Demand for container equipment is down from its peak
Container lines will post more all-time highs for the first quarter, but could this mark their profit peak? Evidence of market softening continues to mount in the container equipment sector.
The more consumer demand and port congestion increase, the more container lines and leasing companies pay for newly manufactured containers, the higher the output of Chinese container factories, the longer the ocean liners lease containers, the more liners pay to rent them and the higher the sale. price of older boxes when leases expire.
Officers of Triton International (NYSE: TRTN), the world’s largest container rental company, said in a conference call on Tuesday that box production was down, prices for new containers were down, durations and rental rates were falling and the prices of old containers on the secondary market were falling.
Down – but still higher than any previous year except 2021.
“When we look at the market, we say, boy, this is actually a really nice market,” said Brian Sondey, CEO of Triton. “If you had transported us from 2015 to here, it would be amazing. But compared to unprecedented shortages and unprecedented prices last year, that’s down a bit. »
Sondey described last year as “an extreme shortage of containers” and the current market as “still quite tight” but “not as extraordinary as 2021” and “more of a steady market”.
New container equipment market
The world’s containers are built by a very small number of producers in China. Production in 2021 was by far the highest on record, at 7.18 million twenty-foot equivalent units, according to Drewry. Production in 2022 “is well below last year’s pace,” said John O’Callaghan, Triton’s global head of marketing and operations.
Shipping lines “have been more cautious about their container growth [equipment] fleets this year,” Sondey said. Leasing companies are also ordering fewer boxes. “When prices change, leasing companies can be a little more careful” in their own orders, Sondey said.
The average price for new containers was around $4,000 per TEU in mid-2021. Three months ago, when Triton released its latest quarterly results, it had fallen to $3,400 per TEU. Now, O’Callaghan said prices were “just under $3,000.”
That’s a 25% drop from the peak, though still higher than pre-COVID prices. Sondey described July 2021’s high container prices as “a condition we’ve never seen before”, noting that “the market just can’t stay at this level forever”.
For liners that lease new containers from companies like Triton, instead of ordering them for their own account, rental rates are also down from 2021 highs. “Container prices are now also reflected in rental rates,” confirmed Sondey.
The liners leased boxes from Triton for average terms of 12 to 13 years in 2021. The term reverted to 10 years in 2022. “I think that just reflects the prices of containers on Earth coming down a bit,” said Sondey said. “When container prices…are no longer near $4,000, it is easier to spread the premium [over fewer years].”
Used Container Equipment Market
Another key indicator is the resale price of old containers coming out of leases and being sold on the secondary market (for use as storage, etc.).
Disposal prices hit historic highs last year as liners rolled out all the old boxes they could find and the number available for resale plummeted.
According to Sondey, “we’ve been saying for three or four quarters that our gain on sale and disposal prices needs to come down [because] they were so extraordinarily high.
“And we see prices starting to come down. We expect that to happen more…although we’re not trying to give the impression that we’re going to get back to where the sales gains were in 2019.”
The supply chain crisis is not over yet
Signals from the container equipment sector confirm an easing in liner demand from the extremes of last year. However, Triton executives have argued that the congestion story is far from over.
“We hear about [liner] customers that the bottlenecks that really plagued the shipping industry — and, I think, the economy — are still there,” Sondey said.
According to O’Callaghan, “The disruption has been exacerbated by what has happened in China’s main port areas. There is potential for further disruption on the West Coast as congestion cycles back and forth between Asia and the United States.
Asked about the effect of the shutdowns in China, Sondey said: “It’s a very uncertain situation. Typically, what we see with a disruption is that the same amount of goods wants to move. And when you see temporary disruptions, that means there are peak periods where things are flowing higher. This usually means that shipping companies need more containers in their fleet compared to the cargo they are carrying. But I don’t think anyone is brave enough to predict how it will turn out.
Inventories in the various container shipping segments have fallen since late March or early April despite expectations of record first-quarter earnings and continued strong earnings throughout the year.
An example of this is Triton, which posted record net income of $181.2 million for the first quarter of 2022, compared to net income of $129.3 million in the first quarter of 2021. Adjusted earnings per share of 2, $78 topped the analyst consensus of $2.63. As of Tuesday’s close, Triton’s stock price was down 12% from its 52-week high on March 23, despite rising 5% on the day of the earnings beat.
Triton expects to earn less in the second quarter of 2022 than in the second quarter of 2021 due to lower prices for old containers sold in the secondary market.
In terms of share price, Triton faces the same headwind as much of the public container space: earnings remain extraordinarily high by historical standards and an unprecedented amount of revenue has been locked in, but inventories are down from their highs as prices and container rates have come off last year’s all-time high.
“We keep trying to say that we think it’s not a matter of earnings trajectory. It’s where they are and how they relate to the value of the business,” Sondey said.
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