Low rates, new ships, expensive charters

photo of a ship of the container shipping company Zim

Investment bank Jefferies cut its earnings outlook for Zim. (Picture: Shutterstock/VladSV)

Container lines are facing a triple whammy: Freight rates are low – below break-even in some trades – and show no signs of increasing. New ships are flooding the market. And the ship leases that container lines booked at historically high rates during the boom have yet to expire. Some leases run until 2024 or 2025.

What levers can shipping companies pull to stop the bleeding?

They don’t seem to be able to increase freight rates. Demand is too low and carriers are not canceling enough crossings. They want new ships delivered (whether owned or leased) because they benefit the bottom line through much higher fuel efficiency. Aristides Pittas, CEO of ship rental company Euroseas (NASDAQ:ESEA), told the recent Marine Money Week conference that his company’s new buildings “consume 40% less fuel oil than similar vessels built 10 years ago”. .

This leaves the long-term leases of older vessels. Losses on these contracts can be mitigated.

Reports: Zim seeks early charter terminations

Israel-based Zim (NYSE: ZIM) is the star child of this trilemma. It is highly exposed to falling freight rates, particularly in the East Coast Asian and US market. He has a big backlog of new builds and those ships have already started hitting the water. And it is simultaneously highly exposed to charter costs – more than any other ocean carrier, with more than 90% of its fleet chartered compared to ownership.

Zim is now looking to reduce his inherited charter responsibilities, according to multiple reports.

“Zim has requested the termination of several charter vessels,” Linerlytica said. Tradewinds, citing brokers, said the carrier was “looking to terminate or even sublease some traditional Panamax container ship charters.” Alphaliner wrote, “Zim is rumored to be making some tonnage available through subleases or deliveries ahead of schedule.”

Without naming the carrier(s) involved, vessel broker Braemar said “excess tonnage is now being marketed, with some vessels becoming available earlier than expected from previous charter commitments”.

FreightWaves made several requests for comment on these reports to Zim’s media and investor relations teams, which did not respond.

Freight rates fall again

There was a brief period of optimism about spot freight rates in the second half of April and the perception that they had finally bottomed out. Then rates started falling again.

Since the week ending May 4, the global spot composite Drewry World Container Index (WCI) has fallen 15% to just $1,494 per forty-foot equivalent unit in the week ending Thursday. Since June 8, the WCI Shanghai-Los Angeles Spot Index is down 21% to $1,581 per FEU. The WCI Shanghai-New York Spot Index fell 16% over the same period to $2,508 per FEU.

The global spot composite Freightos Baltic Daily Index (FBX) fell 7% between June 6 and Thursday, to $1,288 per FEU.

The China-West Coast FBX valuation fell 17% over the same period to $1,190 per FEU, while the China-East Coast FBX spot valuation fell 9%, to $2,226 per FEU.

a table of spot shipping rates

Average spot rates in USD per FEU. Blue Line: China-West Coast. Green Line: China-East Coast. Orange line: world composite. (Graphic: FreightWaves SONAR)

The trend is also negative for contract fares, which are more important for regular line revenues than spot fares. Xeneta’s global index measuring contract rates fell 9.4% in June from May and is down 51.7% year-to-date. The XSI US Import Contract Rates Sub-Index fell 11% in June from May.

“One wonders where this will all end,” said Xeneta CEO Patrik Berglund.

Jefferies slashes earnings outlook on Zim

“Marine ships have limited pricing power and spot rates remain very low on most routes,” Jefferies marine analyst Omar Nokta said in a Tuesday report, in which he cut his earnings outlook for Zim.

Nokta previously forecast Zim to post a net loss of $183.7 million for this year and $87.3 million for next year. On Tuesday, his 2023-2024 loss expectations for Zim were inflated by 150%. He now forecasts a net loss for Zim of $353.7 million this year and $324.7 million next year. Additionally, he presented his outlook for 2025, predicting a further net loss of $150.8 million for the shipping company.

Investors reaped massive returns on their Zim shares as the COVID-era consumer boom reached new heights, but timing was everything. The stock peaked in mid-March 2022. Since then, it has plunged 87%.

Shares of Zim fell to $11.78 per share at one point on Tuesday, pennies above the all-time low hit on the first day of trading after going public in late January 2021.

chart showing Zim shipping stock price

Like all major shipping carriers, Zim is far from distressed and still has plenty of cash amassed during the boom: $3.5 billion at the end of the first quarter, pro forma of the dividend payout in April.

However, it burns through this pad. It would make sense to proactively limit losses from high-priced legacy charters as freight rates remain below break-even and new Zim buildings come into service.

Nokta estimated that Zim’s current quarterly cash burn is $250 million, or $1 billion per year on an annualized basis. It’s “obviously not ideal, but Zim has plenty of liquidity and leads to overcome the current extreme weakness in the spot market,” he claimed.

Click for more articles by Greg Miller

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