Foreign container lines were widely blamed for stratospheric freight rates throughout the supply chain crisis. President Joe Biden proclaimed last June he was “viscerally offended” on the “rip-off,” clenching his fist and saying he felt like “popping someone,” presumably a foreign container-line executive.
Because the shipping lines took the warmth for raking in billions amid the pandemic, one other group of foreign-owned container shipping firms quietly raked in record sums outside the publicity glare: the container-ship lessors, otherwise often called tonnage providers.
Shipping lines own about half their fleets and rent the remaining. The availability chain crisis was not only the best period in history for shipping lines, it was the best period in history for the shipowners that rented the tonnage to the liner firms.
The more ships the liner firms could get their hands on, the extra money they may make off cargo shippers. Liners were desperate for ships in 2021-2022 and tonnage providers could dictate the terms, forcing charter durations to years beyond what liner firms wanted and jacking up rates to historic highs. At one point, some ships were renting for six figures per day.
Now that the dust has settled, tonnage providers are far less exposed than shipping lines to the pullback in import demand. They’re heavily shielded by their charters through 2024. Not only did they completely avoid public and political backlash throughout the boom, but their post-boom earnings will stay stronger for longer.
Danaos orders more newbuildings
The second-largest publicly listed tonnage provider, Greece’s Danaos Corp. (NYSE: DAC), recorded aggregate net income of $1.8 billion in 2020-2022. Danaos owns a fleet of 68 container ships plus eight under construction, with total capability of 476,293 twenty-foot equivalent units.
On Monday, Danaos reported net income of $146.2 million for the primary quarter of 2023. Adjusted earnings per share got here in at $7.14, topping the consensus forecast of $6.22.
Danaos’ earnings were inflated by a dividend from its stake in liner company Zim (NYSE: ZIM) in Q1 2022. Excluding the sooner Zim gain (it now not owns Zim shares), Danaos’ Q1 2023 adjusted net income was up 16% 12 months on 12 months. Operating revenues were up 6%.
![KPIs of container shipping lessor Danaos](https://www.freightwaves.com/wp-content/uploads/2023/05/16/image-9-1200x203.png)
That’s a stark contrast to what’s happening with first-quarter shipping line profits, which have plunged by 60% to 95% 12 months on 12 months.
Most shipping line contracts with cargo shippers last just one 12 months. Virtually the entire freight contracts signed at inflated rates throughout the boom have now expired.
Many of the tonnage providers’ boom-inflated vessel contracts with container lines were signed for multiple years’ duration. The upside remains to be firmly in place. Moreover, tonnage providers are having no trouble signing fresh charter contracts with liners (at lower yet still profitable rates) despite a flood of newbuilding deliveries.
As of February, Danaos had 93% of its capability sold out for 2023 and 64% sold out for 2024. As of Monday, it was 97% covered for this 12 months and 73% covered next 12 months. Its average charter duration is 3.2 years.
Danaos booked a further $380.7 million in contracted revenue over the past three months. That included $262 million for three-year charters for six newbuildings to be delivered within the second half of 2024. (Two have 7,100-TEU capability, 4 have 7,200-TEU capability; all are methanol-fuel-ready.)
The corporate is so confident in future prospects that it just signed contracts for 2 additional 6,000-TEU newbuildings — without charters attached and without financing in place. One is due for delivery in Q4 2024, the opposite in Q2 2025.
Danaos’ shares rose 4.6% on Tuesday because the broader market fell and the Dow dropped over 300 points.
Costamare’s container segment ‘stays robust’
Atlas Corp., owner of Seaspan, was previously the biggest U.S.-listed tonnage provider. It was taken private by buyers Fairfax Holdings, company insiders and ocean carrier ONE, and delisted in March. The most important U.S-listed tonnage provider now could be Greece’s Costamare (NYSE: CMRE). It owns 71 container ships with aggregate capability of 524,000 TEUs.
Costamare, unlike Danaos, is a mixed-fleet operator. It also owns 43 dry bulk vessels and is the lead investor in a leasing platform that covers multiple shipping segments.
Costamare now has 98% of its container-ship capability booked for this 12 months and 86% for next 12 months. The typical TEU-weighted duration of its charters is 4.1 years.
On Monday, Costamare reported net income of $141.6 million for Q1 2023 versus $115.4 million in Q1 2022. Adjusted earnings per share got here in at 38 cents, just above the consensus forecast for 36 cents.
![KPIs of container shipping lessor Costamare](https://www.freightwaves.com/wp-content/uploads/2023/05/16/image-8-1200x203.png)
Costamare’s results were “impacted by the softer dry bulk environment … [but] the container segment stays robust, greater than offsetting losses from the dry bulk segments,” said Nokta.
In accordance with Stifel analyst Ben Nolan, Danaos’ dry bulk fleet “has been a drag to performance,” whereas its container-ship fleet “continues to pay out impressive levels of money flow on relatively long-duration contracts.”
Container-ship charter rates “have fallen off materially” from boom-era highs, but Costamare has an “extremely favorable glide path” courtesy of “its pandemic-related contract extensions,” said Nolan.
Charter market rises off the underside
The container-ship charter market has defied negative expectations. It has risen off the underside since March, despite a record wave of newbuildings entering the market and a continued fall in average freight rates.
The Harpex index, which measures global charter rates, is down 74% from the all-time high reached in March 2022. However it’s up 17% from March lows and is over double levels in mid-May 2019, pre-COVID.
“The orderbook stays the principal threat to the market,” acknowledged Costamare CFO Gregory Zikos on Monday’s conference call with analysts. Even so, he noted that “charter rates are on a rising trend with high demand across the board, while fixture periods are increasing in duration.”
Danaos CEO John Coustas said on Tuesday’s call, “The charter market has improved because of the very limited supply of charter-free vessels in addition to the impact of speed reductions as charterers seek to comply with CII [environmental] regulations.”
Coustas expressed little concern in regards to the company’s five 13,082-TEU ships on charter to South Korea’s HMM at $64,918 per day that come up for renewal next 12 months. Those vessels have options for three-year extensions at $60,418 per day that might have to be declared starting in Q4 2023.
“We will not be really concerned, because there are only a few, if any, ships of that size available in 2024,” said Coustas.
“We’re already involved with quite a few liner firms in regards to the employment of those ships. So, we will certainly have something fixed as soon as there may be more clarity on whether the prevailing charterer goes to exercise the choices.”
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