It’s getting more expensive for liner companies to move containers from Point A to B, not just because of fuel cost, but also because of rent.
Container lines own a portion of their fleets and rent or ‘charter in’ the rest. In some cases, they may charter in half of their capacity. Charter rates have risen 20 percent year to date, benefiting companies like Costamare (NYSE: CMRE) that own and lease out container ships.
Costamare reported adjusted net income of $26.2 million for the second quarter of 2019, more than double the $10.5 million earned in the same period last year. Adjusted earnings per share of $0.23 came in much higher than the $0.14 per share expected by analysts. Stifel analyst Ben Nolen highlighted Costamare’s “sizeable beat” and “better than expected charters.”
The company re-chartered 18 of its 70 vessels during the second quarter, largely at higher rates. Costamare-owned ships with a capacity of over 5,500 twenty-foot equivalent units (TEUs) secured new charters in the second quarter at rates averaging 55 percent above those on expiring contracts.
The best indicator of how much more Costamare is earning from higher charter rates is its adjusted voyage revenues, which rose 33 percent in the most recent quarter versus the same period of 2018.
During a conference call with analysts on July 25, Costamare chief financial officer Gregory Zikos said, “Charter rates for larger ships improved, boosted by a reduction in supply due to scrubber fittings. Charter rates for larger ships have continued their upward momentum.”
The IMO 2020 rule requires vessels to limit the sulfur in their fuel to 0.5 percent starting January 1, 2020 – unless exhaust gas scrubbers are installed.
When ships are taken out of service to install scrubbers, the available vessel capacity is reduced and charter rates increase.
Zikos noted that the idle fleet has fallen to just 1.6 percent; global capacity growth for 2019 is estimated at a relatively low 3 percent; and the size of the orderbook is down to 11 percent of the on-the-water fleet from a high of over 40 percent in 2009.
In general, it appears container lines’ exposure to charter rates is increasing, because they are leaving vessel ownership more to container-ship leasing companies and instead focusing on making their service networks more efficient.
“When it comes to the competition we face from liners for newbuilding projects or second-hand ships, I would say that the competition today is definitely much less than we faced years ago,” said Zikos.
What this means for lessors, liners and box shippers
Whether current charter rate strength is sustainable partly depends upon what’s causing it. While some believe it is IMO 2020-related, others feel it is a more general case of demand for ships exceeding supply.
Scrubbers are generally being installed on larger container ships, and vessels in these size categories are seeing the most pronounced charter rate increases in 2019. Nolan estimated that 14.4 percent of the world’s container fleet will have scrubbers installed, with 10.8 percent of box ships getting systems installed by the end of this year.
On one hand, the front-loaded timing of scrubber installations implies that the positive effect on charter rates could be muted next year.
On the other hand, most of the world’s container ships will not have scrubbers installed, and if fuel prices rise sharply, as is expected, the ships could slow down (reducing vessel speed has a non-linear positive effect on fuel efficiency). If ships slow to the extent that more vessels are required to keep the same weekly schedules, this could increase demand for leased ships in 2020, further benefiting charter rates.
In addition to Costamare, listed container-ship lessors that stand to benefit include Seaspan Corp. (NYSE: SSW), Danaos Corp. (NYSE: DAC), Global Ship Lease (NYSE: GSL), Capital Product Partners (NASDAQ: CPLP), Navios Containers (NASDAQ: NMCI), Navios Partners (NYSE: NMM), Performance Shipping (NASDAQ: DCIX) and Euroseas (NASDAQ: ESEA).
The liner companies themselves will attempt to pass along all of the added IMO 2020 fuel costs to cargo shippers via surcharges. However, higher ship charter costs are not passed along; to the extent they increase, they are a negative factor in each liner company’s bottom line.
There has been no positive correlation in 2019 between ship charter rates and container freight rates. Just the opposite. As charter rates have increased, freight rates – which are tracked by the Freigtos Baltic Daily Index (Global) – have fallen.
Mashal
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These are toothpastes and tooth brushes.
The stuff is packed , only to load from warehouse and that’s all.
The stuff will be ready on 17th September,2019.
Can you give me quote till warehouse in Hannover ,Germany along with custom clearance.
Regards
Mashal Khan
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TJ Roberts
Great article, Greg. Please drop me an email, as a CMRE investor, I believe that a company like CMRE is seriously undervalued. A lot of the drop in share price is attributable to the $30M in stock the company is using to finalize the York acquisition; that acquisition was done in perfect timing. Zikos has my utmost respect. At the earnings call during the Q&A, another major revelation was when Greg stated that competition seems to have been drying up when he said, “I have to say that compared to the competition that we faced years ago, either for new-building projects and also for secondhand ships in the water, other sale and leaseback structures….today the competition is definitely much less. There are surely less shipowners, providers like ourselves who do have access to debt or equity and can fund this type of CapEx [for these] types of assets.” To me, this was a telltale for consolidation, and CMRE is doing very well. Next quarter should be even better, and the next dividend could even double from ten- to 20-cents.