Container shipping equities: Industry braces for higher cost
Apart from their individual R&D and capex decisions, carriers are likely to face new expenses related to the wider shipping industry’s efforts to decarbonise operations.
The European Commission has chalked out a strategy for decarbonising shipping. In pursuant to this, the commission announced on 14 July 2021 its proposal to gradually introduce shipping into its Emissions Trading System (ETS), a carbon market that operates in all EU countries with the aim of achieving climate neutrality in the EU by 2050. The system operates under a ’cap and trade’ principle that currently applies to GHG and CO2 emissions. It works by capping overall GHG emissions of all participants in the system which is then reduced over time.
Carbon emitters are obligated to pay for each tonne of CO2 they generate using EU allowances (EUAs). Such allowances are described as rights to emit GHG emissions equivalent to the global warming potential of 1 tonne of CO2 equivalent. The level of the cap determines the total number of allowances available in the whole system which can be traded among ship owners.
To this respect, starting in 2023, 100% shipping emissions from intra-EU voyages and 50% of carbon emissions on a voyage to or from a port in the EU will be included in the ETS.
The first year in which shipping companies will be liable for their emissions will be 2023. Thereafter shipping companies will be liable for 45% emissions in 2024, 70% in 2025 and 100% in 2026, and every subsequent year.
Such a system will enable ship owners to take early steps to reduce their GHG emissions, meaning they will have allowances left to sell in the market. If their emissions exceed their allowances, they will face hefty fines, currently set at EUR 100 per kg of excess CO2 emitted, unless they purchase additional allowances from the market.
According to our calculations, companies such as Maersk, Hapag-Lloyd and CMA CGM could face an annual cost burden of at least 8-10% of their EBIT from 2023 assuming there are no carbon allowances. Note that the cost burden for carriers as percent of EBIT could rise even further when ship owners must surrender enough CO2 permits to cover 45% of their emissions in 2024, 70% in 2025 and 100% in 2026 and thereafter.
2. Fuel prices
Fuel prices in 2020 were quite volatile due to the pandemic. VLSFO prices started the year at USD 533 per tonne (Rotterdam), almost twice the HFO prices. However, the difference narrowed to less than USD 42 per tonne in April 2020 when the effects of the crisis kicked in and the price of VLSFO dropped to below USD 200 per tonne. However, with prices recovering and reaching USD 516 per tonne in June this year, the price gap increased with HFO reaching USD 112 per tonne. This is still lower than what carriers accounted for when they decided whether or not to install scrubbers. As oil prices move up again with recovery in the global economy, average bunker costs are set to rise by as much as 50% in 2021. However, due to the time lag in applying these changes to freight costs, Drewry expects the effects to be phased over 2021-22.
3. Container charter rates
Recently, Seaspan entered into a long-term charter agreement of 10 LNG dual-fuel container vessels (7,000 teu). ZIM will pay approximately USD 1.5bn in total with the delivery of the Post-Panamax vessels expected to start from 4Q23 through the full-year 2024. This charter agreement comes after another deal between ZIM and Seaspan in February when the two companies announced a long-term chartering agreement for ten 15,000 teu LNG-fuelled vessels. In addition, Seaspan has also forward extended the charters of 17 container vessels of unspecified sizes that it has currently chartered to Cosco.
Despite the long-term charter agreement between Seaspan and ZIM, shipowners are selective about fixing long period charters fearing future problems in a normalised market. However, the short-term charters at this point in time are hitting the roof. Charter rates for sought- after Panamax boxships (4,250 teu vessel) have risen by close to 60% in the space of just three months between March and June to USD 52,500pd.
Such is the current scenario that even a feeder vessel is being chartered in for astronomical rates. According to a recent report, Allseas Global Logistics is paying USD 95,000pd for the 2,000 teu “Aisopos II” (built 2016), for a period of 80-100 days. During its previous charter to China United Lines the ship fetched a much lower USD 30,000pd. It will be used for a direct sailing between Ningbo and Liverpool, for which, according to the company, it will earn around USD 7,500 per teu, which equates to USD 15mn for the full ship load. For the chartered period Allseas will spend between USD 7.6mn and USD 9.5mn on charter hire.
4. Ports / Terminal handling costs
One of the most common costs charged to shipping lines are the terminal handling charges (THC) that comprise fees charged by shipping lines to cover costs of moving containers from terminals to ships. These port charges are the biggest cost item for container lines and also affect a container lines’ choice on calling at a port as container lines prefer lower port charges.
In addition, storage costs for containers increased recently due to congestion of port and hinterland infrastructure related to the high volumes at ports in the US and Europe driven by Covid restrictions.
Maersk Ocean’s year-on-year container handling cost has been rising for the last two quarters. While container handling cost rose by 10% YoY to USD 2.39bn in 4Q20, it rose by another 15% in 1Q21 to USD 2.36bn compared to 1Q20.
Unusually high terminal charges also encourage container lines to consider other modes of transport such as road or rail that may work out cheaper without compromising on quality. Both Maersk and CMA CGM have a reasonably good presence in inland logistics. CMA CGM recently expanded its inland transport offering by acquiring container block train operator Continental Rail of Spain for USD 30mn.
5. Expect further upside for asset prices
The ongoing dynamics of high demand and low / tight supply has created a frenzy among shipping lines. Operators are not only trying to possess extra tonnage but are also trying to book vessels for future with forward contracts. Second-hand container ship prices are heavily correlated with charter rates so it is no surprise that asset prices are also rising. Drewry’s analysis suggests that out of 145 second-hand transactions in 2020, nearly 40% were recorded during 4Q20. The trend continued further in 1Q21 with some 94 sales (300,000 teu) recorded. Additionally, 48 ships changed hands during May and June with the recent sales and purchase activities concentrated in the more liquid sub-8,000 teu segment.
In the current market, more ships mean more money for carriers and MSC has been at the forefront in buying second-hand vessels, enabling it to close the gap on Maersk as the world’s largest operator. Prices of second-hand container vessels continue to increase as sellers’ prices rise with growing earning ability of vessels. Valuations for a five-year-old container ship (of 4,000 teu) doubled from USD 17mn in January to USD 34mn in June 2021. Meanwhile, newbuilding vessel orders have surged and yard space is becoming tight; interestingly, newbuild vessel prices have not grown as much as second-hand values. Between January and June, the value of a new build 5,500 teu vessel gained USD 15mn or 31% to reach USD 63mn.
In coming months, we expect the second-hand values of container ships to continue their upward trajectory due to the scarcity of tonnage relative to the colossal demand. However, not all shippers are in a rush to acquire vessels in the current market. For example, Danaos appears to be taking a more cautious approach by creating a cash reserve that could be used to purchase ships once ship values reduce and environmental rules become clearer.
6. Box equipment prices
Severe imbalances — such as exports from Asia, congestion in ports and delays in hinterland transports — are causing container boxes to be stuck in transit for considerably longer periods of time leading to their shortage. New and used container box prices have shot up to record highs as the very strong demand for vessel space and containers has created a shortage of ship capacity, pushing rates and prices to unprecedented levels. And despite the factories producing containers in greater quantities, inventories of new containers remain very low. The onset of peak season in the US and ensuing demand could make matters worse in coming days.
Container carriers who also lease container boxes from lessors have ended up placing orders to the magnitude rarely seen before. Our analysis suggests orders worth at least USD 1.5bn have already been placed since the beginning of this year.