There’s blood in the water and opportunity in the air.
That’s the glass-half-full outlook for the embattled global container shipping sector from the executive suite of multimillion-dollar Seaspan Corp. (NYSE:SSW).
The blood comes in the form of red ink increasingly seeping from the holds of major international shipping companies as overcapacity, especially in container ships, and slowing economies erode already historically low prices for container shipping freight rates. The opportunity: market volatility is driving smaller, overextended players into difficult financial waters and pushing bigger players to form alliances to maximize market share and efficiencies.
Those efficiencies mean fleet modernization and overhaul, bigger ships, route consolidations, repositionings and new ship leasing considerations – Seaspan’s bread and butter.
“We’re always trying to stay one step ahead of what’s going on, and we’re in a good position to take advantage of some of the carnage that’s going on,” said Kyle Washington, co-chairman of Seaspan Corp.’s board, who spoke to Business in Vancouver following the release of the company’s first-quarter 2016 financials.
Those results showed Seaspan revenue up 14.3% to US$215.5 million compared with the same quarter in 2015. However, reported net earnings were down 67% to US$7.1 million.
Profit erosion in the global container shipping sector is not surprising.
Drewry, a U.K.-based shipping consultancy, now forecasts that the sector, which turned a US$5 billion profit in 2015, could lose between US$6 billion and US$10 billion in 2016.
Seaspan Corp. leases container ships to major global shipping lines, which traditionally lease approximately 50% of their fleets.
Washington is the eldest son of Dennis Washington, founder of the Washington family business empire, which has a 51% ownership interest in Seaspan Corp. and owns North Vancouver-based Seaspan Marine Corp.
As reported in “Seaspan expanding fleet despite global container glut” (BIV issue 1382; April 26-May 2), Seaspan is now the world’s largest independent container ship lease company.
It’s registered in the Marshall Islands, but Seaspan has major offices in four locations: Hong Kong, Shanghai, Mumbai and Vancouver. Seaspan’s game plan of securing long-term leases with Maersk Line (CO:MAERSK-B) and other major container ship operators has helped it remain reliably afloat in a marketplace where gambles on leasing container ships in the spot market can generate higher short-term revenue but also come with higher long-term risks.
Revenue for the world’s major freight carriers was down significantly in 2015.
That trend is continuing in 2016. Drewry research shows revenue for a cross-section of major container shipping lines was down anywhere from 9% to 29% in 2016’s first quarter compared with the same time a year earlier.
With average ocean freight contract rates on trade routes such as Asia-Europe down between 20% and 30% over the same time period, as reported in Lloyd’s Loading List, and rates for new freight containers at their lowest level since 2002, major shipping lines are embarking on a series of alliances to maximize economies of scale and vessel efficiencies on major shipping routes.
Those alliances include six major container lines agreeing to form a new partnership called THE Alliance and another four creating the Ocean Alliance.
Regardless of current financial fundamentals of companies like Seaspan that supply carriers with ships and other services but don’t book any of the cargo aboard container ships, the market’s volatility is worrying.
“Yes, it’s a concern,” Washington said, “and we have felt that for a while. We are under a lot of long-term leases, and we hope the market gets better for them for sure.”
Kevin Sterling, a research analyst with Richmond, Virginia’s BB&T Capital Markets, told BIV that one of Seaspan’s key strengths in a marketplace where building a single mid-sized container ship can cost approximately US$125 million has been its ability to partner with companies that share the same long-term business road map.
Washington pointed out that Seaspan has never been stuck with a late or missed payment on a charter since the company went public in 2005 with a fleet of 10 container ships.
However, Seaspan, which as of February had contracted to buy nine new container ships, is also carrying significant debt: about US$3.4 billion.
Sterling and other analysts have also forecast that, because of ongoing overcapacity in the global container shipping sector, storm clouds remain on the horizon for shipping companies and their suppliers.
Responding to concerns from analysts during the company’s 2016 first-quarter conference call over the challenges of finding charters for new ships in the volatile economic climate, Seaspan CEO Gerry Wang said the company has assurances from its shipbuilder that delivery of ships can be deferred at any time.
Washington told BIV that that same marketplace volatility will also present opportunities “to pick up some distress from companies that might not be as stable financially.”
He said that a lot of debt and “impairment issues” in the industry were generated by the 2008-09 recession.
“There are some good companies in this space, but not more than we can count on a couple of fingers.”
Wang echoed the volatility-as-opportunity sentiment in the first-quarter conference call. He said consolidation and government involvement in major shipping companies mean that alliances and ships are getting bigger.
That, he said, creates “opportunities for us.”
“Once the alliances have been established later this year, we would anticipate a very solid demand for bigger … new vessels for operators [in] their pursuit of cost reductions for their operations, so we are looking forward to exciting times ahead of us.”
