Container ship liner operators are facing a market trough in a position they have never quite seen before: with piles and piles of cash on their balance sheets from record-setting earnings in 2021 and 2022.
That should be a comfort, no? Well maybe.
But there’s another side to that coin that may not bode so well for those companies, according to research note published on Tuesday by investment bank Jefferies.
Lead shipping analyst Omar Nokta has just returned from a visit to the headquarters of Israeli liner company Zim, and is relating a thought-provoking discussion with chief financial officer Xavier Destriau.
“Destriau questioned whether this is a blessing or a curse,” Nokta wrote of the liners’ cash reserves.
“A blessing in that companies are in excellent financial condition but a curse in that it could lead to a slower supply response. This is an intriguing point as drastic measures in cyclical industries tend not to come preemptively but rather when companies are facing financial distress.”
Zim, for example, had $4.5bn in cash and liquid securities at the end of third-quarter 2022.
While the companies have responded to collapsing rates so far by blanking sailings – which means they skip a port or ports on a given route to limit supply – the tactic has succeeded only in setting a market bottom at loss-making rates.
Nokta posited that more will need to be done through a combination of reducing vessel speeds and idling capacity. But the ability to do the latter has perhaps been damaged by the unraveling of the 2M alliance between MSC Mediterranean Shipping Company and AP Moller-Maersk, the two largest operators with a combined 34% market share.
“The alliance will remain in place until the beginning of 2025 but investors have questioned whether it will continue to function as it has since the alliance was formed in 2015,” Nokta noted.
As to slow steaming, current speeds of 14 knots, while down from 14.5 in 2022, will need to reduce to 13 knots if the sector wants to achieve a 6% reduction in capacity. This would help offset an influx of newbuildings.
In past downturns liners have been able to idle capacity – forcing a 13% reduction in Covid-hit 2020, for example – as charter terms were short. The liners simply returned tonnage to lessors, who did the idling. That won't be the case this time, Jefferies explained.
“Material renegotiation of high-priced vessel charter agreements is unlikely in the near-term, as these typically occur when liners are facing difficult financial condition, and most shipowners are protected by firm contract terms,” Nokta wrote.
With those longer contracts, vessels will need to be idled by the liner companies as they continue to pay their agreed charter to tonnage providers, Nokta said.
In the current scenario, Jefferies favours lessors like Danaos Corp and Global Ship Lease over the liner operator stocks.
