After a strong 2018 for the leasing industry, with record investment in new containers and gains in lease rates, the sector appears to be cautiously optimistic about its prospects for 2019.
The collective fortunes of the world’s container leasing industry were already on the way up earlier in 2017, and have since experienced a further improvement throughout last year and into early 2019.
Dry freight rental rates held firm for much of 2018, with cash investment returns generally increasing, and the leasing industry achieved one of its best-ever underlying rates of utilisation for the year as a whole.
The gain was driven by a strengthening demand for rental equipment, which eclipsed the sluggish market of 2015-16 and prompted another record investment in new equipment by major leasing companies.
Once again, they accounted for the majority (55%) of global box output, by taking delivery of around 2.4M TEU out of 4.4M TEU produced worldwide.
The balance, of roughly 2M TEU, went to transport operating (mainly shipping) companies. Both the lessors’ and global totals set a new high for the box transport industry, with the leasing side only once previously managing to top the 2M TEU mark (in 2014).
World production had also surpassed 4M TEU only once before, back in 2007 and immediately prior to the financial crisis. Moreover, the bumper crop of deliveries made in 2018 went in relatively even measure to cover fleet expansion and replacement.
Global fleet growth amounted to 5.3% for 2018, which was at its highest level in four years, whilst a record number of older containers (2.1M TEU) were replaced as both lessors and lines tackled the growing age profile of the box fleet as a whole.
Leasing in the lead
The leasing industry accounted for the majority of expansion in 2018, as its fleet size managed an increase of 6%, as against just 4.7% for the transport companies’ owned fleet. It followed on from eight years of robust growth for the box leasing sector, as only 2015 returned a lower figure.
By complete contrast, the operators’ owned fleet has been increasing at a far slower and more erratic pace, with some recent years featuring almost no change or even a net decline in size. In fact, its increase in 2018 was higher than at any time since 2011. The longer-term trend of the past decade has thus inevitably resulted in a far greater net gain in the lessors’ fleet size and a substantial rise for their collective share in ownership terms.
By early 2019, leasing firms found themselves to be in control of 52.6% of global inventories, which is actually greater than at any time since the early 1980s. Their share is also up by more than ten percentage points on the previous low (of 41%) calculated a decade ago at the end of 2008. The lessors’ fleet size, presently at close to 22M TEU, has all but doubled in the past 10 years. By comparison, the operators’ fleet size has still to breach the 20M TEU mark and is just 20% bigger than in 2009. In pure numerical terms, leasing firms have added 11M TEU to their net fleet size in the decade to 2019, whereas the lines have barely managed 4.5M TEU.
Moreover, leasing firms have also made a greater replacement purchase throughout the past 10 years, thereby boosting their total equipment intake to an even greater extent when compared to operators. For, not only have they committed to more than 50% of all new investment in recent years, but also acquired substantial volumes of older boxes from shipping lines by way of the increasingly popular sale-and-lease-back transaction. This, in effect, transfers additional box capacity from the lines to lessors, and thereby further accelerates the latter’s rate of fleet growth (to the detriment of the former).
It also explains why the leasing sector has had a greater replacement need than shipping firms, as much of the equipment involved is well beyond 10 years of age. Sale-and-lease-back is regarded to be a win-win formula for both the lines and for lessors, as it – on the one hand – enables shipping companies to generate additional capital through the resale, whilst – on the other – it provides an almost risk-free means for the leasing company to expand its fleet.
After all, the rental revenue stream is guaranteed and the leasing firm can also later benefit from the residual value of the equipment, which it is often better able to exploit because most lessors have more developed after-sales operations than shipping lines.
The incidence of sale-and-lease-back has escalated throughout the past decade and, although hard data is difficult to come by, the box numbers involved are known to run into millions. It is also symptomatic of an underlying trend that has been reshaping container supply since 2009-10, and prompted the increasingly cash-strapped box shipping sector to view rental as a more favourable option than making a direct investment in their owned equipment. It has also tended to drive the demand for longer rental terms, typically of eight to 10 years initial duration, which have, in very recent years, largely replaced the formerly popular ‘standard’ long-term lease of initial five-year length.
The acceptance by lessees of a contract that is lengthier and less risky (for the lessor) has inevitably forced down per diem lease rates, as well as impacting the initial cash investment return (ICIR), but – on the positive side of the ledger – it has unquestionably underpinned the lessors’ strong utilisation of recent years, as well as reducing their operating costs.
Furthermore, lease rates have actually tended to strengthen and stabilise through 2017-18, after enduring several years of steady erosion up to 2016. By then, the rate (and underlying ICIR) average was at an all-time low.
The ‘headline’ standard 20ft per diem rate doubled throughout the two years to early 2018, and was accompanied by a strong recovery in the corresponding ICIR, which increased from its earlier minimum of 8.5% to almost 10.5%, which had last been attained back in 2012. This same rental rate then remained unchanged for much of 2018, and has only declined into 2019 because of an abrupt fall in the 20ft price, which occurred from late 2018 onwards.
By early 2019, the 20ft rate was back down to US$0.50 per day, but calculated on a relatively low 20ft ex-works price of US$1,750. By comparison, the rate had averaged more than US$0.60 throughout much of 2018, when the corresponding new price was nearer US$2,200. Crucially, the underlying ICIR has not undergone any change throughout the past year, and presently remains above 10%.
Leasing industry utilisation, for its part, is holding at above 97% as of early 2019, with relatively little stock available for pick-up, either used at depots or new from factories. Although the lessors’ investment made so far in 2019 falls a little short of 50% of the global total, it is almost certain to rise in the second quarter, when seasonal demand tends to peak. Total box output for the first three months of 2019 amounted to roughly 650,000 TEU, with leasing firms acquiring at least 320,000 TEU.
Yet another indication of the improved market climate is the apparent stability of the current leasing hierarchy, with very little change occurring in the companies’ pecking order over the past year.
This contrasts with the situation of two to three years ago, when the tighter market condition prompted a renewed bout of company mergers and resulted in the disappearance of four established names.
This was to end in 2017 with the takeover by Textainer Group of Magellan Maritime Services, and its absorption of the latter’s managed fleet of 180,000 TEU. The previous mergers had been of a different magnitude, involving considerably larger fleet transactions, and involved Seaco/Cronos, Triton/TAL and Florens/Dong Fang Leasing.
Although the ownership status could be set to change for a number of current participants, any further merging of top companies is thought unlikely, and the existing status quo is thus expected to remain largely intact.
Instead, the top rank is still dominated by the same ‘big four’, all of which have multi-million TEU fleets and have been enhanced substantially through merger activity – both recently and in the past.
A further three are ranged behind them, each claiming a fleet in excess of 1M TEU. Beneath these is just a small handful of mainstream participants, with only three controlling more than 300,000 TEU. As such, the 10 top firms remain a dominant block, in control of a disproportionately large share of the entire rental fleet (96% of TEU).
Triton International Ltd (TIL) is firmly established as market leader, with a current fleet approaching 6.2M TEU and a dominant leased share of 28%. The expanded Florens Group controls 3.8M TEU (17%), leaving Textainer with 3.4M TEU (15%) and Seaco 2.3M TEU (a little over 10%). CAI International and Beacon Intermodal Leasing each claim over 1.5M TEU (7% apiece) and SeaCube Leasing 1.16M TEU (5%).
TIL, in keeping with its gargantuan size, again committed to the largest investment in new containers during 2018 and received more than a quarter of all new box production carried out for the leasing industry as a whole.
Although down on the company’s even greater purchase of the previous year, this intake was sufficient to boost the Triton fleet size by almost another 10%, net of replacement, which was above the lessors’ average and lifted the company yet further ahead of the competition.
Its expansion was only bettered by CAI, whose fleet was enlarged by a quarter, and Beacon, which managed an increase of 13.5%. The smaller lessor, UES International, also outperformed the average by adding nearly 20%. Others, including Seaco and France’s Touax Group, suffered some slight decline in their fleet size, whilst the likes of SeaCube and Florens managed only small increases, well below the industry average.
CAI and Textainer each accounted for around 15% of the lessors’ total intake, although Textainer’s net fleet growth was, at 4%, closer to the lessors’ median.
Florens took delivery of the greatest number of containers after Triton (equivalent to 20%, including purchases made on behalf of parent Cosco), but the company’s focus was very much on replacement during 2018, resulting in virtually no fleet change.
SeaCube too has been generally concentrating on fleet renewal, aside from its massive reefer growth (see p17-18). Around 40% of SeaCube’s overall TEU purchase in 2018 comprised reefers, with the balance being dry freight, so the company’s US dollar expenditure on reefer equipment was again to dominate heavily last year.
Reefers also accounted for a proportionally large share of Seaco’s (smaller) intake in 2018. It accounted for 30% of TEU and, therefore, also took the majority of this company’s US dollar investment.
The purchases made by all other rental firms were dominated by standard dry freight, which is more in line with the longstanding industry norm.
Beacon, for its part, purchased a similar quantity to SeaCube (around 150,000 TEU, or 6% of the leased total) during 2018, but far fewer reefers. Smaller volumes were acquired by the remainder of top companies, including Touax, UES and Blue Sky Intermodal.
However, at least one new entrant was to jump into the fray during 2018, in the shape of Global Container International (GCI). The new start-up was founded around a year ago by two leasing industry veterans, Adrian Dunner (formerly TAL) and Jeff Gannon (ex-Beacon), and had already built up a dry freight fleet of 50,000 TEU from scratch by the end of the year.
Headquartered in Boston (USA), which is also the home of Beacon, the new GCI venture is backed by Wafra Inc, a US private equity firm, and had already raised a secured credit facility through Deutsche Bank, worth US$150M, by the summer of 2018.
Nonetheless, new entrants to the mainstream are very rare these days, with the last of any significance dating back more than a decade. The barrier to entry is prohibitively high, as proven by the longstanding dominance of the leading names. The only option for the majority of smaller firms, falling outside the top 10 rank, is to target specialist or otherwise more niche operations – or to face a very lengthy period of concerted growth. The mainstream leasing of dry freight (and increasingly reefer and tank) equipment is almost wholly governed by scale, and the need to secure a sustainable funding stream is more vital today than ever.
As a whole, the leasing industry has entered 2019 on a relatively optimistic note, although some lessors are clearly advising caution. With so much uncertainty about the current world economy, the outlook for trade is far from clear and there is no guarantee that box demand will again increase as strongly as last year.
However, virtually all the majors are continuing to actively buy new boxes, again headed by the likes of Textainer, Florens and TIL. These alone have collectively acquired more than 200,000 TEU during the first-quarter period, according to the latest information from industry sources.
Other purchasers amongst the major names are CAI, SeaCube, Blue Sky, Touax, UES, Seaco and GCI, which have accounted for much of the balance, exceeding 100,000 TEU in total. Once again though, both SeaCube and Seaco are more intent on reefer procurement, leaving the remainder of other companies to stay focussed firmly on the standard container market.