Who wins and who loses in shipbuilding and chartering? Container ship market avalanche, charter rates plunge

As container shipping freight rates plummet, container ship charter rates have also experienced a sharp decline, and ZIM, the Israeli shipping giant that mainly relies on chartering, is likely to be the biggest loser.

Shipbroking companies point out that the charter rates for container ships with 6-12 month charters hit a record high in March this year, and had fallen by as much as 70-80% by November. Among popular ship types, the daily charter rate for a 1000TEU container ship was only US$5200 in June 2020, reaching a high of US$41000 in March this year, and falling back to US$11813 in November.

During the same period, the daily charter rate for a 1700TEU container ship increased from US$5788 in June 2020 to US$65500 in March this year, and has now fallen to US$13875. The daily charter rate changes for 2750TEU container ships were US$8125, US$82625, and US$20438 respectively; for 4400TEU container ships, they were US$7013, US$121125, and US$25375.

As of now, ZIM, ranked 10th in terms of capacity, has the highest charter rate, exceeding 90%. At the end of the first quarter of this year, the charter rate for 150 ships was as high as 94%, with lease terms mostly ranging from 3 to 5 years, and an average lease term of 28 months. Among these, 11 leases will expire at the end of this year, and 28 and 34 will expire in 2023 and 2024 respectively. However, the company has 46 newly built long-term chartered ships scheduled for delivery in 2023-2024.

Over the past two years, ZIM has chartered many container ships at high prices, including some with long-term leases of 3-12 years. Therefore, Alphaliner believes that ZIM's profit decline may be the largest in the fourth quarter, estimating that ZIM's earnings before interest and taxes (EBIT) in the fourth quarter will reach US$439-739 million, a decrease of 50-70% compared to the third quarter.

For example, in the first half of the year, ZIM chartered a brand-new 1900TEU container ship built by Jianhua Shipping at Huangpu Wenchong, with a lease term of 3 years and a daily charter rate of US$36,000. However, Jianhua Shipping's second ship of the same type was just delivered in November, with a lease term of only 3-5 months and a daily charter rate of US$15,000, less than half of the rate in the first half of the year.

In the first half of this year, ZIM firmly believed that future freight rates would remain far higher than before the outbreak of the epidemic, and therefore was willing to pay high prices to charter ships. According to Alphaliner's statistics, over the past year, ZIM has chartered 120 existing and under-construction vessels, including 50 ships with 3-year leases, 18 ships with 5-year leases, and 29 ships with leases as long as 12 years.

In order to create the highest economic benefits with the least investment, shipping companies have long established sufficiently large fleet sizes through extensive chartering to enhance market competitiveness. In the past, the chartering ratio of major shipping companies was mostly above 50%. In the past two years, with the surge in profits, shipping companies have been increasing the proportion of their own ships.

Alphaliner's data shows that among the top ten global shipping companies, six have a chartering ratio below 50%, including Maersk's 40.4%, COSCO's 45.3%, Hapag-Lloyd's 37.4%, Evergreen's 43.4%, ONE's 48.4%, and HMM's 32.1%. Among the other four, ZIM has the highest chartering ratio at 94.7%, followed by Yang Ming with 69.4%, Mediterranean Shipping with 54.8%, and CMA CGM with 53.1%.

Since the beginning of this year, the Shanghai Shipping Exchange Container Freight Index (SCFI) has fallen for 25 consecutive weeks, and charter rates have also declined, but the initial decline was limited. Charterers did not want to sign long-term contracts, and lessors were unwilling to offer low prices, so many contracts were signed for very short periods, and everyone was waiting and seeing. On the one hand, they were watching the trend of freight rates after Shanghai's reopening, and on the other hand, they were observing whether inflation had significantly reduced trade volume.

Optimistic shipping companies believe that inflation has reduced purchases of luxury goods and high-tech products, which are transported by air freight. Next year, the International Maritime Organization (IMO)'s new carbon reduction regulations will accelerate the retirement or slow down the sailing speed of non-compliant vessels, naturally reducing the actual supply of transport capacity. However, some shipping companies are more conservative about the future market development.

Among the top ten global shipping companies, ZIM, ranked 10th, was the most confident that future market freight rates would be much higher than before the epidemic. Therefore, Mediterranean Shipping bought a large number of second-hand ships and ordered a large number of new ships, while ZIM signed a large number of existing and new ship charter contracts. ZIM is considered to have made the biggest bet, and the industry is waiting to see the final result. Now, it is clear who won and who lost.