The shipping industry grabbed a lot of headlines last year. Indeed, after a decade in which freight rates had plunged, the owners of container ships saw record returns in 2021, driven by congestion at the world’s major ports and disruption to world trade caused by Covid-19.
But was it as good a year for shipping bosses as the news coverage suggested? And are more conventionally tougher times ahead for the major shipping lines? To answer these questions we spoke to one of our go-to experts in the maritime sector: Basil Karatzas, a longtime reader of WiC. Here the founder of New York-based Karatzas Marine Advisors & Co, a specialist shipbroker, advisory and services firm, offers a more nuanced view of the players that have (and have not) benefited from the unusual circumstances of the pandemic.
Was 2021 the best year for shipping that you can recall?
For the container ship market yes, but not throughout the rest of the industry. Tankers were relatively bad and the cruise ship market was bad. It was the container ship market that made all the news, although the dry bulk market was fairly decent for six or so months of the year. That was a good break for many of the dry bulk shipowners around the world.
But overall it was not such a great year for the industry, except for the container ship market. It probably had its best year ever – and definitely made a lot of money. And that wasn’t just for the big lines like Maersk and MSC but also for individual investors, including US private equity funds, that bought distressed container vessels and loans from the German banks. Many of those transactions made their money five or 10 times over. These were fantastic investments.
It was reported that the leading container lines have been locking in higher contract rates from clients. They made something like $115 billion of collective profit in 2021. So is 2022 going to be another record year for them?
Correct. But I am not sure how it will all play out. For example, if you have a container ship it is very hard to charter it out for more than a year or so. All these companies like Maersk, MSC and CMA CGM will not charter a vessel [for their own use] for more than 12 months. If they are confident about the future of the market, why don’t they book the vessels for longer periods? Why just for one year?
Right now there are a lot of risks in the shipping industry, including in the container ship market. The current high rates have really been about supply chain disruption, but the bigger question is about structural demand. That is the reason I don’t think they are there committing to chartering vessels for longer terms than a year. It makes you sceptical about whether they think the market is quite so great.
Shorter term, are spot rates for containers still trending higher ahead of the Chinese New Year export rush?
Yes, and in the near term you have disruptions. In Long Beach [in Los Angeles] the number of vessels waiting to come to port this week reached an all-time high of 101 vessels at anchor. The Chinese New Year will see factories in China shut down for almost a month and so there is a big move to ship in advance. I was checking some other marine traffic and there are 12 vessels at anchor in New York, which is very, very unusual. Typically there are no container ships at anchor there.
Do you think rates are also being driven by a fear there will be more Covid outbreaks in China, further disrupting activity at ports and bringing more congestion?
Definitely that fear is one of the factors. But the other part of the problem is that companies which ordered merchandise for delivery in the US in June were getting delivery in September. A lot of merchandise on order has been delayed by several months. So, basically, they lost the summer season and received inventory after the season. That made companies order much further in advance for Christmas and their other needs. So you have a backlog of inventory that is still on the water and needs to get delivered. And you have shippers ordering goods proactively in expectation of long wait times. It is basically the perfect storm: delays themselves and people ordering in advance to beat the delays. The Chinese New Year is one more of the reasons for buying earlier.
So in your forecasts the container sector will still be the outperformer in 2022?
Most likely yes. But it’s not because demand is great, it’s because of the disruption in the supply chain. This is a global phenomenon and cannot be fixed in a matter of weeks.
It will take several months just to get the empty containers back to China and clean up the supply chain. A great deal of the containers going to Long Beach end up in New York via the US rail system. But at this stage the train network in America is so congested and out of sync that many of the containers on the West Coast cannot be moved eastwards without further delays. Likewise there’s a similar situation in China where you have a backlog and trains and trucking that are not as efficient as they should be. So it’s a problem that’s compounding itself.
For instance, there’s there is capacity in Miami’s port and they can take container ships, but there is no rail system linking Florida to the rest of the country. So what do you do next to move the containers inland once they have been unloaded?
Some companies have even tried using dry bulk vessels to move containers and Walmart and Costco have directly chartered their own container vessels or even dry bulk vessels to go to smaller secondary ports in the US such as Houston. These ports are not as congested but they lack the infrastructure to move the containers, like the right cranes. So it has basically been a dead end. There are not many alternatives on offer for solving the problem.
The dry bulk shipping market has been driven in recent years by Chinese demand for commodities. What are you seeing here? Is demand from China still strong?
In 2022 China will be the main driver for iron ore and coal. But it also looks like China has rebuilt its excess inventory for steel. Therefore demand for iron ore has been coming down. That’s why you saw the rates for capesize dry bulk vessels deflate in the last two months. In the middle of last year there were depleted inventories – due to Covid – and an attempt to catch up with increased local production. But that appears to have changed towards the latter part of the year.
In 2022 you have a lot of uncertainty in terms of demand. Omicron came out of nowhere and we are still trying to figure out the implications. Today something like 4,000 flights were cancelled worldwide. That’s 4,000 flights that are not burning fuel. It’s good for the environment but if you are a tanker owner it’s not helping you.
One example of a company that has been doing really well in the past year is a US-listed firm called Matson Navigation, based in San Francisco. It has Jones Act vessels and primarily supplies Hawaii [to carry cargo between US ports you need an American-flagged ship]. It has built four modern container ships in the US that provide expedited services between Shanghai, Honolulu and Los Angeles. The turnaround is approximately two weeks, meaning that Matson can deliver much faster than Maersk from Shanghai to Long Beach.
It charges a high premium for that and has positioned its service between air freight shipping and conventional container line shipping. It is faster to load 4,000 TEU container vessels than the 20,000 containers that the likes of Maersk carry. Matson also has its own container terminals to expedite the process. So for customers who cannot wait for Maersk or Cosco, they are moving some of their shipping business to Matson and paying a premium for it [the New York-listed stock is up 57% over the past year].
Are prices for ships still rising?
In general the asset value of ships improved in 2021. Prices for container vessels rose anything from 30% to 300% from 2020 and likewise dry bulk ships saw an improvement of 30% to 100%. Tankers also rose in price with the expectation that it will be the next market to improve.
Last year was also a good one in terms of volumes of sales. There were a lot of transactions going on. Banks slowly started to provide more financing and with more competition the cost of financing ship purchases came down too. Those in financial difficulties were able to sell vessels at rising values and pay off their loans. Ship brokerage activity was up around 40% in volume terms last year.
What was the impact on Chinese shipyards? Has there been a surge in orders and output?
Until April 2021 the climate for new builds felt weak. It was almost impossible to go to China to negotiate a contract and send engineers to supervise construction and so forth.
A weak freight market in 2020 also didn’t help the shipbuilding industry, especially in China where the travel restrictions were more severe. South Korea was a little more flexible, for instance.
There was another factor aside from Covid – the technological risks faced by shipowners. Right now there is no consensus on what the fuel of the future is going to be: it could be methanol, hydrogen, ammonia, natural gas or intermediate fuel. So a lot of shipowners have slowed down on new build orders to wait for more visibility in terms of regulations and fuel trends.
However, with the freight market proving so incredibly strong in 2021, especially for container ships, the industry started ordering massively both in China and Korea. Prices went up, primarily for new container ships and LNG tanker vessels. Many shipowners who had been on the sidelines started to place orders in the second half, when yards still had some availability left.
After May we saw a ‘healthy’ new build market versus the softness before April. The big difference was that a lot of shipowners were so keen to buy that they were prepared to negotiate contracts over Zoom, and without so much engineering supervision from their side as the ship was under construction – given all China’s travel restrictions.
Negotiating via internet video links and accepting delivery remotely – without visiting the shipyard – would have been unacceptable for owners a couple of years ago but it is becoming a more accepted practice.
Will the industry be impacted by increased tensions between China and the US?
If you believe there is decoupling and that just-in-time is no longer an applicable supply chain concept then this becomes a big risk over the long term, especially for the container ship market. Joe Biden doesn’t seem to have changed American policy from Trump in a drastic way. He perceives China just as much as a strategic threat. He’s not lifted many tariffs on Chinese goods and there seems to be a more confrontational approach. It creates more risks for every shipping sector if companies cannot outsource production to China. After all [in those circumstances] China won’t then buy as much iron ore, for instance, and that will impact the dry bulk market.
The Wall Street Journal has reported concerns in the US about how China could use its Logink system and global port investments to gain a data advantage on shipping flows. Is that a valid concern?
Definitely it’s a concern when you take into account the Belt and Road Initiative and China’s control over ports. Cosco is a big player in ports and moving cargos. And you have many Chinese entities that control vessels directly or indirectly. That gives them access to information about cargoes and shipping, which could be exploited at a commercial level. If you want to put a more sinister spin on it, it might affect how the world is supplied when so much cargo is transported on Chinese vessels and moves through Chinese-controlled ports and infrastructure.
Finally, are you worried that the usual shipping cycle of boom and bust is coming in 2023-24, driven by a glut of supply?
Comparatively speaking not that many ships have been built during this cycle, because finance has been more difficult to come by and because of hesitation around the technical risks surrounding fuels and energy efficiency. But we still have a risk of tonnage oversupply. Unless the world economy keeps growing and demand for cargo improves there is definitely an oversupply problem looming in 2023 and 2024.
The prices being asked for some of the container ships now are not remotely sustainable by historical standards either. You have 15 year-old container ships with 6,000 TEU selling for $40 million. Those vessels need be earning $50,000 a day for the next five years to be breaking even. Those are situations that are accidents waiting to happen.
In fact, there is a good chance that the container ship market could be upside down for some owners by 2023 or 2024, given some of the valuations we’ve seen on ships in the past year, which have been unbelievable. Once again, if Maersk and MSC won’t give you a five-year charter, what does that tell you?
This q&a session has originally been published by Week in China website and weekly magazine, a well respected and insightful periodical with developments in the People's Republic of China. A link to the online version is available by clicking here, while the pdf version of the article can be seen here.