Published: October 2017
Another testing year for dry box builders
Dry freight container manufacturers have faced a difficult 2017, with the challenge of switching to waterborne paints coinciding with a sharp upswing in demand.
The current year has, so far, proven a challenging one for much of the dry freight box building industry, as it has, on the one hand, implemented a fundamental switch in its manufacturing process, while, on the other hand, contended with a far from clear-cut trend in demand and pricing. Since April 2017, all container factories operating within the Chinese mainland (over 98% of the world total) have had to substitute their former use of traditional solvent-based paints with a waterborne alternative.
This action, enforced by the Chinese Government on environmental grounds, has required a reconfiguration of the entire production process, due to the application and drying cycles associated with waterborne paint being lengthier, and particularly so in the winter months for plants in the more temperate central/ northern regions of China.
The changes have tended to impact dry freight production to the greatest extent, because the painting process accounts for a proportionally higher share of its overall production cost. It is reckoned to have added as much as 10% to the underlying cost of dry freight manufacturing, with some standard box factories looking to increase their average 20ft finished price by almost US$200, in order to cover the extra expense.
At the same time though, global container uptake has proven anything but uniform during much of the current year, as buyers have tempered their ordering to both accommodate the changing manufacturing procedure and a recent sharp fluctuation in demand. The latter was still relatively weak at the start of 2017, although the requirement for new containers has since picked up very strongly.
3M TEU in sight
It is being suggested that the modest production of 2016 may have not properly met true demand, due to most operators/ lessors underestimating the underlying rate of trade growth for that year. In consequence, box production in 2017 could actually be addressing an earlier shortfall, as well as servicing a more positive growth forecast for the current year, each of which is boosting the likely final total for the whole year. This is now expected to top 3M TEU for 2017, compared with nearer 2M TEU in 2016. The dry freight figure has already reached 2.3M TEU for the January-September period, with over 1M TEU delivered in the third quarter alone.
However, this surge has been occurring at a time when the dry freight manufacturing side is less able to guarantee supply. Ordering was initially cut back during the second quarter, when all factories first adopted the new painting practice – and few buyers wanted to be ‘guinea pig’ customers, or pay a higher finished price. Uptake increased substantially in the third quarter, as lines and lessors alike were forced to commit to higher investment, in order to meet a growing backlog of demand. By that time, the new painting process had been largely accommodated (especially with the onset of warmer summer weather), and pricing had better stabilised.
The outlook could be different again for the final quarter (and into the new year), as capacity may yet become constrained if the majority of factories outside of southern China are unable to guarantee paint drying times during the coldest periods. In the worst instance, the global box building capability might be restricted by as much as two-thirds, should all production be confined to the warmer south.
Not that this is a foregone conclusion, as most affected plants are already addressing the issue. Nevertheless, it will, at the very least, likely result in some further expenditure and consequent rise in the cost of production. In the meantime, many buyers have continued to hedge their bets, by forward-booking production into October/November, leaving very little immediate factory space available for latecomers. Output in the final quarter of 2017 is still expected to be high, even if the figure is down on its third quarter peak. During this preceding three-month period, dry freight output was running at its highest rate in more than five years, and up by over 50% on the recent quarterly average.
Despite the combined impact of rising production, against uncertainties about supply, finished container prices have tended to remain largely stable throughout 2017. They started the year at a little above US$2,000 (per 20ft), but subsequently held at around US$2,200 for much of the second and third quarters – after the waterborne change was effected – and have only commenced climbing again in very recent weeks, as strong demand and rising material costs, coupled with fears of an impending capacity shortage, triggered a rush of ordering. By late September, the 20ft average was US$2,350, and the outlook is for this to be the absolute minimum for the coming three months.
Container builders are, in addition to everything else, having to absorb a sizeable increase in the cost of Corten steel, which has gone up by almost 50% during the third quarter period. Back in June, its price was US$450 per tonne (having earlier averaged US$550 for the opening quarter), but it had escalated to nearer US$650 by September. Much of this price increase has still to feed through, and can only add to any additional cost already associated with waterborne paint use. It remains to be seen how much of this increase will be absorbed by manufacturers, through their acceptance of a reduced profit margin. As it is, profitability has tended to improve over the past year for most top box building groups, after they experienced a poor performance in 2016.
As shown in Table 1, the output figure for the nine-month period, spanning January-September 2017, comprised a relatively strong 2.35M TEU. It featured the usual near 95% share as standard boxes (2.2M TEU). The approximate 6% balance (150,000 TEU) is made up from various ‘dry freight specials’, including maritime open-top, flatrack and open-side, as well as pallet-wide (45ft) and North American domestic (53ft) containers. The latter accounted for a reduced 1.7% of all dry freight TEU production carried out so far in 2017, leaving around 5% as other (maritime special/pallet-wide) types. These respective shares are down slightly on recent years, and have always made up a minority of the overall dry freight total.
The current split for standard box equipment also falls in line with the recent trend in procurement, with around 75% of all production so far carried out in 2017 comprising the much-favoured 40ft high cube. Less than 20% was of 20ft length, leaving the balance of about 5% as either 40ft (of 8ft 6in height) or 45ft (9ft 6in). The world’s dry freight manufacturing industry remains centred firmly in China, and continues to be dominated by a small handful of groups, just five of which collectively operate 30 factories at around a dozen port locations.
The majority of all deliveries made so far in 2017 have gone to leasing firms, which is in keeping with the trend of recent years, and a reflection of the present market uncertainty. Lessors may end up taking as much as 60% of all dry freight equipment produced in 2017, with only a relative handful of very large shipping companies committing this year to any largescale purchase for their owned fleets.
Nearly a half of all production destined for the leasing side is going to the recently enlarged TIL (Triton International Ltd), formed in 2016 from a combination of TAL International and Triton Container. It resulted from the biggest merger of leased equipment to have occurred to date, and created a fleet size of around 5M TEU.
TIL’s 2017 purchase of new containers will amply match its ambitious size and aspiration, as this one company had already acquired a dry freight total exceeding 600,000 TEU in the ninemonth period to end-September. This compared with a dry freight total of 1.33M TEU destined for the leasing industry as a whole. The TIL investment has already broken all previous records, as no single company (either lessor or line) has ever achieved a procurement rate on this scale.
CAI International was ranked a distant second, having received around 200,000 TEU, followed by Beacon Intermodal Leasing, Florens/ Cosco and Textainer Group, each of which similarly managed a TEU purchase running into six figures. Also active were SeaCube Leasing, Seaco Global, UES International and Blue Sky Intermodal, although their respective intake was far lower. Many top lessors, in addition to their purchase of new containers, were to further commit to substantial sale and leaseback during 2017, which has added yet more to their overall fleet size, and to the detriment of the share owned by shipping lines.
The recent stronger uptake of new boxes has been driven, in no small part, by an increase in the requirement for replacement stocks, even though, as suggested, fleet growth in 2017 is likely to be higher than in 2016. The substantial round of company mergers that took place in 2016 – which led to the formation of the mega-lessor TIL, resulted in Florens Group combining with Dong Fang International, and saw an even greater consolidation occurring between leading shipping firms – has since triggered a sizeable ‘clear-out’ of old container stocks. Unsurprisingly, it was to be fuelled yet further by the demise of Hanjin Shipping. Nevertheless, the average age of the world’s container fleet is still slightly higher than five years ago, and remains well above its average prior to the financial and shipping crises of 2009.
The ‘post-merger’ landscape of 2017 has thus tended to draw some large buyers back into the fray, notably TIL and CAI, as well as Maersk Line, which has, so far, proven the most aggressive purchaser of new containers amongst shipping companies. Other major shipping lines to have stepped up their new box expenditure in 2017 are MSC, CMA CGM and OOCL, all of which have also already received in excess of 100,000 TEU apiece. Yet others, including Hapag Lloyd, Wan Hai Shipping, Hyundai Merchant Marine and SM Line, have also been active, but purchased on a more modest scale. Hapag Lloyd, together with Maersk and CMA CGM, all made fleet gains through merger in 2016, with much of their consolidation still in process during 2017. The joining up of Cosco Container Lines with China Shipping Group was another big transaction of the past year (and which also resulted in the aforementioned merger between the Florens and Dong Fang leasing arms). More recently still, Cosco (fresh from its earlier expansion) has concluded a deal to acquire OOCL.
As highlighted, the world’s dry freight box building sector had already endured a consolidation process of its own, although this was concluded many years ago. It has left the vast majority of capacity in the hands of a few major (Chinese) participants.
The world’s current capacity base is calculated at an approximate – and largely stable – 5.1M TEU per year, assuming maximum double shift working.
The double shift has become an increasingly theoretical figure in more recent years, leaving current capacity to be more accurately measured as an annual single-shift capability of around 2.5M TEU. The 3M-plus TEU being forecast for this year will amount to roughly 120% of the existing single-shift potential. In monthly terms, dry freight output has to top 200,000 TEU globally in order to ensure a minimum industry-wide one-shift operation and, even though this figure has been surpassed during most months in 2017, it still fell short earlier in the year.
Unsurprisingly, the (traditionally strong) second quarter, running from April to June, proved weak due to the introduction of the new painting regime. The most productive quarter instead occurred between July and September, when factory productivity approached (and surpassed) 150% of its single-shift capability – and so averaged a working rate exceeding 1.5 daily shifts. As has already been implied, fourth quarter output could yet again be compromised potentially by the industry’s switch to waterborne paint use, although forward bookings are strong at the moment.
The current optimum still necessitates a sustained daily working of between 1.0 and 1.5 shifts, as anything above this level tends to put pressure on factory lines. However, running at less than one shift reduces efficiency, and brings the plant operation closer to break-even. This has become of less critical concern in recent months, as demand has generally strengthened. New box prices have also risen, and since held largely firm, and only more recently were impacted by rising steel, paint and associated manufacturing costs. Profit margins have thus tended to improve this year for the box manufacturing industry as a whole, although most of the major groups remain vulnerable to sudden future fluctuations in both cost/ pricing and demand.
CIMC ramps up
The more upbeat outlook of 2017 has prompted some renewed movement in the area of new factory development, which had earlier slowed (and almost halted) due to market uncertainties. The world’s long-established top producer, CIMC (China International Marine Containers Group), is now pressing firmly ahead with its longstanding Fenggang project, close to Dongguan city, phase one of which is now due to commence production from early in 2018. As highlighted previously, the eventual dry freight capacity of the new site could be as high as 750,000 TEU/year, although it is probable that its inauguration will later be counterbalanced by closure (or some scaling back) at other plants operated within the group. CIMC now has several factories aged 20 years or greater within its network, some of which are clearly ripe for resale and redevelopment.
CIMC has witnessed a marked improvement in its box building fortunes during H1 2017, when the group noted “an increased demand for standard containers and [the placing of] a higher than expected number of orders”. Nevertheless the enforced introduction of waterborne painting from April did impact on its usually busy second quarter period, encouraging the company to minimise and fast-track any disruption resulting from changes in the manufacturing process. CIMC reports that its implementation was accomplished ahead of schedule, and that it has since committed to an even “greater investment in HSE (health, safety and environment) procedures”.
Dry freight dozen
Its established network of around a dozen dry freight factories continues to offer much the same twin-shift capacity as in recent years, which is currently equivalent to 2.35M TEU per year. This has declined only slightly on its former peak level of the late 2000s, although the company’s plant capability will clearly be enhanced, initially by the imminent opening of the new Fenggang factory.
The company’s aggregate production of all dry freight standard, special and domestic containers topped 1M TEU for the nine-month period from January-September 2017 (according to industry sources), which compared with less than 800,000 TEU delivered during 2016 overall. CIMC factories have thus accounted for a slightly improved 45% of world dry freight output accomplished so far in 2017, against nearer 40% of the 2016 total. The company continues to contribute around 45% of the world’s capacity total, which indicates a slightly better utilisation rate for its factories in 2017, and one more in keeping with the industry average. CIMC has, so far, maintained an approximate productivity rate of 1.2 shifts/day for its entire network in 2017, which beats the average of less than one-shift achieved for the whole of 2016.
CIMC’s most recent financial data reveals a similar, more upbeat picture. Its sale of standard containers (excluding all specials) amounted to 535,000 TEU for the first six months of 2017, which was more than twice the number supplied during the same period in 2016. Turnover for the entire container building division – including all dry freight and reefer – more than doubled as well, to approximately US$1.5B (RMB10.05B) for the first-half period, and yielded a net profit of more than US$100M (RMB680M).
More than two thirds of the revenue total was accounted for by the dry freight division. By contrast, total revenue was calculated at less than US$750M for the same six-month period in 2016, when the group’s total box building division sustained a loss of almost US$20M. The shift back in strong profitability gives a clear indication of the way new box pricing has rebounded and more than kept pace with the recent rises in production cost. It has been further strengthened by a gradual restabilising of the value of the Chinese RMB currency against its US dollar exchange.
CIMC’s long-established rival is Singamas Holdings, which has long maintained a network of eight dry freight plants. These offer a combined multi-shift capacity exceeding 1M TEU, and also experienced an altogether better performance during 2017, when a total of almost 500,000 TEU were delivered during the January-September period. This was the same figure as achieved for 2016 as a whole, and Singamas continues to meet roughly 20% of world output, whilst also controlling a similar fifth of global dry freight capacity. The group’s network is thus maintaining a level of factory productivity broadly in line with the global average, which is again equivalent to more than single-shift working.
The group, in its interim review, reported a total output of 310,000 TEU (almost all of which were dry freight type) for the opening half of 2017. The total was up by more than 40% on the same period in 2016, although the company’s revenue stream experienced an even better recovery, of around 45%. This occurred even though the share generated from producing higherpriced special dry freight equipment has fallen significantly, to below 20%, in 2017, compared with nearer 40% in preceding year.
The revenue derived from the group’s total box building arm amounted to US$575M during the first half of 2017, and earned a segment profit of US$20M before taxation and noncontrolling interest. It compared with a corresponding turnover just US$400M for the same six-month period in 2016, when the group also posted a net loss of US$33.5M. The fiscal change was again attributable to a gain in the average selling price applicable to standard box equipment, with the 20ft index reported at US$1,900 for the opening half of 2017. It compared with nearer US$1,400 for the same period in 2016.
Much of the balance of all dry freight manufacture was carried out by four other main participants, all based within China. The largest, Changzhou Xinhuachang International Containers Co (CXIC), produced 255,000 TEU through the January-September 2017 period, which was again comparable to its entire figure for 2016. The company presently meets a little over 10% of all dry freight production, compared with its capacity contribution of roughly 15%. The group currently operates a total of five standard box plants, having closed and sold off its Huizhou (HXIC) site for redevelopment at the start of 2017.
Dong Fang International Container (DFIC) operates three standard box plants, providing a combined, and stable, multi-shift capacity of around 400,000 TEU/year (8% of the world total). These produced 325,000 TEU in January-September 2017, contributing a healthy 14% of the global total – and attaining one of the best productivity rates across the entire industry. The total was above anything achieved annually by the group in past years, and more than double the total managed for the same nine-month period in 2016. It was a likely reflection of the group’s changed ownership status, which resulted in it becoming a part of the Cosco Group.
Maersk Container Industry (MCI) continues to operate a single dry freight factory, MCI Dongguan, which had constructed 135,000 TEU during the opening nine months of 2017. This total too was well up on that achieved in 2016, although the factory has once again benefitted from sizeable business placed by its Maersk Line affiliate during 2017. It continues to offers a capacity equivalent to 200,000 TEU/year.
Only one other volume factory remains in China, operated by Pan Ocean Container Services (POCS), which had already constructed 60,000 TEU through January-September 2017. It is yet another company on course in 2017 to surpass all previous annual manufacturing totals, and it has a planned capacity of more than 150,000 TEU/year....