Old is gold: skyrocketing cost of aging ships sounds like inflation SOS

  • Old container ships sold and chartered at record prices
  • Extraordinary long-term charters lock in costs for consumers
  • High shipping costs drive up inflation around the world
  • Wave of huge new container ships expected in the next two years

SINGAPORE, June 21 (Reuters) – Shipping companies are turning rusting buckets into gold mines in a modern alchemy that could fuel already runaway inflation for years to come.

The disruption to global trade caused by pandemic shutdowns and a shortage of new cargo ships has pushed freight rates for aging container ships to record levels.

Riding the boom, shipping companies are securing long-term leases lasting three to four years, meaning consumers could continue to pay the price of rising costs until hundreds of new ships ordered come into service.

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Take the example of the Synergy Oakland, a mid-sized vessel flying the flag of Cyprus that can carry more than 4,200 20-foot steel containers.

The Greek firm Euroseas bought it in 2019 for 10 million dollars when it was already a decade old. As world trade was thrown 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.

He landed one more short-term rental earning around $10 million in the space of two months before walking out on a four-year lease for $61 million in May, a return of six times in itself over the purchase price. three years ago.

“That was almost the perfect move in a rising market,” Symeon Pariaros, managing director of the shipping company, told Reuters. “We haven’t seen anything like this in the history of the container market.”

The world’s containership 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 analysis firm. shipments.

But increased demand for consumer goods during lockdowns, congestion at ports that tied up ships for longer than expected, and a slowdown in new ship construction, in part due to uncertainty about whether ships would meet with the new environmental rules, they contributed to the transportation crisis. and record freight costs.

Container capacity rose 4.5% last year, mainly because old ships that normally headed to the graveyard kept sailing, but it still hasn’t been enough to cool prices.

A Reuters review of more than 30 private transactions completed in the past six months showed shipowners are chartering vessels on long-term charters at record rates to capitalize on the once-in-a-generation bull market.

In May, the cost of blocking container shipments soared a staggering 30.1%, a record monthly increase in long-term ocean freight rates, according to the Xeneta Ocean Freight Index.

Six-month navigation tracking of the container ship ‘Synergy Oakland’

SHIPPING COSTS AND INFLATION

Record fees have already contributed to higher prices for everything from second-hand cars to dining tables to bicycles, and the pain for consumers will continue, experts say.

The International Monetary Fund (IMF) estimates that the container shipping boom in 2021 accounted for 1.5 percentage points of the global price increase this year, or about a quarter of the US inflation rate.

“The impact of shipping costs on inflation is large and widespread, affecting countries around the world,” said Yan Carriere-Swallow, a senior economist in the IMF’s Asia-Pacific Department.

While higher food and oil prices in the wake of the Russian occupation of Ukraine are reflected in consumer prices in two months, it may take up to a year to feel the full effects of container shipping costs, Carriere said. -Swallow.

In addition, the COVID-19 outbreaks are still affecting China’s ports and while large shipping companies have ordered a record volume of new large container ships, most will not come online until next year or 2024.

“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’m afraid freight rates will remain higher than pre-COVID for many more years.”

The Navios Spring, currently sailing from California to China, was chartered for three years in January for $60,000 a day, seven times the $8,250 a day it cost two years ago, according to data from two shipping agents.

The Marshall Islands-flagged ship, built in 2007, cost its original owners $42 million. She will earn $65.7 million over the length of her three-year contract, brokers said.

Navios Maritime Partners, the ship’s operator, did not respond to requests for comment.

Navios Amarillo, a sister ship to Navios Spring, is booked on charters through January 2028, at which point she 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.

Value of 10-year-old container ships in millions of US dollars

SHIPPING BENEFITS

The container shipping industry as a whole made a mind-boggling profit of $59.3 billion in the first quarter of this year, shipping expert John McCown said, up from $19.1 billion in the same period a year ago.

“Shippers are winners and their significant increase in profits is being financed by higher prices for all products moving on container ships,” McCown told Reuters.

Maersk from Denmark (MAERSKb.CO)the world’s second largest container liner with a nearly 17% market share according to intelligence provider Alphaliner, has cashed in.

Maersk posted record profit in the first three months of 2022. Revenue rose 55% to $19.3 billion and it raised its forecast for underlying earnings this year before interest, taxes, depreciation and amortization to $30 billion. read more

Mediterranean Shipping Company (MSC), which overtook Maersk to become the world’s largest container line this year, does not publish financial results. The Geneva, Switzerland-based company declined to comment for this story.

US President Joe Biden said on June 9 that Congress should crack down on outrageous prices being charged by shipping companies that control the market.

Maersk told Reuters its financial performance was due to exceptional market conditions and bottlenecks in the United States, adding that it had invested billions in improving US port operations and logistics.

Some of the big shipping companies are using their profits to vacuum up remaining cargo ships at sky-high prices, which in turn will help prop up high freight rates and fuel inflation going forward, analysts said.

Shipping container rates have increased since late 2020 as COVID-19 restrictions eased

WHEN WILL SHIPPING COSTS GO DOWN?

A record 503 second-hand container ships were sold last year, equivalent to 7% of the global fleet, Clarksons said, with a further 108 sold in the first five months of 2022.

MSC, for example, has bought 200 second-hand container ships since August 2020, according to market analysts.

With no container ships being scrapped this year, the average age of these ships rose to 13.9 years from 11 years 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 more than they were two years ago, sales data shows.

For example, MSC bought the Xin Feng Yang Pu, a Liberian-flagged cargo ship currently sailing in the South China Sea, for $70 million last month, broker data shows. The same ship, which was renamed MSC Freeport, was sold for $7 million in 2007.

Still, there are signs that the boom could come to an end in the next year or two, when many of the giants of the sea commissioned by major companies enter service.

In 2021, a record 555 container ships worth $42.5 billion have been ordered and 208 vessels worth $18.4 billion have been booked so far in 2022, according to the World Transport Council. Maritime, an industry group based in the United States.

Some of these ships will be among the largest container ships ever built, measuring 400 meters 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 past year it had ordered 12 new large container ships that are nearly four times the size of the Synergy Oakland.

If ports and supply chains were operating as before the pandemic, the influx of new ships could push shipping prices down, said Peter Sand, chief analyst at Xeneta, a freight rate platform.

“It has the potential to trample spot market rates. Especially now that inflation is hitting globally.”

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Information from Joe Brock; Gavin Maguire graphics; Edited by David Clarke

Our standards: The Thomson Reuters Trust Principles.

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