Date: Wednesday, March 30, 2022
Do container line bosses believe the historic freight boom will end anytime soon? If the ship charter market is any indication, it sure doesn’t look like it.
Liner companies continue to pay record-high sums to rent container ships for up to five years, even as the Russia-Ukraine war caps rate gains.
The Harpex index, which measures container-ship charter rates, has held steady at its highest level ever for the past three weeks. Alphaliner recently said that charter rates are at “historic highs” and have plateaued “after weeks of continued rises.”
The conflict hasn’t pulled rates down yet. But it has paused new charter deals and temporarily kept rates from going even higher, according to container-ship owners speaking at the Capital Link International Shipping Forum on Tuesday.
‘Wait and see’ before ‘pressing on the gas pedal again’
George Youroukos, chairman of Global Ship Lease (NYSE: GSL), said during the Capital Link forum: “The Ukraine war has added to the already expected inflation and with that in mind, we see some liner companies taking a wait-and-see stance [on ship charters].
“Nothing has changed with the fundamentals. But psychologically, people want to see how this is going to be resolved before pressing on the gas pedal again.”
According to Aristides Pittas, chairman of Euroseas (NASDAQ: ESEA), “If you had asked me [about the market] before the war, I would have been extremely bullish. Now, I hear these discussions about a possible recession.
“I think we will have a much clearer picture in a month or two. So, we expect the market to be quieter until then. There is a slight pause right now.”
Youroukos added, “Consumer demand has a lot to do with psychology. Right now, people are worried. If this conflict is resolved and there is no longer a question mark in people’s minds, we might see the effects of a bottleneck. If people stop ordering, and then they feel this [risk] has passed, we might see a surge in demand again, especially if this pause is for a couple of months.”
Long-term charter market
Ship lessors didn’t sound perturbed by a hiatus in chartering activity. After all, they’re in the middle of the biggest boom in their history. Since Jan. 1, 2020, pre-COVID, shares of Danaos (NYSE: DAC) are up 1,017%, Euroseas 616% and GSL 235%. Danaos hit a new all-time high earlier this month.
“This is a windfall we’re seeing today. The question is how do we deal with all this cash that’s accumulating,” said Pittas.
“These are super-healthy rates,” said Evangelos Chatzis, CFO of Danaos. “We are fixing 25-year-old [smaller] feeder ships at $30,000 per day, which is a spectacular number that we have never seen before.” Chatzis said that midsized ships in the Panamax class are renting for $50,000-$60,000 per day for up to five years.
Alphaliner reported that ocean carrier ONE recently chartered two 8,000 twenty-foot equivalent unit ships, the Conti Annapurna and Conti Conquest, at $65,000 per day each for three years.
Ship sales are creating disruptions that are leading to more chartering in the long-term market, added Youroukos.
“There are charterers there to take the ships for three to five years. Lately we have seen a lot of liner companies buying ships, and this has created issues between the liner companies. Normally, a liner would have extended [an existing charter that’s expiring] but the ship has been purchased by a competitor. So, [the original charterer] will lose a ship and will need a replacement.”
Short-term charter market
According to Pittas, the main effect of the war-induced pause is being felt in the short-term market, where liners have been paying extremely high day rates for periods of a few months.
“I think everybody agrees that the long-term prospects continue to be good … but what has disappeared recently because of these uncertainties is the short-term charters,” said Pittas.
If so, it’s a very recent development, because Alphaliner reported extraordinarily high rates in the short-term market just a week before the Capital Link event.
Alphaliner said that BAL Container Line agreed to a “staggering” rate of $235,000 per day for three to four months for the 4,892-TEU Zhong Gu Jiang Su.
It further reported that BAL chartered the smaller 3,834-TEU, 25-year-old Zhong Gu Liao Ning for a “mind-blowing” $200,000 per day, which it called “the highest rate ever paid for a ship of this size and age.”
Congestion supports charter rates
Port congestion is a key driver of shipping rates and prices. The more congestion, the lower the effective ship supply and the higher the value of vessels in the freight, charter and secondhand sales markets. “The supply side is very positive [in favor of rates],” affirmed Pittas. “It’s the demand side that’s the unknown.”
According to Constantin Baack, CEO of MPC Container Ships (Oslo: MPCC), around 25-30% of container shipping supply is now tied up in congestion.
Baack believes the most closely watched congestion site — the queue for Los Angeles/Long Beach — has been only temporarily reduced. “My expectation is we will see increased congestion over the next few months in LA/LB.
“We’re now seeing quite some delays and congestion on the East Coast as well,” said Baack, who also pointed to growing congestion at Chinese ports due to COVID lockdowns and European ports due to the war.
“The Clarksons global port congestion index is very close to an all-time high and the Kuehne + Nagel index is suggesting the same,” he said.
According to Chatzis of Danaos, “It’s not just the ships and the ports, it’s the whole supply chain. These things are going to take time to correct themselves. I don’t see it all of a sudden normalizing. I don’t see this being fixed anytime soon.”