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EDITOR COMMENT Q4 2021 – Operational difficulties will lead to higher profits

‘It was the best of times, it was the worst of times, ..…’ wrote Charles
Dickens, the greatest writer of the Victorian era. As it was then, so
it is now. Operationally, it is the worst of times - fractured by the
speed of the post-pandemic bounce-back after the worst economic
contraction in living memory, the tank container market continues to
be volatile, disrupted and unbalanced. Freight costs are likely to stay
at historical highs for some time with certain routes increasing further
due to the seasonal demand for reefers, which has crowded out
booking space for tank containers. Slot capacity remains extremely
tight with ocean carriers often prioritising the containers of their
global network partners - such as Kuehne+Nagel and DHL - over
shipper-owned containers. Tank containers are often left behind at
transshipment ports and newly ordered box carriers will not ease
capacity until they enter service in 2023.

Chaotic supply chains have left orders unfulfilled, creating cash
flow pressure as the time lengthens between buying goods and
selling them. Longer tank container cycle times through ports
have only worsened terminal congestion with repositioning costs
ballooning. Load/discharge locations for tank containers have
become less predictable as supply chains flex to accommodate
demand fluctuations and uncertainties.

This issue focuses on South America where - as elsewhere - port
congestion has, if anything, deteriorated and is adding to supply
chain complexity. Ports, terminals and logistics services - not
least quality drivers - still experience protracted delays with many
gateway ports experiencing operational interruptions.

Inflationary pressures abound - dramatic rises in raw material
costs are driving standard tank container prices to $20,000, up
from last year’s Q2 low of under $13,000.

Financially, however, 2021 looks to be among the best of times for
shipping lines, tank container lessors, operators and manufacturers.
Although global trade may be lower in volume terms, skyrocketing
freight rates have led to record profits for market leader Maersk,
whose full-year profit will match its combined results from the past
nine years and generate the biggest profit in Danish history. It has
never been a better time to be an ocean carrier.

For the tank container industry as a whole, the weighted average
cash-on-cash yield for new builds is increasingly attractive
compared with the 14% average over the past decade. GATX’s
acquisition of Trifleet Leasing last December coincided with the
low point of the global tank container market, making the timing
of the acquisition near-perfect.

Tank container operators have been fortunate to be contractually
able to pass through the extraordinary increases in shipping rates
and typically enjoy higher margins when ocean carrier rates are high.
With equipment short, and the physical supply of products a top
priority, the negotiating power of operators has increased markedly.

Several have de-risked their exposure to shipping lines by
adjusting their contract lengths while demurrage revenues have
increased due to higher volumes being moved and longer
retention times. Most operators have improved their efficiency,
cost management and fleet management during the pandemic
while many have invested in upgrading their fleets with sensor
systems and/or special coatings. The result will be much stronger
operating cash flows in 2021 and significant improvements to
EBITDA in the second half.

Asia remains the strategic opportunity, supporting Den Hartogh’s
merger with MUTO, while the acquisition by Suttons of VTG’s
relatively insignificant overseas tank container interests helps refocus
VTG on Europe and Eurasia. At the other end of the M&A
spectrum, asset manager DWS and global investment group
CDPQ completed their equal-share acquisition of freight railcar
and tank container lessor Ermewa (including Eurotainer and
Raffles) from SNCF in October for $3.7 billion.

Lessors will have a good year, helped at the margin by
consolidation among lessors and the difficulty of securing funding
- especially for non-standard tank containers - due to the banks’
retreat from smaller players. With long new build lead times,
demand has been boosted for leased and rental equipment with
per diems continuing to rise from Q2’s benchmark of $5/day.

Tank container manufacturers have seen profits rebound after last
year’s huge slump, with LNG equipment in especially high demand
in Asia. Market leader CIMC saw profits rebound 78% in the first
half of 2021 as revenue in its chemical division increased 42%.

All in all, the tank container sector continues to demonstrate its
exceptional operational and financial resilience in the best of
times, and the worst.
January 17, 2022


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