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“Tough” 2017 for charter market due to new alliances

Mon 27 Mar 2017 by Rebecca Moore

“Tough” 2017 for charter market due to new alliances
We believe firmly that there is a good future for owners of smaller and medium sized tonnage.” Ian Webber (Global Ship Lease)

Carrier consolidation will make the charter market more difficult initially, but there will be benefits in the long term and plenty of opportunities for smaller and mid-sized tonnage, says Global Ship Lease’s Ian Webber

Box ship company consolidation and the formation of the new alliances will be “tough” in the short term for the charter market, chief executive of container ship lessor Global Ship Lease Ian Webber said – but he emphasised that there was a good future for medium and smaller-sized chartered tonnage.

Global Ship Lease is a New York listed container ship lessor, formed in 2007 as a spin-off from CMA CGM. It owns 18 vessels with a total capacity of 82,312 teu. All 18 are fixed on time charters, 15 of which are with CMA CGM and three with Orient Overseas Container Line (OOCL).

With a fully contracted fleet, it has long-term predictable cash flow. Contracted revenues are worth US$680 million, with 4.2 years weighted average remaining on contract coverage. It has no exposure to the spot market until September 2017. Its average teu weighted vessel age is 11.9 years.

Mr Webber told delegates in a talk at the International Maritime Industries Forum (IMIF) that while corporate consolidation will lead to improved business efficiency to the benefit of the financial results of operators, in the near term it will be to the detriment of the charter market and will add to the downwards pressure on the market.

He added: “It is going to be a tough year for the industry overall but we believe that the benefits of consolidation, both corporate and the new alliances, should lead to improved conditions for operators, as they can save costs within their networks. The down-side of that is that tonnage will be redelivered to the charter market which already has an excess, so it will be tough in the short term for the charter market in 2017 and maybe a bit beyond. It all depends on global economic growth.”

Indeed, his presentation looked at the negatives and advantages for container ship lessors, and highlighted the fact that the commercial impact of liner consolidation and mega alliances was expected to be negative overall for container ship lessors exposed to the spot charter market in the near term, but more positive over time:

 

  • more efficient capacity utilisation by liner operators would have a negative impact on the balance of supply and demand for lessors
  • a less fragmented lessee market was likely to have a negative impact on the bargaining position of lessors
  • a more disciplined approach to vessel ordering would have a positive impact upon the balance of supply and demand over the long term
  • stronger liner company credit profiles would have a positive impact on lessee and counterparty risk over the long term.

     

    He pointed out that spot market charter rates remained close to an all-time low, fluctuating around the level of operating expenses for most vessel size segments. “Spot rates for some segments, such as Panamax, are now materially below operating expenses,” he noted.

     

    He added that second-hand prices are expected to come under increasing pressure, with charter-free values for ever-younger tonnage likely to converge upon scrap values over the coming months. The relative value of charter coverage – as long as it is on a cash-accretive basis and to quality counterparties – should continue to rise, while distress in the sector is expected to catalyse additional scrapping and generate attractive counter-cyclical purchase opportunities.

     

While the liner market is in a state of flux, with consolidation a prominent theme, Mr Webber did not think that this trend would be mirrored in the non-operating charter owner sector.

 

He explained: “When liner operators consolidate they can save money through rationalising their networks, removing sales and administrative roles, and reducing general overheads.” He added that it was not as clear where owners could make those savings. The only advantage of being bigger is that it gives access to capital through public and private equity markets.

 

Backing up his point, he said that Seaspan Corp, despite being the world’s largest non-operating owner, owns only 100 of the 5,000 ships in the total global fleet.

 

“In my perspective the glass is half full and there are reasons to be cheerful.”

Ian Webber (Global Ship Lease)

 

In terms of investment, he said that Global Ship Lease would consider other customers, but would only look at charter-attached acquisitions. “These are few and far between, but there are some out there.”

 

He said: “We are happy with both of our customers. We are well aware of the benefits of customer diversification so we would be very happy to expand our portfolio as well. But we remain disciplined and never rely on speculative deals.”

 

The company’s vessels are of medium and smaller size, between 2,027 and 11,040 teu, and Mr Webber believes that the outlook is positive for chartered vessels of this size. “We believe firmly that there is a good future for owners of smaller and medium sized tonnage.”

 

He pointed out that the biggest grouping of trade lanes is intra-regional. Intra-Asia is the biggest, with a third of world trade, and uses small and medium sized ships – the biggest box ship in the intra-Asia trade is just under 6,000 teu, and the average is 1,500 teu.

 

Indeed, he highlighted the fact that most trades are served by ships smaller than 10,000 teu, with almost 30 per cent of the global fleet deployed on intra-Asia trade alone. Approximately 80 per cent of intra-Asia vessels are of less than 2,000 teu.

 

“Smaller trades have grown most robustly and most reliably in last few years and look set to do the same again. For owners of smaller and medium sized ships this is good news,” said Mr Webber. “Medium-sized and smaller ships are here to stay.”

 

He pointed out that they were protected against being replaced by larger vessels as the port infrastructure in those areas would not be able to handle bigger ships. Furthermore, the volumes are not great enough to warrant the arrival of larger vessels on these trades.

 

Indeed, the supply-side dynamics were improving for the small and mid-sized vessel segments:

 

  • ratios for mid-sized and smaller segments range from 1.3 per cent to 7.1 per cent, as opposed to 49.6 per cent for vessels of 10,000 teu or larger
  • around 2.8 million teu of new capacity is scheduled for delivery in 2017 and 2018, adding to the existing oversupply of approximately 1 million teu
  • newbuilding deliveries are concentrated in the larger segments, but will place continued pressure on the cascading of tonnage
  • All fleet segments below 8,000 teu – that is to say, mid-sized and smaller tonnage – have shown either contraction or neutral growth during 2016 (based on data through September 2016).

 

Summing up his thoughts on the outlook for the container shipping and charter sector, Mr Webber said: “In my perspective the glass is half full and there are reasons to be cheerful.”