners tend to have a symbiotic relationship – as, although owners provide the vessels, liners cover fuel costs, Mr. Lister noted, and around half of the global fleet is owned by liner companies.

Liners tend to prefer owning larger vessels, which make up 45% of the global fleet, as these strategic assets operate on the major global East-West trade routes like Asia to Europe, trans-Pacific, and transatlantic trips, Mr. Lister stressed.

Midsized And Smaller Container Vessels Subject To Different Market Dynamics Than Larger Ships

Mid-sized and smaller ships, which are up to 10,000 TEUs, service intermediary trade routes, such as North-South trips. Smaller ships such as those operated by MPC Container Ships MPCC, which range from 1,000 - 6,000 TEU, are used for intra-regional trade routes, including intra-Asian, intra-European, and intra-South American journeys, the company’s CEO, Mr. Constantin Baack, stated. Around 98% of the ships used in these smaller trade routes are below 5,000 TEU, he continued. These mid-sized and smaller vessels, all under 10,000 TEU, are a fundamental part of global trade, as they account for around 70% of global containerized trade volumes, GSL’s CCO Mr. Lister noted.

All of the companies participating in the webinar are focused on mainly smaller and midsized vessels. Euroseas ESEA is centered on vessels ranging from 1,500 to 6,500 TEU, GSL’s fleet ranges from 2,000 TEU to 11,000 TEU, DAC is focused on ships from 2,200 TEU up to 13,000 TEU, and MPC owns those measuring 1,000 to 6,000 TEU.

Although large, midsized, and small vessels are all operating in the container shipping industry, they experience significantly different market dynamics. While the orderbook for larger vessels is incredibly high due to the massive profits liner companies experienced during the pandemic, there are far fewer new builds on the order book in the mid-sized and smaller container shipping space.

Spurred on by significant cashflows during the pandemic, liner companies invested in new, larger vessels in order to maintain competitiveness on mainline trades, Mr. Baack stated. However, while many companies did opt to purchase new builds for the smaller ships, the orderbook is not nearly as high as it is for the larger vessels. Additionally, a number of factors such as global fleet age and environmental regulations will impact the smaller container vessels heavily. The global fleet on the water has an average of 15 to 16 years, compared to the average economic lifespan of a ship, which is around 25 years. These factors will likely prompt more recycling, taking a portion of the global fleet off the water, MPCC’s CEO stated. 

Mr. Lister from GSL delved into the specifics of the orderbook, noting that the order book to fleet ratio is 29%, and is weighed heavily toward very large ships. For sub-10,000 TEU ships, however, the ratio is 14%, and deliveries extend until 2027. GSL’s CCO emphasized that there has been chronic underinvestment in mid and smaller-sized container vessels, a major cause of the aging fleet. So, although there are a number of new builds on the books for smaller vessels, net growth is minimal compared to the aging fleet for this segment.

Demand And Charter Rates

In general, economic growth drives demand in the container shipping sector. Historically, GDP growth served as a metric for container demand. Currently, the ratio of demand growth per GDP growth measures at around 0.8 to 1.2, MPCC’s CEO stated. Currently, as the world economy stagnates, demand is low, yet rates remain higher than they were before the pandemic.

As container demand is propelled by economic growth, and the world economy is subject to volatility, the security and up-front cash flow that longer-term charters provide is quite attractive to container companies. This is compared to shorter-term spot rates, which offer the potential of incredibly high rates when the market is high but do not provide the security of long-term, predictable profit.

Although owners of smaller-sized ships usually opt for shorter-term charters, ESEA capitalized on a number of competitive opportunities during the pandemic and secured longer-term charters, Dr. Anastasios Aslidis, CFO of Euroseas Ltd. said. The company has secured significant charter coverage for 2024, with almost 70% of the new buildings covered at rates near $30,000 a day. Additionally, the company has a charter cover of 25% for 2025. For GSL, which prioritizes the forward cash flow visibility that longer-term charters provide, 80% of 2024 is covered. The company has contracted revenues of $1.8 billion with an average remaining charter term of 2.1 years. Mr. Chatzis of DAC noted that the company has a substantial contract backlog of $2.5 billion, translating to approximately $1.9 billion of EBITDA, with an average charter duration of three years. Currently, the company is 90% covered for 2024 and 60% covered for 2025, highlighting DAC’s commitment to securing charters for medium to long durations. Opting for shorter-term charters ranging from three to twelve months, MPCC aims for a staggered charter book, avoiding having all ships open simultaneously. MPCC has fixed 67% of its operating day for 2024.

As the market is currently soft, and many tonnage providers secured high rates from liner companies when the market was booming, there has been some concern that these contracts will be renegotiated. However, Mr. Chatzis of DAC dismissed the notion, stating that in his over two decades in the industry, there has never been a contract renegotiation without exception. He clarifies that liners, despite facing challenges, are companies with real assets and business infrastructure, servicing the global logistical chain. The contractual commitments are not easily altered simply due to market fluctuations.

Investing In Fleet Renewal And Newbuilds

While companies strive to maintain competitive supply and demand dynamics, they also aim to maintain a competitive and relatively young fleet. Therefore, a number of companies in the small and midsized segment have invested in new buildings. ESEA’s CFO noted that the company has ordered nine ships over the past few years, with two already delivered and seven more to come. The new additions to the fleet are modern vessels with advanced technology, burning 35% to 40% less fuel per day compared to similar-sized ships, Dr. Aslidis noted. 

DAC has also invested in new vessels. The company has 10 ships on order, all ranging from 6,000 to 8,000 TEU. These new vessels are designed to be methanol-ready, equipped with scrubbers, and incorporate the latest emission-reducing technologies.

Mr. Chatzis, DAC’s CFO, stressed the importance of fleet modernization and staying competitive through innovation and renewal. He said that, in order to meet the evolving needs of its customers, DAC believes in investing in the latest technology and aligning with developments and regulatory changes in the industry.

Although faced with an aging fleet, owners may be hesitant to invest in new buildings due to the lack of certainty surrounding green fuels and environmental technology, weighing out the benefits of these pricey investments with the risk that they may not prove advantageous. 

GSL’s CCO expressed caution and a preference for an "active wait-and-see approach." He pointed out the challenges of choosing the right fuel among the many options like methanol, ammonia, and nuclear. Rather than purchasing new ships, Global Ship Lease focuses on retrofitting existing ships to enhance efficiency, collaborating with charterers on operational improvements in order to optimize ship performance and reduce emissions.

Capital Allocation – Shareholder Rewards Or Fleet Renewal?

After container shipping companies welcomed increased profitability during the pandemic, they were faced with the option of offering larger rewards to shareholders or investing in renewing their fleets.

Dr. Aslidis of ESEA stressed the importance of returning value to shareholders and highlighted the company’s two-pronged approach to returning value to its shareholders. First, the company initiated a dividend payment of $0.50 per quarter, totaling $2 per year. This dividend distribution has been in place for nearly two years, and the company aims to sustain it for the foreseeable future. Secondly, ESEA has implemented a share repurchase program, aiming to maximize repurchases within the allowed liquidity constraints. This is all while ESEA seeks to balance its cost allocation, enabling it to fund its new building program, cultivate an environmentally friendly fleet, offer shareholder rewards, and maintain liquidity so that it may jump on any advantageous opportunities that may arise now that the market is weaker. 

Similarly, Mr. Baack of MPCC stated that the company places a strong emphasis on returning capital to investors through dividends and noted that MPCC has paid out over $730 million in dividends in less than 24 months. MPCC’s policy is to pay out 75% of its adjusted net profits as a quarterly dividend. The company is able to offer dividends while remaining well-positioned for investment opportunities due to its low leverage – it has a net debt of around $1 million per vessel. The company has also renewed its fleet, with a substantial portion of its fleet being either newly built or quite young. MPCC’s CEO expressed his belief that cautiously adopting new technology allows the company to remain a strong partner for charterers. Generally, MPCC has invested in new technology where the locked-in EBITDA is higher than the construction Capex, providing limited risk to the company.

For DAC, paying dividends has been a high priority, Mr. Chatzis stated. The company has increased its dividend steadily over the past few years, reaching $3.2 per share, offering a yield of approximately 4.5% to 5%. The company’s intention is to sustain a fixed dividend that is not tied to income or cash flow percentages, ensuring investors view it as a reliable component of their returns. Apart from the dividend, DAC’s CFO noted that, as he believes the company is undervalued, DAC has begun a share buyback program to reward shareholders. So far, the company has completed a $100 million buyback and has authorized an additional $100 million program. 

In terms of fleet renewal, DAC considers it a priority, not only for replacing aging vessels but also for enhancing the environmental performance of its fleet, which has an average age of 14 years. To this end, DAC has placed orders for methanol-ready ships, enabling the option of retrofitting for methanol use without committing the capital upfront.

Mr. Lister of Global Ship Lease highlighted the company's considered approach to capital allocation, taking risks, opportunities, and relative risk-adjusted returns into account. The company has designed its dividend of $1.50 per share, approximately 8% at the current stock price, to be sustainable throughout market cycles. GSL has also implemented a share buyback program, which started in the third quarter of 2021 and has continued quarterly. 

Despite its recent softening from the pandemic-induced boom, the container sector remains a vital component of global trade. The market dynamics vary significantly between larger and mid-sized to small vessels, with the latter showing potential for growth amid environmental regulations and a smaller order book.

This content is for informational purposes only and is not intended to be investing advice.

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.