Boxed-out

Boxed-out
Container shortages short-changes shippers, through carriers and lessors benefit.

By Chris Dupin

      The tail is wagging the dog this year in the container shipping business.
      A shortage of shipping containers is being attributed as a prime cause of rising freight rates and shippers' difficulties in moving their products to buyers.
      'I was with the president of a large Asian container liner shipping company last week, and we were talking about the massive rebound in rates over the last six months,' said Loli Wu, managing director and head of Americas transportation and infrastructure investment banking at Bank of America Merrill Lynch. 'I asked for his views on what was contributing to that. And he kind of surprised me, because he said one of the biggest contributors has been tight box supply.'
      Wu, speaking in June at a New York conference arranged by the magazine Marine Money, said it was 'almost unfathomable' that the effect of the container shortage was so great, given the smaller capital outlay for containers when compared to other parts of the supply chain.
      'We somewhat marvel at it ourselves,' Brian Sondey, president and chief executive officer of container-leasing company TAL International Corp., said at the same event. 'The lowly container is the bottleneck for global containerized trade. There just is no faster way to expand the container fleet quickly.'
      Some investment bankers at the New York meeting were focused on the beneficial effect the shortage was having on the container sector of the shipping industry. Stocks of publicly trade container-leasing companies like TAL, Textainer and CAI International rocketed to new 52-week highs this spring and summer. In July companies like Hapag-Lloyd and A.P. Moller – Maersk raised earnings projections for the year.

'Screaming For Containers.' But in early June at a meeting of agricultural exporters in San Francisco, shippers were expressing consternation over the fact that shortages were making it difficult or impossible to get their goods to market.

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   'I'm just one of many that are screaming for containers,' said Robert Sinner, president of SB&B Foods, a Casselton, N.D.-based shipper of identity-preserved soybeans.
   He told fellow members of the Agriculture Transportation Coalition that '2010 has been much worse' for his company, saying it had bookings cancelled even by a carrier with which his firm had a 15-year relationship.
      Other shippers, such as Debbie McMillan, director of operations at Derco Foods, an exporter of dried fruits and nuts, and Erika Tarr, program manager for the Specialty Crop Trade Council that negotiates rates for about 150 similar companies, complained about demands for rate increases, sometimes just weeks after signing new service contracts with container carriers, and being told that their boxes would be considered 'non-loadable' unless they agreed to the increases.
      Complaints about the unavailability of containers and space on containerships by both exporters and importers spurred the Federal Maritime Commission to launch a fact-finding investigation into 'Vessel Capacity and Equipment Availability in the United States Export and Import Liner Trades' in March.
      Commissioner Rebecca Dye, who is acting as fact-finding officer of that probe, told Congress on June 30 that 'a shortage of containers worldwide is exacerbated due to the virtual halt in container manufacturing from late 2008 though 2009.'
      She made her remarks in a hearing before the House Committee on Transportation and Infrastructure, subcommittee on Coast Guard and maritime transportation, summarizing information gleaned from dozens of interviews with shippers and carriers.
      In addition to a drop in new container construction, she noted that 'many containers carrying imports arrive at distribution centers far removed from many export locations,' and that 'imports are increasingly transloaded into larger domestic containers near ports of entry increasing the likelihood that empty ocean containers will be shipped back to Asia to be used for higher paying Asian exports.'
   The change in the supply/demand balance for shipping containers has been rapid.
      'Cargo volumes have gone through the roof. I think it surprised everyone. At the end of the day, there is just a big shortage of containers,' said John Maccarone, chief executive officer of San Francisco-based Textainer, the world's largest container leasing company with a fleet of 1.4 million containers, representing 2.2 million TEU.
      There were about 26 million TEUs of containers at the end of 2009, with about 55 percent owned by shipping lines and other operators and 45 percent owned by container lessors. This statistic comes from a prospectus filed by SeaCube, a Park Ridge, N.J.-based container-leasing company that announced plans for a public share offering in March. SeaCube estimates the size of the world container fleet decreased for the first time in history in 2009, dropping 4 percent from 27 million TEUs at the end of 2008.

Production Lags. Maccarone estimates that production of new shipping containers averaged about 3 million TEUs per year from 2004 to 2008 and about 1 million TEU per year were retired because of poor condition or age ' a typical box has a lifespan of about 12 years. As a result, he said supply grew in those years at about 8 percent a year.
      In late 2008, those trends reversed. As the world recession bit and trade plummeted, containership companies abruptly reduced their orders of new containers and accelerated scrapping of boxes, Maccarone said.   
      From the fourth quarter of 2008 through 2009, he said virtually no new dry cargo containers were built. Many of the factories in China where they were built were closed.
      SeaCube estimates about 89 percent of all containers are standard dry freight boxes; 4 percent are specialized boxes for carrying commodities such as large machinery, sheet glass, vehicles and grain; about 6 percent are refrigerated boxes for frozen and chilled products; and the rest are tank containers for carrying chemicals, oils, juices, and other liquid products.
      One reason the market could turn on a dime is 'the delivery lead time for new containers is 30 to 90 days, and is significantly shorter than the two- to four-year delivery lead time for containerships,' observed SeaCube in its prospectus. 'As a result, changing market conditions result in changes in the container fleet far more quickly than changes in the containership fleet.
      'When trade demand slowed in the second half of 2008, container lessors and operators ceased ordering new containers, causing a 95 percent reduction in production of new containers, and essentially no new units were added to the fleet in 2009,' it added.
      Geoff Giovanetti, managing director of the Wine and Spirits Shippers Association, said figures from Containerization International estimated container production at just 350,000 TEUs in 2009, compared to 3.25 million in 2008, 4.25 million in 2007, and 3.1 million in 2006.
      Steven Blust, president of the Institute of International Container Lessors, said more than 90 percent of all container production is located in China. There are small amounts of production in Vietnam, Malaysia and Taiwan.
      Information service Alphaliner estimated in June that Chinese manufacturers had the capacity to build 5 million TEUs of containers, with 71 percent of capacity in the hands of two companies, CIMC Group and Singamas, both of which have multiple factories in China. Other smaller box manufacturers include CXIC, Dong Fang, Hyundai, Maersk and Jindo, all of which have capacity in China.
      But production is ramping up only gradually this year. For example, Alphaliner believes CIMC and Singamas have the ability to build 3.5 million TEUs, but will only produce 1.35 million TEUs in 2010. Total production by all manufacturers will be 1.5 million to 2 million TEUs this year, it forecast.

Cummings

      The FMC's Dye was asked by Rep. Elijah Cummings, D-Md., chairman of the House on Coast Guard and Maritime Transportation Subcommittee, if she thought Chinese manufacturers were intentionally holding back on container production to drive rates higher. Dye said she didn't know what their intention was.
      'What we have discovered is that the plants shut down at one point completely. Whether or not they are moving fast enough to retool we don't know why or what is happening. But we do not believe it is fast enough for our American businesses that need the equipment,' Dye said.
      Blust, however, said production had resumed to the point companies are able to make 250,000 containers per month. He estimated production will be more than 3 million in 2011 and could reach 4 million in 2012.
      Supply of containers 'will probably be tight in the peak season,' he said. 'But after the peak season, will demand for containers taper off again? Will there be a chance for production to catch up again? I think people are optimistic that 2011 will continue to grow, that production will match the demand out there, but we have had a six-month ramping up and it takes some time to get people in place and trained.' He noted that trained welders and other workers at container manufacturing plants may have moved to other industries when container orders dried up in 2008-2009. Many factories have not yet added second shifts as they did in the peak production years.
      This slowdown in container manufacturing has come at a time when the delivery of new containerships has continued at high levels. And of course, a containership is virtually useless without containers to put into its slots.
      SeaCube estimates 750,000 TEUs of slots were added to the world containership fleet in 2009, a 6 percent increase, in a year when the world's container population fell 4 percent to 26 million TEUs.
      This year, Alphaliner expects another 1.25 million TEUs of containership capacity will be added, but only 1.5 million to 2 million TEUs of boxes. And in 2011, Alphaliner expects another 1.38 million TEUs of container slots to be added.

Efficiency. Over the years, shipping companies have gotten more efficient in their use of containers, but its not clear if they can squeeze additional use from the existing world container fleet.
      Lee Michael Sissons, director of Asia/Europe service for Maersk Line, said his company has been able to improve container usage, that is the number of voyages a container makes, by 4 percent since 2009, despite the effect of slow steaming.
      There used to be a rule of thumb in the industry that there needed to be three TEUs of containers for every TEU slot on a ship. But there is less slack in the system than ever before. Alphaliner said over the past decade the box-to-slot ratio has fallen two-to-one.
      It's even lower on some trades, said Maccarone, especially on major routes such as the transpacific, Asia to Europe, or the intra-Asia trades.
      In some congested ports in Africa, South America, and the Middle East, turnaround times for containers are longer and more containers are needed for each slot.
      'Another thing that has added significantly to the big shortage that we have now is super-slow steaming,' Maccarone said. Because it takes longer for a container to make a round trip from Asia and back, 'shipping lines have told us it takes 5 to 7 percent more containers to carry the same amount of cargo.'

Better For Lessors. Historically, liner carriers and leasing companies have split the ownership of the world container fleet about equally ' SeaCube estimates the leasing industry owns about 45 percent of the global container fleet.
      With the sharp downturn in liner shipping volumes, and their need to conserve cash ' in part because they are continuing to take delivery of expensive new containerships ' liner companies cut back on container orders.
      'They do not have the capital expenditure budget for this year or next year either,' said Maccarone, who estimates leasing companies are now buying 65 percent to 70 percent of the new containers.
      Sissons said Maersk, which has its own container manufacturing plant is making and leasing as many boxes as possible. It is also encouraging shippers to use reefers for dry cargo. Maersk is one of a handful of carriers ' COSCO, China Shipping, Evergreen and Hanjin are others ' that own or have ties to container manufacturers.
      The shortage has been good news for the container-leasing companies.
      'We are having a wonderful year. Our utilization reached 98.4 percent, which is the highest I've seen and I've been in the industry 34 years,' Maccarone said in June.
      He thinks other leasing companies are posing similar numbers, up from the second quarter of 2009 when Seacube said utilization was 85 percent at three public container-leasing companies ' Textainer, TAL and CAI International.
      Companies, he said, are happy to pick up containers from cities such as New York, Baltimore, and London ' 'places where you couldn't give them away before, and they are bringing them back to Asia,' Maccarone said.
      The container shortage has also resulted in higher prices, from less than $2,000 last year to about $2,700 this summer for a standard 20-foot box. Maccarone said that a rule of thumb, a 40-foot dry container costs about 1.6 times what a 20-foot box costs and a high-cube container about 1.7 times what a 20-foot box costs.
      While shippers are upset about the box shortage, Maccarone said conditions in the industry came together to create 'almost a perfect storm.' As container shipping companies earned big profits in 2004-2008, they ordered large number of ships, only to see cargo volumes, then freight rates collapse just as those ships were being delivered.
      Liner companies, stopped ordering boxes to conserve cash, returned them to leasing companies, or engaged in sale-leaseback deals. For example, Maccarone said his company purchased about 50,000 containers from carriers trying to raise cash, which then leased them back.
      Other carriers, sold or scrapped containers, not only to raise money, but to eliminate the coast of storage, which Maccarone said averages 40 cents per day globally for his company, but can reach as high as $1 a day in more expensive locations such as Japan.

'Sweeping' Up. A number of carriers, including APL and Maersk, are using 'extra loaders' or 'sweeper ships' to clean out pockets of empty containers.
      'We have reactivated laid-up vessels to move empty containers from the East Coast of North America and Latin America to Asia, where the shortage is most significant,' said Maersk's Sissons.
      On July 12, Maersk was planning to sail the last of five 'B' class ships that had been laid up in Scotland's Loch Striven for a year.
      'Maersk Brooklyn had 1,000 40-foot containers on board and it's vital that we get this equipment back into service to ensure we're able to keep our promises to our customers,' said Annemette Jepsen, managing director for Maersk Line U.K. and Ireland.
         Another of the 'B-class' ships was scheduled to call ports in North America to pick up empty boxes on its way to Asia where they are needed so that they can be reloaded to carry exports.    That ship was the Maersk Bentonville, named after the hometown of one of the biggest shippers in the world, Walmart.