Container Leasing Surge Shows Global Economy Accelerating: Freight Markets
The global trade rebound is pushing shipping lines to rely more on leasing companies such as CAI International Inc. and TAL International Group Inc. for the containers used to transport everything from bananas to blouses.
“We’re seeing perfect conditions,” Brian Sondey, president and chief executive officer of Purchase, New York- based TAL, said in an interview. “Relatively strong growth in trade creates a good level of need for containers, supply is very tight and shipping lines aren’t purchasing as many containers as in the past.”
Shipping lines that competed for containers in 2010 may face an even bigger shortage this year. Demand for steel cargo boxes may increase as much as 11 percent and manufacturers are limiting production. Sea carriers, including A.P. Moeller-Maersk A/S, operator of the world’s largest container line, are also sailing at slower speeds to save on fuel costs and are directing more capital to new vessels.
Even with enough containers currently in use to circle the earth 4.3 times, the shortfall has pushed new container prices to a record, allowing lessors to raise rates.
The Bloomberg U.S. Container Leasing Index, which includes Textainer Group Holdings Ltd., TAL, CAI and SeaCube Container Leasing Ltd., has surged about 121 percent since the end of 2009, four times the gain of the Russell 2000 Index.
Beginning last year, “there was a rebound in demand, a shortage of containers, people scrambling everywhere to get the containers, and it was a Shangri-La type of environment for the leasing companies,” said Jefferies & Co. Inc. equity analyst Daniel Furtado in San Francisco. He has a “buy” rating on CAI, based in the same city, forecasting that shares will rise to $30 in the next 12 months, a gain of 38 percent after rising 117 percent in 2010.
Shipping lines will purchase about 35 percent of new containers this year, according to TAL’s Sondey. They have historically purchased about 60 percent of the new supply.
“This is turning out to be a longer-play opportunity because the shipping companies really haven’t gotten back into any sizeable buying of containers, and so they’re relying on the leasing companies to provide the containers necessary,” said George Henning, president and chairman of Pacific Global Investment Management Co. in Glendale, California.
Henning manages the $160 million Pacific Advisors Small Cap Value Fund, which held about 170,000 shares of TAL at the end of 2010. Parent-company Pacific Global owns more than 350,000 of TAL shares, which Henning said was about 5 percent of its portfolio.
Relative to Growth
Demand for containers, as measured in 20-foot equivalent units, or TEUs, typically increases at two to three times the growth rate of global gross domestic product, according to Helane Becker, an analyst at Dahlman Rose & Co. LLC in New York. Becker has a “buy” rating on all four leasing companies. She forecast container demand growth of as much as 11 percent this year, compared with 8.8 percent compound annual growth over the last decade.
Global GDP will rise 4.4 percent in 2011, compared with an average growth rate of 3.6 percent over the past decade, the International Monetary Fund said in its World Economic Outlook report released April 11.
Merchandise export volume this year is forecast to increase 6.5 percent after a record 14.5 percent surge in 2010, the biggest back-to-back gains since 1970, according to World Trade Organization figures.
In Asia, where lessors say they expect emerging markets to propel trade volumes, economies will expand 6.7 percent this year, the IMF projects. Emerging Asia, which includes China, India, Korea, Taiwan, Hong Kong, and Singapore, among others, is expected to grow by 7.9 percent.
The number of ocean shipping containers in use in the global fleet is about 18.61 million units, or 28.54 million TEU, according to the World Shipping Council’s May Container Supply Review. If placed end to end at the earth’s equator, a circumference of about 131.46 million feet, the 570.8 million feet of steel boxes would stretch around the globe more than four times.
During the recession, shipping lines came to a “near-death experience” as trade volumes sunk and left them with unneeded containers, Dahlman’s Becker said. The companies realized they would have more flexibility when trade slowed and could spend more on new ships if they relied more on lessors, she said.
The current price on a new container is about $3,000, according to the World Shipping Council. Container lessors sign carriers to five-year to six-year contracts worth about 14 percent of the purchase price, according to Becker.
Based on that purchase price, a leasing company would earn $420 a year. Because dry boxes are depreciated to between $950 and $1100, the first lease covers the cost of the container, Becker wrote in a March 11 research note. A container typically lasts about 14 years and is afterward sold as scrap.
“If you think about 3.4 million TEUs being produced at $3,000, that’s $10.2 billion of capital that the shipping companies need to have in one form or fashion,” said Steve Bishop, SeaCube’s chief financial and operating officer.
The Maersk Conakry, a new container vessel that’s 817 feet (249 meters) from bow to stern, can carry about 4,500 TEUs, enough containers to fill a train 17.4 miles (28 kilometers) long, according to the carrier’s website. At full capacity, leasing every container on board would generate about $5,180 per day for the lessor at current rates.
While shipping lines still own about 60 percent of the entire container fleet, their share will diminish as the older boxes they own are scrapped and they turn to newer containers held by lessors, TAL’s Sondey said.
“Our shipping line customers are saving whatever capital they have to build out their vessel networks, which means they don’t want to allocate money to containers,” said Sondey, whose renters include Maersk and Evergreen Marine Corp.
Textainer, TAL, CAI and SeaCube account for about 44 percent of the leasing market, as measured by the industry standard 20-foot equivalent units, according to Salvatore Vitale, an analyst at Sterne, Agee & Leach Inc. in New York, who has “buy” ratings on all four companies.
Also driving up demand is so-called slow-steaming, whereby vessels sail at reduced speeds to save fuel. Slow-steaming eats into container supply by about 5 percent to 7 percent as longer trips from Asia to North America tie up boxes for greater periods of time, John Maccarone, president and chief executive officer of Textainer, the world’s biggest lessor of containers based on fleet size, said during an April 27 interview on Bloomberg Television.
Marine fuel, known as bunkers, cost $629.50 a metric ton on May 24 in Singapore, a key refueling point, according to data compiled by Bloomberg. That’s 47 percent more than a year ago.
The largest ships burn 320 tons of fuel a day when traveling at full speed, Soren Andersen, vice president for vessel management at Maersk Line, the container unit of Maersk, told Bloomberg on Jan. 18. They can reduce fuel usage to 40 tons when they sail as slowly as possible, saving owners about $27 million a year, according to the executive.
“Demand is very strong,” Textainer’s Maccarone, based in San Francisco, said during the interview. As a consequence of the shortage, “utilization of our containers is approaching 99 percent, which is almost impossible to reach.”
Utilization, the percentage of the entire lessor fleet rented out, was at an all-time high of 98 percent in the first three months of this year, seasonally the weakest quarter, according to Vitale, who expects the rate to remain at that level this year because of tight supply.
Following last year’s deficit of 367,000 units, the number of containers manufactured in 2011 will fall 461,000 units short of the amount carriers need, Vitale projects.
This will help prop up lease rates as well as boost the value of for-sale used containers, TAL’s Sondey said. TAL rents out containers on leases shorter than the container life, letting it price future leases higher when rates rise, he said.
For Maersk, the rising price of boxes would add to costs for the company’s container shipping line, said Michael Storgaard, a Copenhagen-based spokesman for the company.
“It means the same for Maersk Line as for other shipping companies: more expensive boxes,” he said. Still, at a group level Maersk also has a unit that builds the units, protecting profits in the event that prices strengthen, he said.
The recession prompted container makers to reduce production and cut their workforce. With the economy rebounding, manufacturers are having trouble finding skilled labor to ramp up production, according to Vitale.
Three producers, China International Marine Containers Group Co. Ltd., Singamas Container Holdings Ltd., and CXIC Group Containers Co. Ltd., control 83 percent of the market, Dahlman’s Becker said.
Singamas, the second-biggest manufacturer, may increase prices 11 percent this year after steel costs rose and the Japan tsunami exacerbated a global shortage of cargo boxes, Chief Executive Officer Teo Siong Seng said in an interview in Singapore on April 15.
The shortage of boxes may stretch beyond 2012 as lines add large vessels that will likely sail at slower speeds, Teo said.
“The container manufacturers seem to be managing the number of containers that are being produced very carefully,” SeaCube’s Bishop said in an interview from his Park Ridge, New Jersey, office. “If demand is at or exceeds supply, there’s really no reason to expect current utilization rates to drop significantly.”
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