Too Many TEUs Too Soon?

Profitability is no secret, really; it’s all about balancing supply and demand - and this time the carriers have done it successfully. From those bleak days of March and April when losses exceeding US $22 billion and multiple bankruptcies were forecasted, the initial box carrier’s 2ndQ financial results have been most impressive. But can the carriers continue this disciplined approach, or are they reverting to prior bad habits and flooding the markets with unneeded TEU’s?

Currently, the box carriers have clear sailing. The Japanese ONE Alliance (NYK, MOL, K Line) reported a US$ 167 million 2nd Q profit, despite lower liftings and revenue; freight rates were higher than forecast ONE’s announcement said, attributing its profitability was due to a “relatively stable short-term market,” cost reductions due to a reduction in its fleet, extra blanked sailings, a “sharp bunker price drop”, plus reduced capacity on the major east-west trade lanes.

OOCL also carried fewer boxes but improved its 2nd quarter revenue, as higher rates translated to US$ 1.58 billion, a 1.1% increase despite 4.6% decline in liftings, while in June Maersk announced they expected their 2nd quarter 2020 results to be better than both 1st quarter 2020 and 2nd quarter 2019.

Loops and Capacity Needs to Match Demand

Additionally, shipowner and charterer Global Ship Lease (GSL) reported strong 2nd quarter results; in fact they reported an increase in operating revenue from US$ 63,087 million (2nd Q 2019) to $ 71,376 million (2ndQ 2020), with similar increases in both operating and net income. They also reported multiple charter extensions and new charters to their box carrier clients, who include Maersk, MSC, Cosco, CMA CGM, OOCL, and Zim. Ian Webber, CEO said “…we have locked in 97% of our Adjusted EBITDA for 2020, and 75% of 2021.”

What’s noteworthy of GSL’s success is their fleet runs from 2,207-11,040 TEUs; providing hard evidence that the box carriers use of smaller vessels as ‘sweepers’ is successful in moving the boxes their now-reduced loops are unable to move while not flooding the market with unneeded TEU’s. From owners to operators, this is hard evidence that the box carriers finally realize that loops and capacity needs to match demand.

Too Much Too Soon?

But similar to football/soccer clubs buying one too-many superstars and destroying the harmony that made their club successful, one wonders if the box carriers are adding TEU’s too soon.

Our friends at The Loadstar reported recently how the box carriers, specifically THE Alliance, is re-instating several sailings that had been blanked, while the 2M Alliance has upgraded its fortnightly Asia-Europe sweeper service to weekly, as demand and freight rates continue to rise. Although both Maersk and MSC initially advised their customers that the service would only be maintained if there was sufficient support, each sailing has been 90%+ filled. THE Alliance ‘extra loader’ has been equally over-subscribed and just upgraded it from a 6,000TRU vessel to 10,000 TEU’s. While capacity and TEU details are unavailable for the Ocean Alliance, industry reports are their ships are sailing fully loaded.

The box carriers are managing capacity with a greater degree of finesse and discipline than the shippers could have ever imagined. Four-week delays are reported in moving boxes out of China, and the rates we see in Xeneta (May 1 – Aug 18; 22% and 25% increase on market average rate per FEU for Asia – to N.Europe and Asia – US West Coast respectively) are proof of their success in ensuring available TEU capacity trails TEU demand.

But as the American Covid-19 outbreak continues to hold and a 2nd wave of Corona positive cases threatens the UK and EU, will the 2M readjust? Will THE Alliance pull those newly-scheduled 10,000 TEU sweepers and return to the 6,000 if demand begins to collapse? A review of GSL’s 2ndQ 2020 results and their fleet shows only four of the 43 box ships in their fleet are 9,115 TEU’s or larger, as opposed to 25 ranging from 5,098-8,667 TEU.

One wonders if one of the many ‘new normals’ of the Covid-19 world may be the idea that the most valuable and versatile ships in a box carrier’s fleet are the Post-Panamax 5,500-9,700 and the Super-Post-Panamax 10,000-14,000TEU’s. The next year should be most interesting.

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