Shipping has two jobs. One is transport, a painstaking task, which it performs safely and efficiently, moving around 8 billion tons of cargo last year. The other is to manage the investment needed to ensure that the world never runs out of shipping capacity.
A more challenging task, which involves betting billions of dollars on a future which seems to get ever harder to predict.
Thinking Outside the Box
The container business is particularly exposed to these problems. The operational side of the business is far more complex than bulk shipping, because, in addition to providing ships, liner companies have thouppsands of customers and must handle the administration involved in bills of lading, invoicing and door-to-door delivery. This requires a bureaucracy of thousands, generally topped off by a management board. Yet tough competition has, in recent years, drawn these companies into the world of speculative investment so familiar to the tanker and bulker markets.
The $200bn Question
Of course the container industry is used to heavy investment. In 1980 there were 600 containerships, in 1990 1,289, in 2000 2,624 and today there are 5,014 ships (compared with 5,543 tankers and 8,361 bulkers). As the ships got bigger capacity grew even faster, increasing from 4.4m TEU in 2000 to 14.6m TEU in May 2011, a 328% increase involving an investment of $197 billion.
The Volatility Club
Surging cargo growth helped with the risk of ordering billion dollar strings of ships, but today’s investment risk is very different from 10 or 20 years ago. One thing which has changed is volatility. For many years container lifts grew every year, boosted by new trades (e.g. China) and new commodities (e.g. forest products and reefer cargo). But the credit crisis took containers into new territory and in 2009, for the first time ever, the container trade declined by a staggering 9%.
Caught Off Balance (Sheet)
Meanwhile, control of the fleet changed. 20 years ago liner companies owned their ships. Today over 50% are chartered in from independents, mainly financed through the German KG system. This did three things. Firstly, it took assets offbalance sheet, improving returns; secondly, asset risk moved to independent investors; and, thirdly, the market in containerships became more liquid. All welcome to liner companies who could leave the “asset angst” to the independents and their bankers.
Looking Ahead
So there you have it. Over the last two decades the container business has joined the speculative shipping club, and rightly so. Today’s challenge is to decide whether the world economy will need to treble its capacity again in the coming decade (pushing the fleet up to 45m TEU). Or, are things are slowing down? Not an easy decision, but someone has to make it. Have a nice day.