In the latest financial insights from the container shipping sector, the third quarter of 2023 has proven to be challenging for major players in the industry. Among our portfolio of 13 companies reporting quarterly results, eleven liners witnessed an average slump of 54.6% Year-over-Year (YoY) in their 3Q23 topline. Operating costs managed to decline by 18.1% YoY, attributed to falling chartering costs and decreasing bunker prices. Despite these cost reductions, the overall Earnings Before Interest and Taxes (EBIT) contracted significantly, plummeting by an average of 94.1% YoY.
Drewry Container Equity Index Reflects Industry Struggles
The Drewry Container Equity Index, a key indicator of the industry’s financial health, tumbled by 28.1% Year-to-Date (YTD) as of November 22, 2023. This decline was primarily driven by lowering freight rates, which experienced a substantial drop of 30.7% in YTD 2023. In contrast, the S&P 500 showed an 18.4% growth during the same period. Notable individual stock price declines include APMM falling by 9.0%, Hapag-Lloyd slumping by 22.2%, and ZIM reporting impairment of assets worth USD 2.0bn, leading to an 18.1% decrease in its stock price.
Regional Dynamics Influence Stock Performance
While major players faced adversity, container companies with exposure to China experienced a more positive sentiment. The proposed fiscal stimulus by the Chinese government contributed to a boost in out-of-China and intra-Asia trades. Asian stocks in the broader index rose between 2.0% and 19.4% in the month ending November 22, 2023.
Drewry Container Equity Index Trades at a Significant Discount
The Drewry Container Equity Index’s Price-to-Book (P/B) ratio stands at 0.5x, indicating a 47.5% discount compared to its pre-pandemic average from 2013-2019. With expectations of a sharp decline in freight rates in 2024, the industry anticipates further challenges, likely keeping the multiple suppressed.
Softening Charter Market Affects Container Shipping Landscape
As the fleet of container shipping companies expands, the charter market experiences a softening trend. One-year Time Charter (TC) rates witnessed declines of 14.2% and 52.5% YoY in October for vessels sized 1,110 TEU and 8,500 TEU, respectively. Larger vessels, constituting the majority of the order book and new deliveries, faced steeper declines. Although rates showed slight improvement in April-May 2023, attributed to MSC and CMA CGM aggressively chartering vessels, the market continues to decline since the two companies halted such activities.
Second-hand Asset Prices Weaken Amid Market Challenges
The softening charter market has a ripple effect on second-hand asset prices, with prices for five-year-old vessels (2,700 TEU and 7,200 TEU) contracting by 30.6% and 31.5% YoY in October. Prices for ten-year-old ships experienced even more substantial declines, ranging between 36.7% and 53.2%. In contrast, newbuild prices (1,500 TEU and 14,000 TEU) rose by an average of 2.2% YoY, primarily due to capacity shortages in shipyards.
Future Outlook and Industry Challenges
Costs related to chartering-in slots or vessels remain a significant portion of container shipping companies’ cost structure. While the 3Q23 results witnessed a marginal reduction in this cost, aligning with the declining charter market, industry experts anticipate this trend to persist in 4Q23. Additionally, with ZIM leading the way in reporting impairment losses, other companies are expected to follow suit as prices for older vessels continue to decline.
source:Drewry