CENTRO INTERNAZIONALE STUDI CONTAINERS
ANNO XXXVIII - Numero SETTEMBRE 2020
CONTAINER RATES ARE ON FIRE. HOW CAN YOU INVEST IN THAT?
Containers have wrestled the ocean-shipping headlines away from
tankers and bulkers as stratospheric China-to-California box rates
approach $4,000 per forty-foot equivalent unit (FEU). Container
shipping, declares a glowing new report by Fearnleys Securities, is
"The Unsung Hero."
How can investors expose themselves to this historic
trans-Pacific rate spike? Can box stocks woo tanker and bulker
shareowners? And what do the curiously low prices of some container
equities say about sentiment toward a U.S. recovery?
FreightWaves interviewed four shipping analysts to delve into
these questions. Their responses highlight significant differences
between investing in container shipping versus bulk commodity
They also point to opportunities for investors and traders to
ride today's container wave.
In tanker and dry bulk shipping, the ship owner is generally
U.S.-listed and extremely leveraged to highly volatile daily spot
freight rates. Theoretically, there should be a clear, direct link
between spot rates and stock prices.
The link is not so clear in container shipping. According to the
Freightos Baltic Daily Index, spot rates from Asia to the U.S. West
Coast (SONAR: FBXD.CNAW) were up to $3,835 per FEU as of Monday. The
liner companies are the direct beneficiaries of these soaring spot
However, most liners have more long-term contract business than
spot business, and many own diversified logistics platforms.
Meanwhile, almost all public liner companies are listed in Europe
and Asia, not the U.S.; the only U.S.-listed liner, Matson (NYSE:
MATX), is primarily in the domestic Jones Act trade.
Investing in global liner giant Maersk - which has two classes
of stock listed in Copenhagen and some thinly traded American
depositary receipts (ADRs) in the U.S. (OTC: AMKBY) - is a very
different proposition than, for example, buying Nordic American
Tankers (NYSE: NAT) shares on Robinhood.
Investors can also buy liner exposure through
The prize goes to those who had the intestinal fortitude to buy
bonds of French liner CMA CGM at "peak fear" in March,
when those notes were trading at 55 cents on the dollar. They're now
close to par (100 cents).
Leasing: 'Not particularly sexy'
The primary way U.S. investors buy exposure to container
shipping is not through liners but via common and preferred shares
of leasing companies: ship owners that charter (rent) vessels to
liners and container-equipment owners that rent boxes to liners.
"It's kind of a boring business," acknowledged Ben
Nolan, analyst at Wells Fargo, referring to containership leasing.
"They're not particularly sexy," echoed Michael Webber,
founder of Webber Research & Advisory, of box-equipment lessors.
According to Randy Giveans, analyst at Jefferies, "When you
look at tankers, there's a lot more volatility in rates. More boom
and bust. With container shipping, utilization may move around a
couple of percentage points, and in normal times - and obviously
this year is not normal - rates stay in a pretty tight band. Plus,
there are a lot more vessels on long-term charters in the container
market than in tankers and dry bulk. Container shipping is more like
a conveyor belt moving goods from Asia to the U.S. and Europe.
"This year has been different. Because of COVID and the
massive supply and demand shocks to containers, it has been quite a
ride," said Giveans. "But usually, the driver for
containers is much more about global GDP. And the drivers for
tankers and dry bulk are more about geopolitical events and weather
and shocks to supply and demand."
Tanker and bulker stocks are generally more casino-esque than
the container stocks - and shipping investors have been more drawn
to the excitement of the casinos. Quite a few tanker stock buyers
have had a very exciting albeit very unprofitable year in 2020.
The case for ship lessors
The U.S-listed containership lessors (otherwise known as tonnage
providers) include Seaspan owner Atlas Corp (NYSE: ATCO), Costamare
(NYSE: CMRE), Global Ship Lease (NYSE: GSL), Danaos Corp. (NYSE:
DAC), Capital Product Partners (NYSE: CPLP), Navios Containers
(NASDAQ: NMCI), Navios Partners (NYSE: NMM) and Euroseas (NASDAQ:
"There's a lot of misunderstanding of what these stocks are,"
said J Mintzmyer, analyst at Seeking Alpha's Value Investors Edge
(disclosure: Mintzmyer owns long positions in several containership
"This is just like aircraft leasing. Yes, there is a ship
and someone is steering the ship. But these are not actually
"This is equipment leasing," he explained. "When
the liner industry is very healthy and counterparty risk goes toward
zero and interest rates are down, the value of the lease goes up."
Several analysts now argue that these stocks have not recovered
as much as they should have, contending that investors who buy in
now could pocket upside as the stocks catch up (even more so after
the recent days' sell-off).
These stocks have two main drivers, both of which are heavily
leveraged to the coronavirus. One is the counterparty risk of the
liners that charter the ships. In periods of crisis, liners have
defaulted and given the ships back. They have also renegotiated the
The second driver is charter maturities. If a lessor has ships
on 10-year charters, what's happening with charter rates this month
is irrelevant. But for a lessor with multiple charters expiring
soon, today's charter rates are highly relevant.
Charter rates, bond prices rebound
When liners "blanked" (canceled) double-digit
percentages of capacity from Asia to Europe and the U.S. during the
second quarter, they needed a lot fewer ships. Liners own a portion
of their fleet and charter the rest from tonnage providers. In
crisis periods when they need fewer ships, and a charter expires,
they'll either not renew or only renew at much lower rates.
During coronavirus, charter rates fell precipitously, by 25-40%.
Counterparty risks escalated. The stocks of the containership
lessors would logically sink on this combination - and they did.
Then, things went off-script. U.S. cargo demand was much higher
than expected and all the blanked capacity was reinstated.
Survivability fears about CMA CGM and other liners dissipated as big
second-quarter profits were reported. Bonds recovered.
Containership time-charter rates jumped all the way back to
where they were before the crisis began, in some cases higher.
Alphaliner reported Tuesday that rates for classic Panamaxes
(4,000-5,299 twenty-foot equivalent units) are now garnering their
highest rates since 2011 - up to $20,000 a day.
And yet, the stock prices of the containership lessors have not
followed suit. They're still down in the 30-40% range year to date.
According to Mintzmyer, "You can put up charts of all these
different things. The CMA bonds. The GSL bonds. Charter rates.
Maersk's stock. Matson's stock. The stocks of box lessors, companies
like CAI (NYSE: CAI). They're all correlated. January: great.
February, March: horrendous. Then recovery. But if you look at the
containership lessors, they're still all much closer to their
Ship-lessor stocks left behind
Nolan at Stifel has been pointing out this disparity since
mid-August, dubbing containership leasing companies "the single
most compelling investment opportunity in traditional shipping
Nolan told FreightWaves, "You haven't seen the same degree
of follow-through [with prices] with respect to the ship-lessor
equities. The counterparty risk is off the table. The [charter]
rollover risk is less severe. The duration of time charters is going
"The bonds have really rerated. So, either credit investors
[who bid up bonds such as CMA CGM's] are ahead of the curve or
they've missed something. Either there's a risk the bonds need to
come down or some of these equities need to come up."'
Battle for eyeballs'
There are at least two reasons the ship-lessor stocks haven't
recovered. One could be that there's not enough interest - these
stocks just aren't sexy enough. Another could be that there are
legitimate fears about the U.S. recovery.
"I think it's mostly a lack of air time," said
Mintzmyer. "If you look at tankers, what got those stocks
moving was companies speaking on CNBC and analysts talking about
Webber cited the "uphill battle for eyeballs" for
Nolan agreed that the container stocks have lacked attention.
"Capital for shipping is transient. Either it's there or it's
not. And right now, it's not. It doesn't really matter what you
think from a valuation perspective until there's a catalyst to get
people to want to look at it again. The question is: At what point
is there a catalyst? Maybe it will be [third-quarter] earnings.
That's my best guess at the moment."
Giveans and Nolan both said a lag between the surge in liner
spot container rates and containership lessor stock prices made
"When you see $4,000-per-FEU rates, the liners get that
cash immediately, whereas on the ship-charter side, the activity is
few and far between so you wouldn't see an immediate uplift [in
charter income]," said Giveans.
"It sort of makes sense that these [ship-leasing] equities
would lag because they're kind of the tip of the spear relative to
the liner companies," added Nolan.
"When there's excess capacity, the liners can lay off
equipment and still do reasonably well and the lessors bear the
brunt of that impact. Then, if the market begins to recover a bit
for the liners, it doesn't necessarily have to translate
[immediately] into a stronger market for the lessors."
But this raises the question: If stocks are inherently
forward-looking and efficient, the market should be able to account
for the charter-rate recovery as well as when lessors' charters will
expire (and reap the benefits of the rate recovery), then reprice
the stocks. If that's not happening, perhaps the market is pricing
in a faltering U.S. economic recovery?
"The wild card here is that I don't think anybody can say
with high conviction that demand is going to be great for however
long," said Nolan. "It's surprisingly good now, but we're
not there yet."
"I think there are a lot of questions about the
sustainability of demand," said Giveans. "Container rates
are certainly going to come down as inventories get restocked and
demand doesn't rebound as quickly as many people had hoped."
"I think it reflects trepidation around the future,"
said Webber. "I agree that you would have thought there'd be
more of a recovery [in the containership lessor stocks]. But I also
think the markets are consciously or subconsciously inferring a
degree of credit risk."
Betting on box lessors instead
With containership lessors, said Webber, "the market
exposure is lumpy because you have bigger chunks of cash flow
rolling off at different times [due to charter expirations]. This
can overlap with the refi [debt refinancing] cycle, and all of a
sudden you get stuck."
Webber believes a better way to invest in the container-shipping
space is to buy stocks in the box-equipment lessors that own
containers and rent them to liners (as with ships, liner companies
own a portion of their box fleet and rent the rest). These companies
include Triton (NYE: TRTN), CAI and Textainer (NYSE: TGH).
"They're more liquid [than shipping container stocks]. And
they don't have these waves of new supply that obfuscate what's
going on from a sector dynamics perspective like you do in
shipping," Webber explained.
It takes two years to build a ship but only six to eight weeks
to build a container. In practice, this means box supply is more
closely calibrated with demand than ship supply. It's less likely
for capacity owners to overshoot.
"These [box-equipment lessor] stocks offer a better
real-time gauge of what's actually happening from a trade
perspective, and they're closer as a real-time indicator to the
container lines themselves," argued Webber.
Investor interest still tepid
FreightWaves asked the analysts whether the recent publicity on
container-shipping spot rates is bringing more investors into the
Mintzmyer is enthusiastic. "It's so weird that nobody is
talking about this. I think container ships are the most interesting
of all the shipping sectors," he said.
"We have certainly had some calls," reported Giveans.
"But mostly from people who were already interested in
container ships. It's more legacy investors who had been on the
sidelines and are now saying, 'Oh my goodness, this market is
actually good. We have something positive here. How long can this
According to Nolan, "Whether this is inventory restocking
or stimulus spending or whatever, clearly something is going on. It
has raised some eyebrows. People are looking at it as a non-energy,
non-tech way to play the COVID-19 recovery. But it's certainly not
like my phone is ringing off the hook." Click for more
FreightWaves/American Shipper articles by Greg Miller
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