Despite billions in canceled orders, container imports stay near peak

U.S. imports accelerated in July, with inbound cargo from China reaching a year-to-date high, according to Descartes.

Walmart said Tuesday that it had “canceled billions of dollars in orders to help align inventory levels with expected demand.” Target disclosed the following day that it had canceled over $1.5 billion in orders, and revealed that it had shipped in much of its back-to-school goods early.

Nevertheless, U.S. import activity keeps chugging along near all-time highs.

Unprecedented throughput at the nation’s terminals has not been enough to clear queues of waiting ships. As of Thursday morning, there were still 130 container vessels waiting off North American ports.

According to newly released numbers from Descartes, U.S. imports totaled 2.53 million twenty-foot equivalent units in July. That’s up 3% year on year and 15% from July 2019, pre-pandemic. It was the best July on record, with volumes up 2% sequentially from June. This July marked the fifth-highest monthly volume ever recorded by Descartes.

chart showing data on imports
(Chart: Descartes. Data source: Descartes Datamyne)

U.S. imports from China rebounded last month, according to Descartes. It said volumes from China totaled 994,927 TEUs, up 6.3% year on year and 6.9% from June. More containerized cargo was imported from China in July than in any other month this year, with Chinese goods accounting for 75% of the year-on-year TEU increase.

“A number of factors — such as a slowing economy, inflation and high fuel costs — have not had the anticipated impact [of] slowing down U.S. container imports,” said Descartes.

The McCown Report analyzes volumes at the top 10 U.S. ports. McCown found that July imports at these ports were up 0.7% year on year. Imports at the leading East Coast and Gulf Coast ports rose 6.6% and imports at West Coast ports fell 4.9%.

August imports look strong

Import volumes continue to look strong midway through August. Month-to-date U.S. Customs data shows little letup in imports versus July, although some ports might see a small pullback. “Imports will begin to ease somewhat” in Los Angeles in August, predicted the port’s executive director, Gene Seroka.

Ports with large ship queues — New York/New Jersey; Savannah, Georgia; and Houston — are guaranteed to have strong import volumes through at least this month, simply because of cargo backlogs offshore.

chart showing data on imports
(Chart: FreightWaves SONAR)

And despite all the excess inventories held by retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), U.S. consumer demand remains strong. July retail sales — adjusted for inflation and seasonality and excluding motor vehicles and auto parts — were up 0.5% from June and 0.3% year on year.

Adjusted July retail sales were up 17.5% from the same month in 2019, pre-pandemic.

Sales inflation-adjusted to 2019 dollars (Chart: American Shipper based on data from U.S. Census)

National port capacity maxing out?

With consumption levels and imports still well above pre-COVID-era levels, the U.S. port system continues to operate at around maximum throughput. Monthly import volumes appear to be bouncing around near a capacity ceiling.

Descartes has previously stated: “Port congestion became a significant issue when the U.S. consistently exceeded import volumes of 2.4 million TEUs per month starting in March 2021. As long as monthly U.S. container import volumes are above 2.4 million TEUs, port congestion will continue until infrastructure changes are made.”

According to John McCown, author of The McCown Report: “Many ports and terminals are operating at or near capacity. The present U.S. port system is not in the position to accommodate the geometric growth in container volume that is on the foreseeable horizon. 

“To handle that growth, something more than just marginal improvements to capacity is needed. Among other things, new container terminals and even entirely new container ports will be needed to efficiently handle container volume over the ensuing decade. 

“This will require significant infrastructure investment, but that funding requirement needs to be balanced against the disruption that occurred recently. Without meaningful steps taken, such disruption will be more episodic in the future as volume grows over time,” warned McCown.

Click for more articles by Greg Miller 

Volumes at Virginia, South Carolina ports reflect East Coast challenges, opportunities

July was a record month at the Port of Virginia. At SC Ports, July’s volumes were up from June as the Port of Charleston sought to improve port flows.

The East Coast ports have been facing higher volumes as shippers seek to avoid congestion at the West Coast ports. That increased activity has resulted in volume growth at some ports — and processing backups at others.

‘Most productive July’ at Port of Virginia

July was a record month at the Port of Virginia, with the Norfolk complex handling nearly 318,000 twenty-foot equivalent units, a 8.4% gain over July 2021. 

Last month was “the most productive July in the port’s history,” and it was the fourth consecutive month that volumes exceeded 317,000 units, the Virginia Port Authority said Wednesday.

Of that total, July loaded imports were 149,829 TEUs, up 4.8% year over year. Meanwhile, loaded exports totaled 85,170 TEUs, up 5.1% from a year ago.

Container tonnage climbed 5.7% to 2.2 million TEUs but breakbulk tonnage slipped 17.5% to 7,402 TEUs.

The port thinks 2022 could potentially be the best performing calendar year on record, especially if business remains strong during the peak retail months that lead up to the holiday season, according to Stephen A. Edwards, Virginia Port Authority CEO and executive director.

“What we are seeing is growing interest from ship lines and cargo owners that are working to restore some predictability and reliability to their vessel services and supply chains. We have a proven track record of success in what remains a challenging trade environment and the result is growth at the Port of Virginia,” Edwards said. 

He noted that the port has brought on 10 new vessel services in the last 12 months, with five of those brought on within the last five months. 

July volumes rise at South Carolina Ports following June dip

Congestion at some of the East Coast ports has caused volume throughput to slow down — something that the South Carolina Ports Authority is trying to improve.

SC Ports handled 216,097 TEUs at the Wando Welch, North Charleston and Leatherman terminals at the Port of Charleston in July, up 10% from June’s total of 196,225 but down 11.7% from July 2021’s total of 244,821 TEUs. 

SC Ports also handled 119,872 pier containers in July, up 9.8% from 109,124 pier containers in June but down 12.6% from 137,158 pier containers last July.

To improve supply chain flows, SC Ports has extended Sunday gate hours for motor carriers, and that extension will last through at least the peak season. SC Ports also said it has been giving berth priority to vessels taking out more cargo, launched a port-owned and port-operated chassis pool and hired more employees to handle the influx of cargo. SC Ports also said it has significantly improved rail dray dwell times. 

SC Ports said there have been no vessels waiting to berth since early May, even though supply chain challenges exist at other East Coast ports. 

“We are continuing to be adaptive and responsive to ensure fluidity for our customers and cargo owners,” SC Ports President and CEO Barbara Melvin said in a news release. 

In addition to these operational changes are capital investments, including new ship-to-shore cranes. SC Ports says there are 15 such cranes now at the Wando Welch Terminal. Together, these cranes will enable the terminal to work three 14,000-TEU vessels simultaneously.

The last crane was installed recently at the waterfront. 

“It is truly remarkable to see the final crane of our new fleet moved into place on the Wando Welch Terminal wharf. This is the culmination of years of effort, planning and coordination by our team and project partners,” Melvin said. “Our modern equipment provides smarter operations and more fluidity for the supply chain.”

The cranes are part of a $500 million investment to modernize the terminal. Other improvements will include new container-handling equipment, a modernized container yard and refrigerated cargo yard, improved traffic patterns and IT systems, a strengthened wharf and an on-terminal transload facility for mega retailers, SC Ports said.

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Turning point? Port of LA boss sees imports ‘easing’ lower in August

With East Coast ship queues high, port executive Gene Seroka says: “For cargo owners looking to rechart their course, come to Los Angeles.”

photo of container port of Los Angeles

Los Angeles, America’s largest container port, saw no letup in imports in July. But the numbers could finally start to pull back this month, according to Gene Seroka, executive director of the Port of Los Angeles.

Seroka reported Wednesday that Los Angeles handled 935,345 twenty-foot equivalent units last month, making it the port’s best July on record. Volumes were up 5% year on year.

Imports totaled 485,472 TEUs, up 3% year on year and up 9% compared to June.

(Chart: American Shipper based on data from Port of Los Angeles)

“Imports will begin easing somewhat,” said Seroka. “I expect to see that reflected in our August cargo numbers. China factory orders are slowing and some retailers continue to have elevated inventories. You’ll start to see a tapering of some imports, specifically the commodities that won’t be repeatedly purchased every year: appliances, fixtures, furniture, sporting goods.

“But I still like our chances for a strong back half of the year. The cargo that’s coming in the months and weeks ahead will look different than the inventory that’s already on the ground: more seasonal products and the all-important year-end holiday products.”

Blue line: 2022 U.S. imports; 7-day moving average; green line: 2021 (Chart: FreightWaves SONAR)

Landside issues easing — except for rail

Terminal fluidity continues to improve in Los Angeles.

According to Seroka, “Even with today’s rail challenges, our container terminals are in pretty good shape. We’re down to about 2,000 containers waiting nine-plus days for trucks versus more than 32,000 units last October. Dwell time for truck-bound containers is now at four days, close to more traditional times and a significant decline from the high of 11 days.”

On the more problematic rail side, he said, “Inland rail terminals look just like the port did last year — stacks of cargo, folks not picking it up quick enough, and importers who are allowing containers to dwell for a longer time than they normally would. With that, we struggle to load the next train and move it out of Los Angeles.

“We’ve now got more than 33,700 cargo containers designated for rail sitting on Port of Los Angeles docks. In more normal times, that number should be about 9,000. And of those 33,000-plus boxes, more than 20,000 have been sitting nine days or longer. We never used to see that much cargo sitting for nine days. We’ve got to continue to encourage the importers to pick up their cargo [from inland rail terminals] faster so we can get the next trains in.”

Southern California ship queue down

Meanwhile, the queue of container ships waiting offshore has fallen to very low levels. According to the Marine Exchange of Southern California, there were 15 container ships in the Los Angeles/Long Beach queue as of Wednesday, down from 109 in January. The count hit a low of nine ships on Aug. 10.

Cargo volumes were rerouted to the East and Gulf coasts starting in the second quarter due to concerns about Los Angeles/Long Beach peak season congestion, as well as the threat of work slowdowns after the West Coast port labor contract expired July 1.

Now, the tables have turned. MarineTraffic ship-position data shows queues are higher on the East and Gulf coasts than on the West Coast. As of Wednesday afternoon, there were 33 container vessels off Savannah, Georgia, 23 off Houston and 19 off New York/New Jersey.

Seroka made a sales pitch to shippers and suggested they reconsider their decision to avert the West Coast.

“At many other ports around the country, ships are waiting for space, yet here our terminals have capacity. So, for cargo owners looking to rechart their course, come to Los Angeles. We’re ready to help.”

Long Beach volumes also still high

The adjacent Port of Long Beach reported its July numbers on Aug. 9. Long Beach handled total throughput of 785,845 TEUs last month, making it the port’s best July on record.

Long Beach posted its third-highest tally on record for imports in July. Imports came in at 376,175 TEUs, down 1.5% year on year.

The import decline versus the preceding two months was steeper. Long Beach imports hit a year-to-date high of 436,977 TEUs in May. July’s total was 14% lower.

(Chart: American Shipper based on data from Port of Long Beach)

Click for more articles by Greg Miller 

Container line Zim hit by exposure to falling spot rates

Trans-Pacific spot container shipping rates continue to head lower. Zim appears more at risk than some of its rivals.

a photo of a zim container ship

Niche ocean carrier Zim has been one of the great success stories of the container shipping boom. It expanded its fleet faster than larger rivals off a smaller base, focused only on the highest-paying lanes — like the trans-Pacific — and kept spot exposure high at 50%. As earnings skyrocketed, it became the largest U.S.-listed shipping company by market cap.

Freight rates for the second quarter of 2022 disclosed by Zim (NYSE: ZIM) on Wednesday show that it’s still outperforming larger carriers on rates. Yet the numbers reveal a rising risk: Zim is more exposed to weakening spot rates than liner giants like Maersk and Hapag-Lloyd. And those spot rates are continuing to fall.

Zim reported net income of $1.3 billion for Q2 2022, up 50% from the year before but down 22% from net income of $1.7 billion Q1 2022. Adjusted earnings per share of $11.07 fell short of the consensus forecast for $13.37. Zim’s stock price decline 6% Wednesday despite a dividend boost.

Adjusted earnings before interest, taxes, depreciation and amortization of $2.1 billion came in 15% below analyst consensus and down 17% from the first quarter.

Hapag-Lloyd raised its full-year guidance on July 28. Maersk followed suit on Aug. 2. On Wednesday, Zim kept its guidance unchanged, for full-year EBITDA of $7.8 billion-$8.2 billion.

The good news: This is up 18-24% from Zim’s record year of 2021. The bad news: It implies Zim’s second-half EBITDA will decline 32-36% versus the first half.

Spot rate exposure

In contrast to Zim, Maersk expects its second-half EBITDA to fall 9% versus the first half. Hapag-Lloyd anticipates a drop of 3-21%.

Ocean carrier earnings are highly leveraged to average freight rates. Maersk’s spot exposure is down to 29%, while Hapag-Lloyd boasts a much more diversified service footprint than Zim. 

Despite spot rates falling double digits between the first and second quarters, Maersk’s average rate (including both spot and contract) actually increased 9.4% to $2,492 per twenty-foot equivalent unit in Q2 2022. Hapag-Lloyd’s average rate increased 5.8%, to $2,935 per TEU.

Not so with Zim. Its average Q2 2022 rate was $3,596 per TEU, much higher than Maersk’s or Hapag-Lloyd’s, but unlike those carriers, Zim’s second-quarter average decreased 6.5% from the first quarter.

(Chart: American Shipper based on data from Maersk, Hapag-Lloyd, Zim)

Zim had previously stated that rates on its annual trans-Pacific contracts that began in Q2 had more than doubled year on year. The fact that its average rate still fell compared to Q1, even with the higher contract rates included, underscores Zim’s exposure to trans-Pacific spot rates.

Spot rates continue to decline

Indexes measuring Asia-U.S. spot rates have shown a continued decline throughout this year.

The Freightos Baltic Daily Index (FBX) assessment for the China-West Coast route is down 57% year to date. The FBX China-East Coast assessment is down 44%.

Blue line: China-West Coast, green line: China-East Coast (Chart: FreightWaves SONAR)

The FBX incorporates the effect of premium surcharges in its calculations. This has resulted in a steeper decline than shown by other indexes that don’t include premiums in their assessments.

Zim CFO Xavier Destriau said during the conference call the surcharges “had been a significant feature toward the end of 2021 and during the first quarter of 2022, [but] these have clearly faded over the [second] quarter. And we are not assuming we will generate significant additional surcharges going forward.”

On spot rate trends, Zim CEO Eli Glickman said, “Over the past several weeks, we’ve seen a decline in freight rates, particularly in the trans-Pacific. We recognize that the trades may have peaked, however, rates remain elevated and therefore very profitable.”

Destriau predicted that spot rates will continue to gradually decrease, with third-quarter averages below the second quarter, and fourth-quarter averages below the third.

Asked why trans-Pacific spot rates are falling despite high U.S. port congestion — particularly on the East and Gulf coasts — Destriau replied, “Demand is still strong, but it’s not as strong as it used to be. Let’s be clear: There are signs of weakening. That may be … why rates are starting to normalize.”

Zim’s fleet capacity and throughput

Zim’s focus on spot upside in targeted trade lanes was one reason its earnings rose so fast during the COVID era. Another reason, particularly in the earlier stages of the pandemic demand surge, was its decision to rapidly grow its throughput by adding more ships to its fleet.  

Its fleet has risen from 96 vessels at the time of its January 2021 initial public offering to 149 currently. Almost all of the additions are from the charter market, with Zim paying premium rates for multiyear leases. By agreeing to high-priced charters, it increased its upside exposure to the record-high freight market — at the expense of downside commitments to pay high charter rates in years ahead when freight rates will almost certainly be lower.

By paying steep charter prices to add more ships, Zim was able to grow its fleet, and thus its quarterly throughput, faster than larger liners that kept their fleet size steady off much larger bases. 

Zim’s Q2 2022 throughput was up 23% since Q4 2019, the last quarter before the pandemic. In contrast, Hapag-Lloyd’s quarterly throughput was down 1% over the same timeframe, and Maersk’s was 8% lower.

(Chart: American Shipper based on data from Maersk, Hapag-Lloyd, Zim)

Zim’s quarterly throughput peaked a year ago. It handled 856,00 TEUs in Q2 2022, down 7% from Q2 2021. The charter market has been largely sold out, providing less opportunities to grow the fleet with leased tonnage, while port congestion continues to limit throughput.

In other words, an earlier driver of Zim’s earnings boom — fleet growth — had already stalled and now another driver — rates —  is headed down.

Zim’s future charter exposure

Asked about the company’s ability to unwind charter exposure should there be a recession, Destriau pointed out that Zim has 28 charters come up for renewal in 2023 and 34 in 2024. Meanwhile, it has 46 long-term-chartered newbuildings due for delivery in 2023-24.

Destriau maintained that this mix gives Zim flexibility to manage its fleet size based on market conditions. 

If freight rates are strong enough, it will renew expiring charters and add new service strings as newbuilds are delivered. “But if the global economy enters a prolonged recession and demand significantly drops, then obviously, we would not renew those charters.”

Click for more articles by Greg Miller 

The plunge in dry bulk shipping: Ominous signal on China’s economy?

Rates and sentiment in dry bulk shipping have fallen hard. Economic pressures in China appear to be a major culprit.

photo of a dry bulk ship unloading in China

It wasn’t just container shipping that raked in the cash last year. Dry bulk shipping enjoyed its best year in a decade. This year is different.

Container shipping spot rates have fallen, but contract rates are up, supporting average rates. Ongoing port congestion is still tying up container ships and partially offsetting a pullback in cargo demand. Container lines will earn even more in 2022 than 2021.

Not so in dry bulk. Spot rates have nosedived and bulker owners are far more exposed to spot pricing than container lines. Dry bulk congestion has cleared, releasing significant capacity into the market. Dry bulker owners may be back in the red by year-end.  

China appears to be the culprit for much of dry bulk’s reversal, particularly for larger bulkers known as Capesizes (vessels with capacity of around 180,000 deadweight tons or DWT) that heavily rely on Chinese imports of iron ore and coal.

“The Cape market continues to be as appetizing as a bucket of prawns on a hot day,” wrote brokerage FIS on Tuesday. “Although the index decline slowed today, it was mainly due to the fact that we can’t actually fall much further as we rapidly approach the Earth’s core.”

Rates for sub-Capesize bulkers known as Panamaxes (65,000-90,000 DWT) and Supramaxes (45,000-60,000 DWT) — which carry a wide variety of cargo, are less dependent on China and have rates more in line with global GDP moves — are also sinking.

What’s happening in the dry bulk market could be an indicator of deepening economic pain in China and elsewhere.

Sentiment is ‘worst it has been in many years’

In October, average Capesize rates topped $80,000 per day and some individual ships earned over $100,000 per day. As of Tuesday, the Baltic Capesize index assessed rates at just $8,783 per day. That’s not only well below all-in cash breakeven, which includes financing costs, it’s below operating expenses (crewing, stores, etc.)

Freight futures are also falling. Brokerage SSY reported that calendar year 2023 Capesize forward freight agreements were offered Tuesday at $14,900 per day and 2024 contracts at $14,750 per day.

According to Breakwave Advisors, founder of the Breakwave Dry Bulk Shipping ETF (NYSE: BDRY), “Freight futures, especially ones maturing beyond next month, are purely driven by expectations. Earlier this year, memories of last year’s $100,000 day rates increased hopes of a repeat, driving futures to unexplainably frothy levels that have now retracted back to reality.

“The ongoing spot market collapse is having a detrimental impact on traders’ sentiment [and is creating] very steep losses on numerous freight books.

“The weak spot market reflects China’s ongoing recession in the real estate sector … [which is] very crucial for shipping,” said Breakwave. “That is something that should have been easily identifiable months ago. But it wasn’t, as traders were blinded by vivid memories of the past. Currently, sentiment is the worst it has been in many years.”

Chinese stimulus to the rescue?

Chinese steel production — which supports iron ore and coal imports — fell to 907 million tons in July, down 6% from June, according to the World Steel Association.

The hope in dry bulk shipping circles is that China will unveil a major stimulus plan in the second half to offset economic hits from lockdowns and the real estate crisis.

“Our view is that absent a historic collapse of the Chinese economy, upcoming stimulus efforts will provide the catalyst for major restocking of iron ore, and thus, a swift jump in dry bulk demand,” said Breakwave.

The counterargument: According to a report in the Australian Financial Review, Morgan Stanley believes China is hesitant to deploy major levels of stimulus; that even if it does, there would be a six-month lag until it shows up materially in commodities markets; and that Chinese domestic iron ore stockpiles are currently high.

Rates for medium and smaller bulkers also falling

During parts of the 2021 dry bulk rally, as well as this year, smaller bulkers outperformed larger ones. Smaller vessels are still outperforming Capesizes but at lower rate levels; the sub-Cape vessel classes are pulling back too.

According to Clarksons Securities, average spot rates for Supramaxes were the equivalent of $17,700 per day on Tuesday. Supramaxes earned almost twice that in March.

Panamax rates were down to $17,000 per day on Tuesday. Panamax rates neared $30,000 per day in March.

(Chart: Clarksons Securities. Data: Clarkson Research Services, Clarksons Securities)

Dry bulk stocks head south

U.S.-listed dry bulk stocks performed exceptionally well in 2021, racking up triple-digit gains. They continued their ascent in the first five months of the year, despite the negative news on the Chinese economy due to COVID-19 lockdowns and that country’s real estate crisis.

However, since the beginning of June, dry bulk stocks have taken a downward turn, in line with trends in rates and freight futures. Star Bulk (NASDAQ: SBLK) — whose ships earn more because of their exhaust gas scrubbers — is down 22%, Safe Bulkers is down (NYSE: SB) 23%, Grindrod (NASDAQ: GRIN) 26%, Golden Ocean (NASDAQ: GOGL) 30%, Eagle Bulk (NASDAQ: EGLE) 32% and Genco Shipping & Trading (NYSE: GNK) — which has heavy Capesize exposure — 38%.

(Chart: Koyfin)

Click for more articles by Greg Miller 

Port projects pull in nearly $57M in infrastructure grants

Inland port projects and rail cargo handling facilities are among the projects awarded grants through the Department of Transportation’s RAISE program.

Increasing intermodal rail capacity at select ports and developing inland ports are among the goals of projects receiving millions in federal grant money.

The funding came from the RAISE grant program, which stands for Rebuilding American Infrastructure with Sustainability and Equity. The program, administered by the U.S. Department of Transportation, awarded more than $2.2 billion to projects nationwide to “modernize roads, bridges, transit, rail, ports and intermodal transportation and make our transportation systems safer, more accessible, more affordable and more sustainable,” according to a Friday news release.

Among the grants with a railroad or port component were:

  • $25 million for the Victory Project in Nevada.

Funding will be used to complete the planning, environmental studies, engineering design and construction of a stretch of the Nevada Pacific Parkway connecting I-80 and Highway 50. The funding will cover the roadway and bridge component, which will include a new switch off the Union Pacific (NYSE: UNP) to facilitate the creation of a rail switching yard. This project will create an inland port with capacity for rail switching as well as access to both UP and BNSF (NYSE: BRK.B).

“The project will create a state-of-the-art, dedicated and safe area for loading and discharging containers on and off the rail at the port to reduce vehicle miles traveled and support efficient transportation design,” DOT said. “The project will divert nearly 250,000 container boxes from trucks to rail over the next decade. This will speed up the movement of goods to and from the port and benefit the local and regional populations by creating new jobs.”

  • $16 million for cargo mobility optimization and intermodal rail capacity expansion at Port Miami.

The project, which will be spearheaded by Miami-Dade County, includes the construction of 3,200-foot-long rail tracks and the acquisition of three new electric rubber-tired cranes.

  • $13.6 million for multimodal laydown and transportation infrastructure improvements at the Port of Port Arthur in Texas. 

The Port Arthur Navigation District is seeking to convert an abandoned rail yard into a modern cargo storage and staging area. DOT said the area will reduce truck idling and emissions and improve freight mobility and multimodal transfer capabilities.

  • $1.79 million for a Lincoln County rural planning project in Wyoming. 

Lincoln County will develop a plan to improve several aspects of transportation in Wyoming, including upgrading the freight rail system, providing electric vehicle charging stations and improving public transit, DOT said. This will include finding areas “ripe for freight access,” as well as determining optimum locations charging and/or fueling stations. 

  • $445,000 for development of a multimodal logistics center in Utah.

The Utah Inland Port Authority will use the funding for a market assessment and business case analysis for a multimodal logistics center and related infrastructure needs in southern Utah. The project is designed to reduce truck transport and expand the capabilities of freight rail movement as well as improve air quality from the modal shift. 

The full list of awardees plus project descriptions can be found here.

According to RAISE program guidelines, 50% of funding must be designated for projects in rural areas and 50% must be for projects in urban areas. 

The RAISE grant program was formerly known as BUILD grants and TIGER grants in past iterations under previous White House administrations.

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Five years on Wall Street: Shipping’s exits, arrivals, whales and minnows

The latest shipping company poised to delist has a market cap of $3.9 billion. The latest new entrant’s market cap is under $20 million.

photo of NASDAQ, where more shipping stocks are listing

There were high hopes in the 2000s and even the 2010s that ocean shipping would evolve into something more than a niche trading and investing space on Wall Street.

The hope was that consolidation would whittle down the crowded field to a few large-cap whales with business models that worked across cycles and garnered the respect of larger investment funds. The reality over the past half-decade: Consolidation is coinciding with larger-cap shipping stocks going private. And the field of shipping minnows — including penny stocks — keeps growing.

Another one bites the dust …

The latest expected departure: Atlas Corp. (NYSE: ATCO), owner of Seaspan, the world’s largest container-ship lessor. It has 127 vessels on the water with total capacity of 1.16 million twenty-foot equivalent units and an additional 67 on order with total capacity of 793,800 TEUs. Atlas has a market cap of $3.9 billion.

Atlas received a take-private proposal on Aug. 4 from holders of 68% of its stock, as well as ocean carrier ONE. The stated rationale for the plan is that “the shipping industry will go through significant changes over the next several years … and it will be essential for the company to make timely decisions, many of which could impact short-term results … decisions [that] cannot be made as efficiently as a public company.”

That sounds like an argument that shipping companies shouldn’t be public in the first place. The industry has always faced significant changes in its markets — many unforeseen. They have always required management to weigh short-term stock effects versus long-term returns.

Loss of shipping stocks due to privatizations

The public liquefied natural gas (LNG) shipping sector, in particular, has been gutted by privatizations and fleet sales in recent years. “Unfortunately, there are very few ways to play LNG shipping with the public equities,” noted Stifel analyst Ben Nolan in May.

Teekay LNG was acquired by private equity company Stonepeak in January. GasLog Ltd. was bought by BlackRock in June 2021.

Outside of the LNG space, container-equipment lessor CAI was bought by Japan’s Mitsubishi Capital in November. Seacor, which owned U.S.-flag vessels, was taken private by American Industrial Partners in April 2021.

Mixed-fleet owner DryShips was taken private by its controversial Greek sponsor George Economou in August 2019.

“You can’t paint all of the privatizations below with a broad brush,” a shipping finance source who declined to be identified told American Shipper. “DryShips had become uninvestable and would never get anything near NAV [net asset value] valuation. Seacor was a conglomerate that frankly didn’t act as a public company.

“The one thematic you could arrive at is that LNG shipping is long-term-contract-based, but because of the pool it swam in — shipping — it was never going to get the infrastructure-like valuations it truly deserved. So, private equity and others were attracted to the cash flows and low entry points and took them private.”

Loss of stocks due to sales

Beyond privatizations, the field of U.S.-listed shipping stocks has been pared by sales to other public companies that are not predominantly in shipping, or are outside U.S. equity markets.

In January, Golar LNG Ltd. (NYSE: GLNG) exited shipping with the sale of its LNG carrier fleet to a new entity, The Cool Co. (The Cool Co. is listed in Oslo.)

Golar LNG Partners was sold to New Fortress Energy (NYSE: NFE) in April 2021.

The company formerly known as Scorpio Bulkers announced its partial exit from bulk shipping in August 2020. It confirmed a full exit that December. It sold its last bulker in Q2 2021. The renamed company, Eneti (NYSE: NETI), is now focused on offshore wind-farm installations.

Loss of stocks due to consolidation

A further reduction in shipping names is coming through consolidation by larger U.S.-listed players.

Navios Holdings (NYSE: NM) announced the sale of its entire drybulk fleet to daughter company Navios Partners (NYSE: NMM) on July 27. Previously, Navios Acquisition bought Navios Midstream in December 2018, and Navios Partners bought Navios Acquisition and Navios Containers last year. There’s now one Navios stock covering containers, dry bulk and tankers — Navios Partners — down from five.

In the tanker space, Frontline (NYSE: FRO) plans to acquire Euronav (NYSE: EURN) and create a combined entity with a market cap of $4.2 billion. Euronav CEO Hugo De Stoop would lead the combined entity and current Euronav shareholders would own 55%.

That megadeal is contingent on more than 50% of Euronav shareholders tendering stock to Frontline in Q4 2022 — a tender that may come up short given opposition by the Saverys family, which owns 20% of Euronav’s shares.

Other consolidations in the U.S. public market over the past-half decade included the acquisition of Diamond S Shipping by International Seaways (NYSE: INSW) in July 2021, the merger of Global Ship Lease (NYSE: GSL) and private box-ship owner Poseidon Containers in November 2018, the sale of the Gener8 Maritime fleet to Euronav and International Seaways in June 2018, and the sale of Navig8 Product Tankers’ fleet to Scorpio Tankers (NYSE: STNG) and the BW Group’s supertanker fleet to DHT (NYSE: DHT) in 2017.

Additions from spinoffs, IPOs and direct listings

The loss of aggregate market cap in the U.S.-listed shipping space due to privatizations and fleet sales would have been severe save for one big arrival: Israeli container liner operator Zim (NYSE: ZIM), which conducted an initial public offering in January 2021. Zim currently has a market cap of $6 billion and is by far the largest U.S. listed shipping stock.

There were three other sizeable Wall Street newcomers in recent years: LNG carrier owner Flex LNG (NYSE: FLNG) debuted via a direct listing in June 2019. Product tanker owner Torm (NASDAQ: TRMD), dual-listed on Nasdaq in January 2018. And dry bulk owner Grindrod (NASDAQ: GRIN), dual-listed on Nasdaq in June 2018.

Beyond that, newcomers have been dominated by Nasdaq-listed microcaps that frequently dip in and out of penny-stock territory and have extremely low market caps. Pricing of these names, sponsored by Greek shipowners, is highly volatile, assumedly appealing to retail traders who buy stocks as if placing bets at a casino.

The latest entrant is bulker owner United Maritime (NASDAQ: USEA), a spinoff of Seanergy (NASDAQ: SHIP). United’s shares have lost 73% of their value since listing on July 6. Its current market cap is under $20 million.

Shares of tanker owner Imperial Petroleum (NASDAQ: IMPP) — a spinoff of StealthGas (NASDAQ: GASS) — were listed on Dec. 3. Its shares traded at 37 cents on Monday, down 95% from its public debut.

Shares of OceanPal (NASDAQ: OP) — a spinoff of Diana Shipping (NYSE: DSX) — commenced trading on Nov. 30. The stock was at 46 cents on Monday, down 90% from its first day of trading.

Mixed fleet owner Castor Maritime (NASDAQ: CTRM) began trading on the Nasdaq in early 2019. Its share price is down 91% since then.

More microcaps to come

United, Imperial Petroleum, OceanPal and Castor have all done equity offerings handled by the Maxim Group. During the Marine Money conference in New York on June 23, Lawrence Glassberg, executive managing director, predicted more entrants to come.

“You will see smaller companies coming public. One of the big things you’re seeing: new companies going public through spinouts. I would venture to say you’ll probably see another three to five by the end of this year — new public companies coming out.

“From our perspective on the Maxim side, we do have at least one company on file for an IPO that’s on the smaller side and we’re transitioning with another company to a public transaction. There is appetite. It’s all about volatility, volatility, volatility. There is the ability to sell equity to investors,” said Glassberg.

Threats to future scale

Thanks to Zim, the combined current market cap of the new shipping names that debuted over the past five years is roughly in line with the preannouncement market caps of shipping names that privatized or sold out.

The big difference is in the scale of the companies. Median market cap of the new entrants is about half that of the median for departures.

Will more privatization plans follow the latest proposal for Atlas, leading to the loss of more big names?

What the LNG companies had in common with Atlas was a preponderance of multiyear contracts. Public dry bulk and tanker owners don’t have that long-term coverage. Even in booms, public dry bulk and tanker owners maintain significant spot exposure, and time-charter durations are shorter than in LNG or container shipping.

Because of this, the financial source speaking to American Shipper said, “I don’t believe it’s the privatization angle that threatens the future scale of the public shipping space.”

He does see two other threats to scale, however. First, the “hyper-cyclical volatility amid the microcaps.” And second, the very nature of tankers and bulkers, which is to carry fossil-fuel cargoes. Assuming global decarbonization efforts move forward, then “over time there will be less oil and coal to move. Not immediately, obviously, but over the next 10 to 15 years.”

Yang Ming: Revenue up nearly 50% — end of story

Yang Ming summed up its second quarter and the first half of 2022 in about 150 words.

Yang Ming Marine Transport Corp. released a brief financial statement Thursday in which it announced net profit for the first six months of 2022 totaled $4.04 billion. 

Yang Ming does not typically share wordy earnings reports, but Thursday’s news release was even briefer than usual — only one paragraph long, about 150 words and numbers. 

The Taiwanese ocean carrier said Q2 consolidated revenue, converted to U.S. dollars, totaled $3.8 billion. It said that represented a 49.4% improvement from the second quarter of 2022 but did not provide last year’s revenue total.

Yang Ming said Q2 net profit was $1.9 billion but did not disclose how that compared to 2021. It did say consolidated revenue for the first half of 2022 was up 59.5% year over year to $7.5 billion. 

The company said it handled 2.27 million twenty-foot equivalent units in the first six months of the year, a 2% increase from the same period in 2021. 

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Click here for more American Shipper/FreightWaves stories by Senior Editor Kim Link-Wills.

Hapag-Lloyd CEO: US consumer still ‘holding up,’ demand not collapsing

Hapag-Lloyd bookings point to a gradual unwind of the container shipping boom, not a crash.

photo of a container ship

The container shipping outlook from Hapag-Lloyd, the world’s fifth-largest liner company: Demand is moderating, spot freight rates should keep ticking lower, and congestion — currently very high — should abate. But demand is not collapsing. Congestion in some regions, such as the U.S. East Coast, is more stubborn than in others. And higher contract rates will offset spot rate declines, leading to near-record second-half profits.

Container shipping demand

“The U.S. consumer seems to be holding up reasonably well,” Hapag-Lloyd CEO Rolf Habben Jansen said during a conference call on Thursday. “If you look at the first half, trans-Pacific volumes were growing [year on year], which is remarkable given the steep increases we saw in 2021 versus 2020.”

According to CFO Mark Frese, “Currently, markets are talking intensively about weakening demand. But despite all the bad news, demand remained robust in the reporting period [Q2].”

Commenting on import demand as of today, halfway through Q3, Habben Jansen said: “We see U.S. demand holding up, whereas certainly in Europe and some other places there’s probably more nervousness and uncertainty. We don’t see demand falling off a cliff — anywhere.”

Blue line: 2022 imports, green line: 2021 imports (Chart: FreightWaves SONAR)

However, he does see “a fairly material easing of demand” compared with the peak. “We definitely see signs of the economy cooling down, which will help markets normalize in the months and quarters to come.

“We used to be multiple times oversubscribed on every ship system; we are still oversubscribed today but not as strongly anymore. That’s why you see the spot rates coming down. It’s not like there is no tension whatsoever. But there are certainly signs that the market is easing somewhat. We see that in the bookings and quotations being requested.”

Container shipping spot rates

Hapag-Lloyd secured an average rate of $5,870 per forty-foot equivalent unit in Q2 2022, up 71% from the year before and its highest quarterly average ever.

Its average rates rose 6% sequentially versus the first quarter, during a time when the Shanghai Containerized Freight Index, which measures spot rates, dropped 26%. The rise in Hapag-Lloyd’s average rates was driven by higher annual and multiyear contract rates, said Frese.

According to Habben Jansen, 45%-50% of Hapag-Lloyd’s business is under contract. He expects spot rates on the remaining 50%-55% to continue their decline through the second half, although he noted that “by historical standards, spot rates are still at very high levels.”

The company’s full-year guidance implies contract rates will continue to support average rates. Hapag-Lloyd expects earnings before interest, taxes, depreciation and amortization of $8.6 billion-$10.6 billion in the second half, with Q3 stronger than Q4. The upper end of its second-half guidance is close to the $10.9 billion in EBITDA in the record-breaking first half, implying ongoing market strength.

“The exceptional freight rate environment continues to be the main driver of our financial performance,” said Frese.

Congestion easing at some ports, but not on East Coast

Port congestion is helping to support rates by tying up ships, removing effective transport capacity from the freight market.

Clarksons’ container shipping congestion index is now close to its all-time high. According to Hapag-Lloyd, the index jumped 53% for the U.S. East Coast in Q2 2022 versus Q1 2022, with China up 28%, Northern Europe up 26% and the U.S. West Coast down 14%.

chart showing container shipping congestion
Container congestion in million TEUs; 7-day moving average (Chart: Hapag-Lloyd. Data source: Clarkson SIN)

“I don’t think this shows the entire picture,” said Habben Jansen of the Clarksons index.

“We do see some signs of things easing. The U.S. West Coast has clearly improved. The Med is running fairly smoothly. Asia has clearly improved compared to a couple of months ago. Container availability is clearly better than it was some months ago. So, I would expect this congestion index is going to show an improvement over the months to come.

“The real issues now are on the U.S. East Coast and in [Northern] Europe,” he said. On the East Coast, “things are not deteriorating but they are not improving.” In Europe, congestion “is being driven by labor tensions at a number of big ports. Once that’s behind us, I’d expect to see further easing there.”

Advantage goes to cargo shippers in 2023-2024

The wind-down of congestion — when it finally happens — will release more ships into the market. A wave of newbuild deliveries will inject even more capacity in 2023-2024.

“We have seen the orderbook going up further,” said the Hapag-Lloyd CEO. “Right now it’s at about 28% of the global fleet [the percentage of capacity on order versus capacity on the water]. That’s quite high. It’s a very significant orderbook, which means we will get quite a lot of new vessels in the fleet going forward.

“How much of that will be absorbed by demand or by new environmental regulations or [offset] by increased scrapping remains to be seen,” he said. New environmental rules that might effectively require lower speeds could reduce capacity by 5%-10% in 2023-24, he said. (Competitor Maersk estimates a higher potential: 5%-15%.)

In addition, ships kept in extended service by boom-era rates will be put into drydock for maintenance when more capacity is available. “It will create more space to catch up on some of the drydockings that need to be done,” said Habben Jansen.

But overall, Hapag-Lloyd expects container shipping’s future market balance to tip in favor of cargo shippers. After several years of import demand outpacing transport supply, it cited estimates that global fleet capacity will grow 7% in 2023, more than twice the 3% growth rate for demand.

“We clearly see that over the coming 24 months, supply growth will outpace demand growth,” said Habben Jansen.

chart showing Hapag-Lloyd results

Click for more articles by Greg Miller 

HMM cautious in short term despite Q2 profit long jump

South Korean ocean carrier HMM expects “downward pressure” on demand growth in the second half of 2022.

HMM reported Wednesday its operating profit shot up by 153% year over year, but the South Korean ocean carrier isn’t counting on revenue figures to be quite as impressive in the second half of 2022.

Seoul-headquartered HMM said the operating profit for the first half of 2022 was KRW 6.08 trillion ($4.68 billion), up from KRW 2.4 trillion ($1.8 billion) in the first six months of 2021. 

First-half revenue leapt by 87% year over year from KRW 5.33 trillion ($4.1 billion) to KRW 9.95 trillion ($7.66 billion). 

HMM provided year-over-year comparisons between the first six months of 2022 and 2021.

Net profit was the most impressive figure of all — up 1,560% from KRW 365 billion ($281 million) in 2021 to KRW 6.06 trillion ($4.65 billion) this year.

HMM significantly improved earnings in H1 2022, mainly led by high freight rates and efficient fleet operations,” the company said in an earnings statement. “The Shanghai Containerized Freight Index (SCFI) in H1 2022 was 4,504 points, up 49% from 3,029 points in H1 2021.” 

Second-quarter earnings also significantly improved year over year. Revenue was up 73% from KRW 2.9 trillion ($2.23 billion) to KRW 5.03 trillion ($3.85 billion). Operating profit increased 111% from KRW 1.38 trillion ($1.06 billion) in Q2 2021 to KRW 2.937 trillion ($2.264 billion) this year. Net profit leapt 1,290% from KRW 211 billion ($162 million) to KRW 2.933 trillion ($2.261 billion).

HMM said it was able to attain record results despite fuel costs rising 35% from the first to the second quarter of this year. 

HMM said its second-quarter net profit skyrocketed by 1,290% year over year. (Chart: HMM)

“The financial structure has remained strong,” it added. “HMM’s debt-to-equity ratio has improved to 46% in June 2022 from 73% in December 2021.” 

HMM provided only three points in the “outlook and plans” section of its earnings release, which hint that results for the second half of 2022 might not be as astounding as those for the first six months of the year.

“Demand growth is expected to be under downward pressure due to considerable uncertainties mainly related to widespread inflation, rising oil prices and [a] recurrent coronavirus situation, in addition to geopolitical tensions,” HMM said. 

It added that the “global supply chain is forecast to remain strained in the coming months” and port congestion at locations around the world is “still pervasive.”

HMM said it unveiled a mid- to long-term strategy in July and “will spearhead an effort to address the full range of future challenges and lay a solid foundation for sustainable growth.” 

HMM will spend more than $11.3 billion as part of the growth strategy that includes expanding its container ship fleet from 820,000 twenty-foot equivalent units to 1.2 million TEUs by 2026. 

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HMM making change at helm

12 HMM container ships’ sticker price $1.57 billion

Click here for more American Shipper/FreightWaves stories by Senior Editor Kim Link-Wills.