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Reefer leasing gets back on track

After cutting its reefer investment in 2017, the world’s box leasing industry made a record purchase last year, while reefer rental rates and cash returns also recovered. But most lessors are viewing the current year with caution

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After taking a break in 2017, the global box leasing industry was to recommit strongly to reefer investment during 2018, when it actually achieved another delivery record. Its fleet expansion, although down on the headier rate averaged earlier in the 2010s, was still impressive (at 7%) and again double that managed by shipping lines, which have, for many years now, been adding significantly fewer reefers to their owned fleet.


Leasing companies took delivery of more than 140,000 TEU of new reefers during 2018, almost all of which were 40ft high cube. Once again, their intake accounted for more than 50% of all reefer expenditure (calculated globally at
around US$1B), with shipping companies contributing the entire balance. The lines acquired a little over 130,000 TEU as maritime reefer equipment during 2018, from a global production total of 275,000 TEU.


The global figure was up by 20% on the 225,000 TEU constructed in 2017, with the leasing industry clearly benefiting to the greatest extent. By contrast, leasing firms bought a far lower 60,000 TEU as newbuild during 2017, as many participants were then being discouraged by poor rates and weaker utilisation. These, in turn, had fallen in the aftermath of the lessors’ earlier bout of frenetic purchasing, which had occurred throughout much of the preceding seven years. In short, the lease side was to bear the brunt of weaker demand in 2017.


Lines stepped up


Shipping lines, by contrast, actually stepped up their investment in 2017 by acquiring the balance of 165,000 TEU, which represented their biggest reefer purchase in more than five years. Nevertheless, the lines’ rate of fleet growth till fell short of that achieved by the rental side in 2017, as much of their intake went to cover replacements.


It was also impacted by further saleand-lease-back activity, whereby older reefers were transferred from line to lessor ownership. Despite their more aggressive rate of old reefer disposal, the line-owned reefer fleet continues to feature an older age profile than that controlled by lessors.


The leased reefer fleet increased in size by 5% in 2017, against 4.3% for the lines’ owned portion and global growth figure of 4.6% (mid-way between the two extremes). World growth was a little higher in 2018, at slightly more than 5%, with the lease side (as already highlighted) again contributing the majority of this increase. The lines’ own expansion rate was just 3.5% in 2018. However, earlier still, the line-owned reefer fleet suffered a net contraction of 4% in 2016 (one of only two years when this has ever occurred, the other being in 2013).

 

The year 2016 also marked the last year when the lessors’ reefer fleet managed close to a double-digit growth rate (9.8%), having previously averaged more than 15% per annum through 2010- 15. Throughout that earlier era, leasing firms had accounted for more than 55% of all reefer production, in addition to receiving substantial extra equipment by way of sale-and-lease-back. Its newbuild intake was calculated at almost US$7B for the entire period, out of an estimated global total of US$12.5B. Just US$5.5B worth was thus purchased directly by shipping companies for their owned fleet.


Hitting 50%


The net result of the leasing industry’s stronger, and largely unabated, rate of fleet expansion has been a substantial gain in its ownership share. By early 2019, rental companies controlled almost exactly half of the global reefer fleet, compared with 40% five years earlier (end-2013) and below 30% a decade ago (end-2008).


The renting of reefer equipment has, consequently, become far more commonplace and increasingly mainstream than was the case prior to the financial crisis of 2008-09, with shipping line no longer automatically opting to buy,
rather than lease, as a matter of policy.


The leased reefer fleet has more than tripled in size throughout the past decade (to end-2018), against a meagre 25% growth for the lines’ owned reefer inventories. In pure numerical terms, the rental count fell just short of 1.45M TEU by early 2019, with shipping lines controlling close to 1.5M TEU. Ten years ago, lessors could claim just 450,000 TEU to the lines’ 1.2M TEU.


Not that so massive a structural change has been trouble-free, with the reefer leasing sector paying a price by way of weaker rate levels and eroding cash investment returns. These were to come under increasing pressure throughout the five years to 2016, when the lessors’ rate of fleet expansion was running at its peak – and the global market was awash with rental equipment.


The ‘headline’ 40ft per diem tumbled from around US$6.50 in 2011 to nearer US$4 by 2016. This was far lower than the pre-2011 minimum of around US$6. The underlying initial cash investment return fared even worse, dropping to an unprecedented 10% by 2016 for leased 40ft reefers, which compared with a figure exceeding 12.5% prior to 2012.

 

The situation has improved during the past two years, as the lessors’ rate of fleet growth slowed and their purchasing was curtailed a little. It has brought the reefer supply back into better balance with the lines’ absolute demand, and so helped enhance rental yields. The rate average for 2018 was back up to almost US$5/day, yielding a cash investment return of 11.5%.


By early 2019, these indices had slipped a little again, but largely because of a decline in reefer pricing. The 40ft price average had fallen well below US$15,000 by the opening quarter, generating a rate level nearer to US$4.50, but still a stable cash investment return of 11.5%.


Global reefer uptake, as driven by trade demand, had also proved stronger in 2018 than in recent years (and especially 2016-17), which was to further boost the lessors’ utilisation and general performance. As a result, there
were relatively few idle reefer stocks to be found either awaiting collection from factories or residing at depot locations.

 

 

 

 

Longer terms The earlier decline in reefer per diems was also driven by an increased industry-wide shift towards even longer term rental, with the former popular fiveyear initial term being almost wholly replaced by one of eight years or more.


This trend is also occurring within the dry freight sector and so is not just confined to reefer leasing, although it marks a very important step change for the latter. A commitment on the part of shipping lines to a significantly longer contract term is key to the move away from buying reefers in favour of renting, which (as highlighted) has already set the current decade apart from that which preceded it.


The leasing sector, for its part, is naturally keen to extend the initial rental term, as it carries less risk. Therefore, the longer the rental term, the more heavily the rate tends to be discounted, with the majority of leasing firms offering such incentives.


In addition, many lessees are further opting to renew the rental term after its initial expiry, thereby avoiding redelivery for the lessor, with some lines potentially retaining equipment for much of its entire operating life. All of this has had a downward impact on headline lease rates, although countered by reduced operating expense for the lessor.

All bar one


The upturn of 2018 was to attract the majority of top reefer leasing participants back into the purchasing market, as well as encouraging a greater US dollar investment from each.


The latest data received from box manufacturing sources in China indicate that five of the seven established volume reefer firms were actively buying during 2018, once again headed by SeaCube Container Leasing. This single company accounted for a further 40%-plus of all new reefer deliveries made to the leasing side that year. A further 27% went to the market leader, Triton International Ltd (TIL), leaving around 15% for Seaco Global, and 7-8% each for Textainer Group and Beacon Intermodal Leasing.


CAI International, by contrast, was conspicuous by its absence from the fray, as the company instead committed more heavily to dry freight purchasing during 2018. In numerical terms, SeaCube received around 60,000 TEU as new reefers during 2018, compared with around 40,000 TEU going to TIL, and 22,000 TEU to Seaco. The balance of 21,000 TEU was divided between Textainer and Beacon. SeaCube also accounted for a substantial share of the 2,500 x
20ft reefers delivered in total to the leasing sector in 2018.

 

By contrast, reefer investment had been confined in 2017 to just three of the majors, all of which took smaller quantities than in 2018. The majority of leasing firms had then been opting for a preferential purchase of dry freight equipment, with only the likes of CAI and Florens continuing with this during 2018.

 

Nevertheless, the lessors’ relatively limited intake of new reefers had been offset in 2017 by a significant acquisition of used reefers from shipping lines by way of sale-and-lease-back, with this activity reportedly down for the following year. The increased incidence of sale-and-lease-back is yet another manifestation of the changed pattern of reefer procurement, as shipping lines are not only opting to lease a greater proportion of new reefers, but also selling older equipment to the rental side.

 

Fewer buying more

 

Shipping lines may have committed to relatively strong reefer investment in both 2017 and 2018, but the number buying has not been that large. Instead, it comprised a varied and eclectic mix of companies, both major and small. In 2018, the tally was headed by Maersk Line, once again,which purchased another big volume after breaking all records in 2017. Its intake amounted to almost 30,000 x 40ft high cubes during 2018, much of which went to cover replacements, following the earlier takeover of the Hamburg Süd operation. Thus, Maersk alone accounted for 45% of all reefer investment made by shipping lines last year.


Hapag Lloyd, by taking delivery of around 25,000 TEU (mostly 40ft high cube), came a distant second, followed by Chiquita Group, Evergreen Marine Corp and Yang Ming Transport Corp, which received 17,000 TEU between them (again 40ft high cube).


Other important reefer buyers were the Chinese trio, SITC, TS Lines and Zhonggu Xinliang, as well as Pacific International Lines, Tropical Shipping, Eimskip (of Iceland), Crowley Liner Services and Wan Hai Shipping.

 

In all, shipping lines and other transport firms collectively took delivery of 4,000 x 20ft and almost 65,000 x 40ft high cube reefers during 2018, plus a separate 3,000 units of 45ft or 53ft length, exclusively for domestic use.


Looking ahead


The outlook for 2019 suggests that the leasing industry may commit to another sizeable reefer purchase, even if some companies are erring on the side of caution. Most are unsure whether 2019 will play out as strongly as occurred in 2018, and therefore fear that reefer demand may weaken again at some point. Now that the leasing sector is in control of virtually half of all reefer inventories, its exposure to any sudden fluctuation or downturn is significantly heightened.

 

Nevertheless, the same five leading names have stayed active during the opening months, and would again match last year’s intake during the coming year as a whole, should their first quarter investment be sustained.

 

Moreover, they have been joined by one newcomer – a rare occurrence since the late 2000s – which only very recently acquired its first equipment for lease. Based in London, Sun Intermodal Ltd was established in 2017 by several leasing industry veterans. By March 2019, it had a fledgling fleet of 1,000 x 40ft high cube reefers.


Leading lessors


At the other end of the scale sits TIL. It remains in control of the largest rental fleet, following its creation from Triton Container and TAL International in 2016. The company’s reefer fleet climbed close to 450,000 TEU by early 2019, just 15,000 TEU of which was 20ft, with the remainder 40ft high cube. It increased in size by almost 5% during 2018, and so continues to make up roughly 30% of all leased reefers.


Seaco retains a reefer count of more than 350,000 TEU (including 12,000 x 20ft) and, despite uncertainties concerning the proposed sale of this Chinese firm and its probable future ownership, it still managed a small net increase of 2% last year. The Seaco reefer fleet accounts currently for a quarter of all leased inventories.

 

The biggest expansion was again achieved by SeaCube, whose fleet expanded by a 25% during 2018 and attained a new high-point of 235,000 TEU, equivalent to over 15% of the lease fleet total. SeaCube’s fleet is also predominantly 40ft high cube, but incorporates around 13,500 x 20ft, plus a couple of thousand 40ft (8ft 6in) units.


Textainer added a more modest 4.5% last year and has reached a size of 165,000 TEU, just about all of which are 40ft high cube. The Beacon reefer fleet, after expanding by almost 60% in 2017, largely by way of sale and-lease- back, added another 17% last year. The Beacon share is approaching 10%, and behind it are positioned CAI and Florens. The CAI fleet sits at around 55,000 TEU, but no information is available on Florens. Florens’ box fleet at the end of 2018 stood at 3,780,000 TEU, of which 97.6% was dry boxes. That means 90,720 TEU are other equipment types, including reefers.

 

 

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