The old is gold: the exorbitant cost of aging ships sounds inflation SOS
SINGAPORE: Shipping companies are turning rusting buckets into gold mines in a modern-day alchemy that could fuel already runaway inflation for years to come.
The disruption to global trade caused by pandemic shutdowns and shortages of new cargo vessels has pushed freight rates for aging container ships to record highs.
Taking advantage of the boom, shipping companies are signing long-term leases lasting three to four years, which means consumers could continue to pay the price of soaring costs until hundreds of new ships arrive. on order come into service.
Take the Synergy Oakland, a medium-sized vessel flying the Cypriot flag that can carry over 4,200 20ft steel containers.
The Greek company Euroseas bought it in 2019 for 10 million dollars when it was already ten years old. As world trade plunged into chaos last year, it brought in $21 million in just over 100 days at the highest daily freight rate in history for a ship its size.
He secured another short-term charter earning around $10m in the space of two months before completing a four-year lease for $61m in May, a six-fold return on the purchase price three years ago.
“It was almost the perfect game in a rising market,” Symeon Pariaros, the shipping company’s chief administrative officer, told Reuters. “We haven’t seen anything like this in the history of the container market.”
The world’s container ship fleet has continued to grow in capacity during the pandemic, growing 2.9% in 2020 after increases of 4% in 2019 and 5.6% in 2018, according to Clarksons Research, a company shipment analysis.
But increased demand for consumer goods during lockdowns, congestion at ports that have tied up ships longer than expected, and a slowdown in new shipbuilding, in part due to uncertainty over whether ships would comply with new environmental rules, have all contributed to the shipping crisis. and save freight cost.
Container capacity jumped 4.5% last year, mainly because aging ships that might normally head for the graveyard continued to sail, but that was still not enough to cool prices.
A Reuters review of more than 30 private deals completed over the past six months showed shipowners are leasing vessels on long-term charters at record rates to capitalize on the once-in-a-generation bull market.
In May, the cost of locking container shipments soared 30.1%, a record monthly increase in long-term ocean freight rates, according to the Xeneta Ocean Freight Index.
GRAPHIC: Six-month sailing trajectory of container ship “Synergy Oakland” (https://fingfx.thomsonreuters.com/gfx/ce/zdpxoendrvx/Synergyoakland.png)
TRANSPORT COSTS AND INFLATION
The record rates have already contributed to higher prices for everything from used cars to dining tables to bicycles, and consumer pain is set to continue, experts say.
The International Monetary Fund (IMF) estimates that the container shipping boom in 2021 accounted for 1.5 percentage points of global price increases this year, about a quarter of the rate of US inflation.
“The impact of shipping costs on inflation is large and widespread, affecting countries around the world,” said Yan Carriere-Swallow, senior economist in the IMF’s Asia and Pacific Department.
While the rise in food and oil prices following Russia’s occupation of Ukraine affects consumer prices within two months, it can take up to a year to feel all the effects of container shipping costs, Carriere-Swallow said.
Additionally, COVID-19 outbreaks are still disrupting ports in China and although major shipping companies have ordered a record volume of new large container ships, most will not come online until next year or so. 2024.
“Current, still high freight rates will continue to put pressure on consumer prices through 2023,” said Jan Hoffmann, head of trade logistics at the United Nations Conference on Trade and Development. .
“I fear freight rates will remain higher than pre-COVID for many years to come.”
The Navios Spring, which currently sails from California to China, was chartered for three years in January for $60,000 a day, a sevenfold increase from the $8,250 a day it cost two years ago. years, according to data from two ship brokers.
The Marshall Islands-flagged ship built in 2007 cost its original owners $42 million. He will earn $65.7 million over the length of his three-year contract, brokers said.
Navios Maritime Partners, the ship’s operator, did not respond to requests for comment.
Navios Amarillo, a sister ship to Navios Spring, is booked on charter until January 2028, when she turns 21. The ship will earn $75 million from the deal, far more than the $51 million it cost new, two ship brokers said.
“Container shipping markets generally remain in extraordinary territory,” said Stephen Gordon, managing director of Clarksons Research.
GRAPH: Value of 10-year-old container vessels in millions of US dollars (https://fingfx.thomsonreuters.com/gfx/ce/gdpzygdqmvw/ContainerVesselValue.png)
SHIPPING COMPANY BENEFITS
The container shipping industry as a whole made a staggering $59.3 billion profit in the first quarter of this year, shipping expert John McCown said, up from $19.1 billion in the same period. one year ago.
“Carriers are winners and their significant increase in profits is being funded by higher prices for all products moving on container ships,” McCown told Reuters.
Denmark’s Maersk, the world’s second-largest container line with a market share of nearly 17% according to intelligence provider Alphaliner, cashed in.
Maersk posted record profits in the first three months of 2022. Revenue jumped 55% to $19.3 billion and it raised its forecast for underlying profit this year before interest, taxes, depreciation and amortization at $30 billion.
The Mediterranean Shipping Company (MSC), which overtook Maersk to become the world’s largest container company this year, is not releasing financial results. The company, based in Geneva, Switzerland, declined to comment for this story.
US President Joe Biden said on June 9 that Congress should crack down on outrageous prices charged by shipping companies that control the market.
Maersk told Reuters its financial performance was due to exceptional market conditions and bottlenecks in the United States, adding that it had invested billions in improving US port operations and logistics.
Some of the major shipping lines are using their profits to scoop up leftover cargo at sky-high prices, which will in turn help sustain high freight rates and stoke inflation in the future, analysts said.
GRAPHIC: Shipping container rates have increased since late 2020 as COVID-19 restrictions eased (https://fingfx.thomsonreuters.com/gfx/ce/znvnegkbkpl/ContainerRatesJune202022.png)
WHEN WILL SHIPPING COSTS BE REDUCED?
A record 503 used container ships were sold last year, or 7% of the global fleet, Clarksons said, and another 108 were sold in the first five months of 2022.
MSC, for example, has purchased 200 used container ships since August 2020, according to market analysts.
With no container ships scrapped this year, the average age of such vessels has risen to 13.9 years from 11 years in 2017, Clarksons said.
That means freighters that are 10 or 15 years old, an age at which they were broken up before the pandemic, are worth up to 10 times what they were worth two years ago, according to sales data.
For example, MSC bought the Xin Feng Yang Pu, a Liberian-flagged freighter currently sailing in the South China Sea, for $70 million last month, according to broker data. The same ship, renamed MSC Freeport, sold for $7 million in 2007.
Still, there are signs that the boom could come to an end in a year or two when many of the giants of the sea ordered by big business come into service.
In 2021, a record number of 555 container ships worth $42.5 billion have been ordered and 208 ships worth $18.4 billion have been reserved so far in 2022, according to the World Shipping Council, an industry group based in the United States.
Some of these ships will be among the largest container ships ever built, 400 meters in length and similar in size to the Ever Given, a cargo ship that got stuck and blocked the Suez Canal in l last year.
Maersk told Reuters that over the past year it has ordered 12 new large container ships that are nearly four times the size of the Synergy Oakland.
If ports and supply chains functioned as they did before the pandemic, an influx of new ships could drive up shipping prices, said Peter Sand, chief analyst at Xeneta, a rates platform. freight.
“It holds the potential to cap spot market rates. Especially now that inflation is biting globally.”