Insight: Old is gold: sky-high cost of ageing ships sounds inflation SOS

Navios Maritime Partners

21/06/2022 06:00

* Old container ships sold and chartered at record prices
    * Bumper long-term charters lock in costs for consumers
    * High shipping costs driving up inflation worldwide
    * Wave of huge new container ships due in next two years

    By Joe Brock
    SINGAPORE, June 21 (Reuters) - Shipping companies are
transforming rust buckets into gold mines in a modern-day
alchemy that could fuel already rampant inflation for years to
come.
    The disruption to world trade caused by pandemic lockdowns
and a shortage of new cargo vessels has pushed freight rates for
ageing container ships to record highs.
    Cashing in on the boom, shipping firms are locking in
long-term leases lasting three to four years, which means
consumers could carry on paying the price for the surge in costs
until hundreds of new ships on order come into service.
    Take the Synergy Oakland, a mid-sized vessel flagged in
Cyprus that can carry more than 4,200 20-foot steel containers.
    Greek firm Euroseas bought it in 2019 for $10 million when
it was already a decade old. As world trade spiralled into chaos
last year, it raked in $21 million in just over 100 days at the
highest daily freight rate in history for a ship of its size.
    It squeezed in one more short-term charter earning around
$10 million in the space of two months before going out on a
four-year lease for $61 million in May, a six-fold return in
itself on the purchase price three years ago.
    "That was almost the perfect play in a rising market,"
Symeon Pariaros, chief administrative officer of the shipping
firm told Reuters. "We've not seen something like that in the
history of the container market."
    The world's container ship fleet continued to grow in terms
of capacity during the pandemic, rising 2.9% in 2020 after
increases of 4% in 2019 and 5.6% in 2018, according to Clarksons
Research, a shipping analytics firm.
    But the surge in demand for consumer goods during lockdowns,
congestion at ports that tied up ships for longer than expected,
and a slowdown in new shipbuilding, partly due to uncertainty
about whether vessels would comply with new environmental rules,
all contributed to the shipping crunch and record freight costs.
    Container capacity jumped 4.5% last year, mainly because
ageing ships that might normally be headed for the graveyard
kept on sailing, but it hasn't been enough to cool prices yet. 
    A Reuters review of more than 30 private transactions
completed over the last six months showed that ship owners are
leasing vessels on long-term charters at record rates to
capitalise on the once-in-a-generation bull market. 
    In May, the cost of locking in container shipments soared a
staggering 30.1%, a record monthly increase in long-term ocean
freight rates, according to Xeneta's ocean freight index.
    SHIPPING COSTS AND INFLATION
    Record rates have already contributed to higher prices for
everything from second-hand cars to dining tables to bicycles
and the pain for consumers is set to continue, experts say.
    The International Monetary Fund (IMF) estimates the
container shipping boom in 2021 accounted for 1.5 percentage
points of global price rises this year, or about a quarter of
the U.S. inflation rate.
    "The impact of shipping costs on inflation is large and
widespread, affecting countries around the world," said Yan
Carriere-Swallow, senior economist at the IMF's Asia and Pacific
Department.
    While higher food and oil prices in the wake of Russia's
occupation of Ukraine feed through to consumer prices within two
months, it can take up to a year to feel the full effects of
container shipping costs, Carriere-Swallow said.
    What's more, COVID-19 outbreaks are still disrupting ports
in China and while big shipping firms have ordered a record
volume of new, supersize container vessels, most won't come
online until next year or 2024.
    "The current still-high freight rates will continue to put
pressure on consumer prices well into 2023," said Jan Hoffmann,
head of trade logistics at the United Nations Conference on
Trade and Development.
    "I fear that freight rates will remain higher than pre-COVID
for many more years."
    The Navios Spring, which is currently sailing from
California to China, was chartered for three years in January
for $60,000 a day, a seven-fold increase over the $8,250 a day
it cost two years ago, according to data from two ship brokers.
    The ship flagged in the Marshall Islands and built in 2007
cost its original owners $42 million. It will earn $65.7 million
over the length of its three-year deal, the brokers said.   
    Navios Maritime Partners, the ship's operator, did not
respond to requests for comment. 
    The Navios Amarillo, a sister ship to the Navios Spring, is
booked on charters all the way out to January 2028, by which
time it will be 21 years old. The ship will earn $75 million
from that deal, far more than the $51 million it cost new, two
ship brokers said.
    "Container shipping markets in general remain in
extraordinary territory," said Stephen Gordon, managing director
of Clarksons Research.
    SHIPPING COMPANY PROFITS
    The container shipping industry as a whole made a
mind-bending profit of $59.3 billion in the first quarter this
year, shipping expert John McCown said, up from $19.1 billion in
the same period a year ago.
    "The carriers are winners and their significant increase in
profits is being funded by higher prices for all products that
move on container ships," McCown told Reuters.
    Denmark's Maersk  MAERSKb.CO , the world's second biggest
container line with a market share of almost 17% according to
intelligence provider Alphaliner, has cashed in.
    Maersk posted record earnings in the first three months of
2022. Revenue leapt 55% to $19.3 billion and it raised its
forecast for underlying earnings this year before interest, tax,
depreciation and amortisation to $30 billion.  urn:newsml:reuters.com:*:nL2N2WO0BW
    Mediterranean Shipping Company (MSC), which overtook Maersk
to become the world's largest container line this year, does not
publish financial results. The company, which is based in
Geneva, Switzerland, declined to comment for this story
    U.S. President Joe Biden said on June 9 that congress should
crack down on the outrageous prices being charged by shipping
companies that control the market.  urn:newsml:reuters.com:*:nFWN2XW0D4
    Maersk told Reuters it's financial performance was due to
exceptional market conditions and bottlenecks in the United
States, adding that it had invested billions in improving
America's port operations and logistics.
    Some of the big shipping firms are using their profits to
hoover up what cargo ships are left at sky-high prices, which
will in turn help to underpin high freight rates and fuel
inflation in the future, analysts said.
    WHEN WILL SHIPPING COSTS COME DOWN?
    A record 503 second-hand container ships were sold last
year, equivalent to 7% of the global fleet, Clarksons said, with
another 108 sold in the first five months of 2022.            
    MSC, for example, has bought 200 second-hand container
vessels since August 2020, according to market analysts.
    With no container ships being scrapped this year, the
average age of these vessels has risen to 13.9 years from 11
years back in 2017, Clarksons said.
    That means cargo ships that are 10 or 15 years old, an age
at which they were being scrapped before the pandemic, are worth
up to 10 times what they were two years ago, sales data shows.
    For instance, MSC bought the Xin Feng Yang Pu, a
Liberia-flagged cargo ship currently sailing in the South China
Sea, for $70 million last month, broker data shows. The same
ship, which has been renamed the MSC Freeport, sold for $7
million in 2007. 
    Still, there are signs the boom could come to an end in the
next year or two when many of the giants of the sea ordered by
the major companies enter service. 
    In 2021, a record-breaking 555 container vessels worth $42.5
billion were ordered and 208 vessels worth $18.4 billion have
been booked so far in 2022, according to the World Shipping
Council, an industry group based in the United States.
    Some of these vessels will be among the largest container
ships ever built, stretching 400 metres in length and similar in
size to the Ever Given, a cargo ship that got stuck and blocked
the Suez Canal last year.
    Maersk told Reuters that over the last year it had ordered
12 new large container vessels which are nearly four times the
size of the Synergy Oakland.
    If ports and supply chains were operating as they were
before the pandemic, an influx of new vessels could pummel
shipping prices, said Peter Sand, chief analyst at Xeneta, a
freight rate platform. 
    "It holds the potential of flooring the spot market rates.
Especially now that inflation is biting globally."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Six month sailing track of the ‘Synergy Oakland’ container
vessel    https://tmsnrt.rs/39Dl3pS
Value of 10-year old container vessels in millions of US dollars
   https://tmsnrt.rs/3y4NVAP
Shipping container rates have surged since late 2020 as COVID-19
restrictions eased    https://tmsnrt.rs/3mZvIyk
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Joe Brock; Graphics by Gavin Maguire; Editing by
David Clarke)
 ((joe.brock@thomsonreuters.com; +6598355351; Reuters Messaging:
joe.brock.thomsonreuters@reuters.net))