Ship Owners Losing After $11.4 Billion Battle for Boxes: Freight

After a quarter in which companies selling space on container lines doubled rates, the amount the owners of the ships are being paid is the least in two years.

Operators, who charter vessels and then charge shippers per container, are demanding $1,379 for a 20-foot box on the China- to-Europe trade route, up 97 percent this year, according to Clarkson Plc (CKN), the largest shipbroker. A measure of how much they’re paying ship owners fell 4.2 percent since the start of January, data from the Hamburg Shipbrokers’ Association show.

The gap is growing because operators are leaving vessels idle or hiring fewer ships, driving down how much they pay owners, while restricting supply and boosting box rates. RS Platou Markets AS and Fearnley Fonds ASA, units of Norway’s biggest shipbrokers, recommend selling shares of Seaspan Corp. (SSW), a Hong Kong-based owner, and buying those of Orient Overseas (International) Ltd. (316), which manages vessels from the city.

“Whatever increase operators are getting is driving them to profitability,” said Rahul Kapoor, a Singapore-based analyst for Platou whose recommendations returned 17 percent in the past six months. “Owners are in no way benefiting and are unlikely to benefit.”

The operators had previously spent 14 months in a price war on the biggest trade routes, losing about $11.4 billion of revenue, according to SeaIntel Maritime Analysis, a research company in Copenhagen. Orient Overseas will report this year its first gain in annual profit since 2010, analyst estimates compiled by Bloomberg show.

U.S. West Coast

Box rates fell 50 percent last year from China to Europe, the second-biggest international route, reflecting a glut of ships rather than contracting demand. The capacity of the global fleet rose 77 percent to a record since the end of 2005, data from Redhill, England-based IHS Fairplay show. Trade gained 44 percent to an all-time high, London-based Clarkson estimates.

Operators’ earnings are also improving from China to the U.S. West Coast, the world’s biggest trade route, with a 40 percent gain to $1,992 since mid-December, Clarkson data show.

The amount of idled capacity will probably expand to the equivalent of 1.1 million boxes by the end of 2012 from 595,000 at the start of the year, according to Alphaliner, a Paris-based industry consultant. Operators won’t renew leases for some ships when they expire, said Fotis Giannakoulis, an analyst at Morgan Stanley in New York. The Hamburg association’s index, a gauge of costs across six types of container ship, fell to a 21-month low on Feb. 28.

Slowing Growth

Operators may have to idle even more capacity to sustain the gains because global trade in goods and services will advance 3.8 percent this year, down from 6.9 percent in 2011 and almost 13 percent in 2010, the International Monetary Fund predicted in January.

Efforts by operators to raise rates on the Asia-to-Europe route failed in eight of the past nine attempts, according to data from Alphaliner. Orient Overseas is confident the latest increase will be successful, Stanley Shen, a spokesman for the company in Hong Kong, wrote in an e-mail.

China will target annual expansion of 7.5 percent, the lowest rate since 2004, Premier Wen Jiabao said in a state-of- the-nation speech March 5. The economy gained 8.9 percent in the fourth quarter, the slowest pace in 10 quarters, and exports fell 0.5 percent in January, the first drop in more than two years, government data show.

The nation’s trading partners are also weakening, with the 17-member euro region expected to contract 0.4 percent this year, according to the median of 18 economist estimates compiled by Bloomberg.

Fuel Costs

Rising fuel costs may erode earnings even if higher rates stick this time. Prices in Singapore, the largest refueling port, averaged $734.21 a metric ton last month, the most in at least nine years, according to data compiled by Bloomberg. A 10- year-old, 5,000-unit container ship sailing at 22 knots consumes 124 tons of fuel a day, according to Morgan Stanley.

Analysts anticipate a jump in earnings for operators. Orient Overseas, which manages Hong Kong’s largest container line, will report net income of $201.7 million for this year, compared with $181.6 million in 2011, the mean of 22 analyst estimates compiled by Bloomberg show. The shares rose 16 percent to HK$52.60 this year, and 20 of 26 analysts covering the company recommend buying or holding the stock.

Seaspan will report earnings of $113 million for this year, compared with $123.4 million in 2011, the mean of eight estimates shows. Its shares rose 37 percent this year, and seven out of 10 analysts tracked by Bloomberg recommend buying or holding the stock. The charters on four of its 72 ships end this year and should have no effect on profit, Chief Executive Officer Gerry Wang said in an interview.

Round Table

“Freight rates are increasing like crazy right now, and there’s tremendous positive sentiment,” Wang said by phone from Vancouver on March 16. “When freight rates are good, charter rates always come up.”

Owners of other types of vessels are also suffering from supply gluts. About 90 percent of world trade moves by sea, according to the Round Table of International Shipping Associations.

The Baltic Dry Index, a measure of rates for hauling coal and iron ore, dropped 43 percent in the past year, according to the London-based Baltic Exchange, which publishes costs along more than 50 maritime routes. Earnings for very large crude carriers, each carrying about 2 million barrels of oil, averaged $47,068 last week, down 79 percent from the all-time high reached December 2007 even after rallying 50 percent this year, Clarkson data show.

Container Index

A measure of the combined earnings of the 14-member Bloomberg Pure Play Dry Bulk Shipping Index (BPG4DBS) will drop 91 percent this year, according to analyst estimates compiled by Bloomberg. The same gauge for the Bloomberg Tanker Index of the six largest U.S.-listed owners anticipates they will lose money for a third consecutive year, the predictions show.

The Lloyd’s List Bloomberg Container Index of the 50 biggest container-shipping companies rose 22 percent this year, compared with a 13 percent advance in the MSCI All-Country World Index of equities. Treasuries lost 1.8 percent, a Bank of America Corp. index shows.

The gap between demand and the capacity of the active container fleet will narrow to 2.2 million 20-foot-equivalent units by the fourth quarter, from 3 million units in the last quarter of 2011, as trade expands and operators idle vessels or return them to owners, Platou estimates.

“Operators are now in a mode where ships whose leases expire will not be renewed,” said Giannakoulis of Morgan Stanley. “Their strategy of fighting during 2010 and 2011 led to huge losses. All the liner companies realize a price war is not to the benefit of the industry.”

To contact the reporter on this story: Isaac Arnsdorf in London at iarnsdorf@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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