The pain of the current container market downturn extends beyond carriers with some independent ship-owners being faced with either lowering charter rates to help save ailing carriers or risking their assets going idle, according to the latest Container Insight Report released by Drewry Maritime Research.
Much of the focus on the recent slump in the container shipping market has focused on the bottom lines of the operators moving cargo on the water, with ever-diminishing profits (that have now almost universally turned to losses) being the driver of a new round of merger-and-acquisition and alliance forming.
The most recent example is the formation of the OCEAN alliance, as well as the mooting of an alliance between Hanjin Shipping and Hyundai Merchant Marine.
However, less is known about the financial health of the roughly other half of ship owners who charter their assets out.
This is mainly because very few non-operating owners make their financials available to the public and, with some notable exceptions; they tend to prefer to stay in the background.
The available annual results for 2015 of some of the leading independent owners show that last year was generally still a profitable one, but the financial pressures are building up.
Firstly, charter rates are plummeting as demand for their assets fall – The Howe Robinson Containership Index that measures charter rates across a broad range of sizes is currently down by over 40% year-on-year – and secondly, the risk of charter renegotiations is increasing as the financial health of their clients worsens.
Already, Danaos Corp. and Capital Product Partners L.P. (CPLP), two owners that are heavily exposed to the South Korean carrier Hyundai Merchant Marine (HMM) that is requesting lower charter rates as part of a debt-restructuring program, have said that the carrier’s actions have the potential to “substantially” lower their revenues.
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Reports indicate that at the time of writing (April 29, 2016) HMM has reached agreement with around 60% of its charterers to lower their prices in exchange for equity in the company.
Hanjin Shipping expected to follow suit as it seeks to hand over operational control to its main creditor, the Korea Development Bank (KDB). As Figures 1 and 2 show far more independent owners are exposed to Hanjin than HMM so the pain will be more widespread if those charter rate reductions become a reality.
Shipowners would much prefer not to become part-owners in failing carriers, but the alternative in the current weak market is that they have no business at all for their assets, or at the very best at much reduced rates.
A problem for independent owners is that they tend to own a greater share of the smaller size ships, which are slowly becoming less attractive due to the cascade of larger and more fuel efficient ships into new trades.
Even when the ownership of size classes is more equal, such as with the 4,000-5,000 TEU Panamaxes, carriers inevitably look to off-hire chartered tonnage before their own, which is why independent owners have shouldered a far greater share of the idle fleet burden.
The expansion of the Panama Canal, which will be inaugurated on June 26, 2016, will add more Panamaxes to the idle fleet as carrier’s upsize services, most of which are expected to be owned by independents.
Any sense of security that independent owners may have previously felt from chartering out ships to Top 20 global carriers has disappeared.
Fact File: Shipowners are increasingly becoming exposed to the financial weakness of their clients and more could face the tough dilemma of either reducing charter rates upon request or having to idle, sell or scrap.
