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Table of Contents

1 - Introduction

1.1 TL;DR

1.2 Introductory Remarks

1.3 Thesis Summary

1.4 Recommended Due Diligences

1.5 News Sources and Who to Follow

2 – Basics of Container Shipping

2.1 Container Shipping vs. Bulk Shipping

2.2 How is Containership Capacity Measured?

2.3 How do we measure Containership Rates?

2.4 The Global Containership Fleet

2.5 Global Shipping Traffic

2.6 The Market Structure of Container Shipping

2.7 Ship Sizes on Different Trade Routes and Cascading

2.8 The Preference for Medium-Sized Ships

3 - Bullish Market Conditions

3.1 The Rise in Shipping Rates and Few Ships Coming Online

3.2 High demand for value-added goods

3.3 Bottlenecks at Ports

3.4 The Inflation Trade

4 - The Bearish

4.1 It’s priced in - the stocks have already ran

4.2 A correlation to the global economy / a major downturn.

4.3 Rates are going to come down hard and fast

4.4 This is a market in perfect competition. More ships will be built, therefore destroying prices.

4.5 Reduced Consumer Demand.

4.6 Rapid De-globalization due to Covid Supply Chain Disruption / Manufacturers moving away from Just in Time / Political Tension.

4.7 Regulator Intervention

5 - Miscellaneous

5.1 Company DDs.

5.2 User Shoutouts

5.3 Concluding Remarks

1 - Introduction

1.1 TL;DR

Container shipping is hot and will remain hot for the next year and a half. Companies in the sector with medium-sized ships such as $ZIM and $DAC are trading at P/E of around 2. Other microcaps are also extremely promising.

1.2 Introductory Remarks

Ahoy ye landlubbers! Welcome to pirate gang. Whether you’re an experienced sea hand or yet to set sail on your first voyage, this DD will get you ready to hop aboard.

Special thanks to two people: u/Hundhaus for introducing this trade to Vitards and to J Mintzmyer whose team at Value Investor’s Edge has collated so much expensive data and supplied it to the public in an accessible format. Also, this isn’t financial advice – I sometimes poop my pants when I sneeze too hard.

One aside on the numbers: I have scoured numerous data sources and collated them to get an accurate picture, but the differences are extremely stark between fleet numbers, capacity, vessel age, and global trade numbers. Do not use these numbers as gospel, but rather as a way to paint a broad picture.

1.3 Thesis Summary

A swell of macroeconomic factors has made a perfect storm for container ships. Chronic underinvestment in an unprofitable industry for years has led to few ships being built. Now, the ships available are aging, few ships are coming online, and new containership demand will seriously outstrip new container ship capacity for at least the next year and a half. Compound this with bottlenecks at ports and trade routes, low retailer inventory levels, and strong consumer demand for value-added goods, and companies that will literally pull in their entire current market cap in pure cash by the end of 2022 before these conditions ameliorate. Therefore, these companies still have tons of room to run. As for individual company selection, I prefer those that run medium-sized ships like $ZIM and $DAC. Companies running large and small ships are still good but have macro problems. It is unnecessary to expose yourself to those problems.

1.4 Recommended Due Diligences

J Mintzmeyer’s Reddit DD 1

J Mintzymeyer’s Reddit DD 2

J Mintzmeyer’s Latest on Seeking Alpha

James Catlin’s article on the Macro Environment of Container Shipping

And Catlin’s update on it

1.5 News Sources and Who to Follow

J Mintzmeyer on Seeking Alpha

J Mintzmeyer on Twitter

J Mintzmeyer on Reddit u/c12mintz

Greg Miller on Freightwaves

Freightwaves for news

James Catlin on Seeking Alpha

TradeWinds News

Container News

Paid Services:

Shipping Intelligence Network

Alphaliner

VesselsValue

The Journal of Commerce

Shipping Watch

2 – Basics of Container Shipping

2.1 Container Shipping vs. Bulk Shipping

Container ships tend to carry value-added goods, usually in forty-foot long containers. Therefore, much of container shipping is done where manufacturers are located.

Bulk Ships are a related but different market from container ships. They are usually used to transport commodities, typically by filling the hull of the ship with that commodity. If the cargo is liquid (such as LNG, gasoline, or hazardous chemicals), it is referred to as Bulk Liquid Shipping. If it is dry (such as iron ore and coal), it is referred to as Bulk Dry Shipping. The most famous index of dry bulk shipping is the Baltic Dry Indices (derived from a few other indexes), and is the most common method of assessing at a glance the costs of shipping commodities.

This DD primarily addresses container shipping but makes the occasional reference to bulk dry shipping.

Wikipedia article on container shipping

2.2 How is Containership Capacity Measured?

The usual unit of mass for a ship and for dry bulk ships is DWT, or Deadweight Tonnage. It is a measure, in metric tons, of the “weights of the cargo, fuel, fresh water, ballast water, provisions, passengers, and crew.” You may see this used in some statistics about container ships, but in container shipping the primary unit you need to be concerned with is the “Twenty-Foot Equivalent Unit.”

The Twenty-Foot Equivalent Unit, or TEU for short, refers to the length of the container itself. Containers typically come in one of two standard varieties. The first is a twenty-foot container, which is equal to 1 TEU. The second is a fourty-foot container, which is equal to 2 TEUs. If a ship has a capacity of 6,000 TEUs, then it can fit 6,000 twenty-foot containers, 3,000 fourty-foot containers, or a combination of both. Containers of different sizes are meant to interlock and be stackable.

Note that the TEU cannot be converted to mass because it is closer to a measure of space. We do not know the contents of any given container, and therefore cannot calculate mass (although in some circumstances you can infer the mass).

Wikipedia article on Twenty-foot equivalent unit

Wikipedia article on Deadweight tonnage

2.3 How do we measure Containership Rates?

The fees that a container ship earns from people transporting containers on them are called charter rates. The most important one to follow is the Harpex Index.

Harpex is an index of global shipping rates across multiple classes of ship (more on that later). How it weights the different classes and where it gathers the market data is unclear to me, but it could be reverse engineered. Regardless, it is used as a global standard.

Reading the Harpex is a little tricky. It is not the cost of hiring a container. Rather, it is the cost of chartering (i.e. renting) an entire container ship. At the time of writing, the Index itself is at 2,212 which is a combination of all the ships with special calculations involved. However, the cost to charter an 1,100 TEU ship is $18,750 USD per day, and the cost to charter an 8,500 TEU ship is $71,000 per day. Depending on the size of the ship, charter rates are anywhere from double to quadruple what they averaged over the last decade. The last time rates were close to being this high was the period from 2005-2008. On $DAC’s 2021 Q1 Earnings Slides, they calculated as of May 10, 2021 that the average charter duration was for 2.9 years.

After reading the next section about ship sizes, you should review the charter rates for the different classes of ships on the Harpex. I have a preference for mid-sized ships between 3,000 and 10,000 TEUs, and it is useful to compare rates between different ship sizes.

An alternative is the Shanghai Containerized Freight Index. It’s an index that measures the cost of exporting a single TEU from the world’s largest container port, Shanghai. The destination is composite of numerous ports. At the time of writing, the index sits at $3,785.40 USD. If the container you want to export is 40ft (or 2 TEUs), double that price. For context, the single TEU index hovered between $400USD and $1,000 in the preceding three years.

An alternative to Harpex is the New Contex, which I will link below.

Harpex

German Wikipedia page on how to read the Harpex

Shanghai Containerized Freight Index

New Contex Index

$DAC’s 2021 Q1 Earnings Slides

2.4 The Global Containership Fleet

Companies tend to operate on varied trade routes that require different sizes. For example, Maersk operates a lot of the larger ships on major trade routes, while $ZIM and $DAC use smaller ships that service smaller routes. All container shipping will do well, but I have a preference for companies that run medium-sized ships. See the section on “Preference for Medium-Sized ships”.

Container ships can be classed into 7 major categories, and they all have unique names. If you’re having a difficult time recalling the names, you can remember the following fun facts: The Panamax was named after standardized units for traversing the Panama Canal upon original opening, the Post-Panamax for ships larger than that (the first one ever built being the Japanese Yamato warship), and the New Panamax for ships that can fit after the expansion of the Panama Canal completed in 2016.

The table below has information about the different container ships, and the new capacity coming online.

​

Side Note on this Chart: Data collated from a Wikipedia article and James Catlin’s Seeking Alpha articles which he scraped from VesselsValue. This information requires paid access to VesselsValue so I’ve collated and inferred from numerous sources. All numbers as of January 01, 2021, January 23, 2021, and June 16, 2021, using latest where available. Some definitions across sources are blurred or use entirely different names. VesselsValue’s names are listed first, Wikipedia’s second. Capacities are VesselsValue’s definitions. There are almost certainly minor errors in this table.

Ships have an operating life of 30-35 years. According to Mintzmyer, “survey costs and operating costs significantly increase after 20 years.” In tight times, a containership will be salvaged after 20 years. In boom times, like now, a vessel’s lifespan will be lengthened to the full 35 years. Catlin says the historical age for demolitions is 23-24 years, although I would expect those timelines to be elongated with current market conditions. Some of the low-hanging fruit may already have been picked, as some of the oldest ships were already salvaged when Covid-19 caused rock bottom rates in the freight market.

The table above does not account for capacity reductions via scrapping. We do not know the scrapping schedules of vessels. However, we can make the following notes about each class:

ULCVs: These classes came online starting 2006. Therefore, we don’t expect any scrapping for at least a decade and all capacity coming online will not be offset by salvaging.

New Panamax: The first of these also went online in 2006. No ships will be salvaged here.

Post-Panamax and Panamax: The Post-Panamax has 108 ships 20 years or older, and the Panamax has 84 ships 20 years or older. We can expect small amounts of capacity to be taken offline here.

Sub-panamax, Handy, and Feedermax: 24% of these ships are 20 years or older (which amounts to 631 ships). While plenty of ships will likely be taken offline, I fully expect ship operators to elongate lifespans in this rates environment.

Currently, the largest ship in operation was completed in 2020. The HMM Algeciras is a behemoth at 400m long, 61 m wide, with a carrying capacity of 23,964 TEUs. This size doesn’t come without difficulties. It, like many other leviathans, can only be docked in certain ports due to the berth needed and the size of cranes required to unload. Many ports are located in freshwater estuaries and due to size limitations are unable to accommodate the necessary port expansions and cranes to operate this.

The Ever Given, which was caught in the Suez Canal last year, is only a little smaller, with a carrying capacity of 20,124 TEU.

You may sometimes see the term “Capesize.” These are referring to the largest sizes of dry bulk cargo ships and are named for having to pass through Cape Agulhas or Cape Horn.

Wikipedia article on Container Ships

Mintzmeyer’s original bull article, September 2020

VesselsValue glossary on ships

Catlin’s Article on Container Ships

Catlin’s Update

Wikipedia article on the Ever Given

2.5 Global Shipping Traffic

Global demand is forecasted by Maritime Strategies International to be 218 million TEU in 2021 (this was pulled from $DAC’s Q1 2021 earnings slide). The UN Conference on Trade and Development reports that in 2020 only 143 million TEUs of containers passed trade routes. For comparison, 2019 had 152 million TEUs pass through ports. While I hesitate to pull exact comparisons from numbers calculated via two different data sets, this stark difference should demonstrate that it seems unlikely that this demand will be met in 2021, hence the rate increases.

In terms of where they are going, the Japan Maritime Public Relations Center made the following estimates about the global 2016 container movements (left column is origin, top row is destination, units in thousand TEUs):

​

In case you don’t want to interpret that chart, it just means that most of the world’s container ships get loaded in East Asia. North America and Europe ship very few goods to Asia, while 21% of the world’s loaded containers goes from Asia to North America and Europe. Again – this is to give you a general idea. Japanese numbers estimate container handling for 2016 at 153 million TEUs compared to the UN’s 137 million TEU estimate.

Many companies have complex routing systems, but this imbalance in global trade flows inevitably leads to full containers leaving Asian ports and empty containers leaving North American and European ones.

Last, container shipping is a cyclical business. Peak season tends to run from August – October, typically for the holidays. During peak season, many carriers add a “Peak Season Surcharge.” For example, this year Hapag-Lloyd is including a $1,000 USD surcharge per TEU from East Asia to North America during peak season.

Wikipedia article on Container Shipping

Academic Paper on Introduction to Container Shipping

UNCTAD Maritime Report

$DAC’s 2021 Q1 Earnings Slides

Hapag-Lloyd Peak Season Surcharge Notice

2.6 The Market Structure of Container Shipping

Container shipping has an oligopoly market structure. The top 5 shipping companies make up 65% of the industry, and the top 10 makes up 85% of the industry. As of May 01, 2021, these companies are:

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​

Evidence points to the domination by these 10 players expanding to 90% of the overall market in the next few years. Some of these players are consolidated further into ”alliances.” Currently, there are three major alliances:

• 2M Alliance: Maersk, Mediterranean Shipping Company, and now (unofficially) ZIM
• Ocean Alliance: COSCO, OOCL, CMA CGM, and Evergreen
• The Alliance: Hapag-Lloyd, Ocean Network Express, and Yang Ming

These alliances can involve sharing vessels. Broadly, the alliances share these common elements:

“The main areas of communication and information sharing cover the same areas such as stowage plans, vessel assignment, and scheduling as well as problem-solving. They also openly discuss how to regulate fuel types, environmental issues, operational efficiencies, and engine failures. Additional elements in each shipping alliance include capacity planning, the contribution of each individual carrier, and the specific compensation.”

To put it simply, there is a high degree of consolidation and cooperation in the container shipping industry, and this has only been a trend since 2017.

Paper on Introduction to Container Shipping

Mintzmeyer’s discussion on Maritime Shipping

Wikipedia Article on Container Shipping Companies

Freightwatch on consolidation of the shipping container market.

Container Xchange explaining the shipping alliances

2.7 Ship Sizes on Different Trade Routes and Cascading

One of the characteristics of the ship sizes is that only the largest trade routes use the New Panamax and ULCV sizes. Namely, ships running between major ports in the US, East Asia, and Europe may use these sizes, but the rest of them do not require ships of this size. For example, Hawaii is mostly serviced by Sub-Panamax vessels.

This has led to something called a cascading effect from larger routes. Tons of new capacity came online for ULCVs from 2017 to 2020. 96 of the 179 ships, or 56% of all ULCVs and likely a slightly larger share of overall capacity came online for that ship class in that period. According to Catlin, this had the effect of over-populating the major trade routes pushing down rates and displacing medium sized vessels into smaller routes. ULCVs is also the category with the most capacity coming online (55 new ships by the end of 2022). This is to achieve maximum efficiency on the largest ports and trade routes.

We would expect a smaller orderbook for smaller vessels to accommodate the increase in capacity on those smaller routes from the cascade down. And indeed, this is what we see. The orderbook as a percentage of fleet for vessels between 3k-7k TEUs is 4% and for sub 3k TEUs is 8%. Catlin notes that this is offset further by over 20% of the sub 6k TEU fleet (or 807 ships) is over 20 years old and primed for salvage. Therefore, 2023 will likely see normalized rates for larger routes while smaller trade routes should continue to see elevated rates for some time.

James Catlin’s Article on Seeking Alpha

Update to his article

2.8 The Preference for Medium-Sized Ships

Containership market experts like Mintzmyer and Catlin are still bullish on the largest and smallest companies, as they should all see appreciable gains. However, it is my preference for medium-sized vessels between 3,000 and 10,000 TEUs. Smaller ships have greater exposure to spot prices and are going to be less severely impacted by the new capacity coming online in the next few years.

The big players have multi-year contracts like Maersk. This is because their container ships are such behemoths that the certainty of multi-year contracts provides a steady, predictable schedule. While Maersk will be prevented from gaining some of the upside of rate increases, they are also protected on the downside as well. That said, if companies are willing to sign multi-year contracts at current rates, then that bodes well for the longevity of all rates. However, we do expect a lot of ULCV capacity coming online to cause a decline in rates to a “normalized” level starting in 2023. We do not know what that normalized level will be yet.

Smaller players with smaller ships, such as $ZIM, have about 20% of their capacity on long term contracts, and 80% at short or medium term. CEO Eli Glickman didn’t discuss exactly how long this meant, but it is reasonable to infer that short term meant quarterly. He went on to say that he preferred negotiating shorter term contracts, probably because he foresees a lengthy high-rate environment. Maersk CEO Soren Skou did not divulge which portion of their long-term contracts are fixed and which are index-linked, but we do know that they have both types of contracts. It is unclear what those fixed rates are for future years. Mr. Skou, in response to an analyst assuming that customers would receive a discount for multi-year contracts, specifically mentioned that he did not say anything about discounts, implying that there weren’t any.

Companies such as $ZIM and $DAC, due to them servicing smaller trade routes, are also less affected by the capacity increases of the larger vessels on the major routes. Obviously, with cascading there is an impact, but not as extreme as those directly on the trade route. The age of the smaller vessels suggests that there will be scrapping soon, which will partially offset the impact of cascading ships from larger routes. Further, the orderbook as a percentage of fleet is smaller for these ships. To reaffirm this, go back and look at the table in the “Ships in Global Feet” section. The numbers coming online speak for themselves. All the ships smaller than Post-Panamax are under-capacity.

In conclusion, it’s my preference for companies running medium-sized ships (Panamax to New-Panamax) that can take advantage of these upside swings both by being on smaller trade routes with less capacity coming online and because these smaller companies can act more nimbly with smaller, shorter duration contracts at higher rates.

Mintzmeyer discussing contract lengths

$ZIM’s 2021 Q1 Earnings Transcript

$DAC’s 2021 Q1 Earnings Slides

Maersk Q1 2021 Earnings Transcript

James Catlin discussing the macro fleet

3 - Bullish Market Conditions

3.1 The Rise in Shipping Rates and Few Ships Coming Online

The Harpex Index is now at record highs. Over the last ten years, the usual index price hovered between 320 and 740. It has now ballooned to 2,212. You should review how individual ship sizes are affected differently, but broadly rates have never been higher. The last time rates were this high were during 2005-2008, where they were typically in the mid 1500s range with a high of around 1750.

These rates have two pieces of evidence which suggest that the higher prices will be sticky to some degree. First, there is significantly more consolidation in the industry since 2005-2008, as 65% of the container ship fleet is held by 5 companies. I couldn’t find any hard data from 2008, but I did find a news source that, as a point of comparison, reported that in 2005 the top 7 companies held only 37% of the fleet. This strongly suggests more “supply discipline” than existed in the past. Second, Mintzmyer notes that many charter contracts are for longer periods of time (2-3 years), meaning there are long-term customers at these prices. According to $DAC’s Q1 2021 earnings, the average charter contract length is 2.9 years.

One of the main problems that occurred during the mid 2000s was that the orderbook as a percentage of fleet were between 50% and 61%, compared to today’s 18%. One of the major issues in that decade was that containership companies gorged on their excess profits, using them to build new capacity until they absolutely devastated their margins upon a downturn. It took more than a decade and a global pandemic for rates to recover.

Both James Catlin and $ZIM CEO Eli Glickman believe anything below a 20% orderbook can be safely absorbed into the global fleet as it will be offset by salvaging of older ships. However, this is a number to watch closely. Should this number rise and companies decide to spend excess profits on building new capacity instead of giving their shareholders a return, it is likely time to head for the exits on this trade. Look at the “Market in Perfect Competition” bear case for more details. For the time being, most of the ships in the orderbook do not come online until 2023.

Despite the sky high rates, we are only now entering peak season for shipping containers. Container shipping is a cyclical business and many companies typically add “Peak Season Surcharges.” Hapag-Lloyd, for example, is adding a $1,000 per TEU surcharge starting July 18 for containers going from East Asia to North America. This suggests shipping rates have more room to run in the short term.

These excess shipping rates have had a nonlinear effect on profits. Similar to increasing steel prices having an outsized impact on profit margins, the variable costs haven’t changed much (less fuel, called “bunker” in shipping circles). After the fixed costs of a voyage have been paid for, there is an outsized impact of high spot prices on earnings depending on the nature of an individual company’s contracts.

Speaking of fuel, there is risk inherent in ordering too many new ships: the International Maritime Organization (a body founded by the UN that adopts policy and, by treaty, has member countries enforce it) has on June 17, 2021 set new requirements (labeled MEPC 75) on ships to have certain emissions standards by 2030. This is in an effort to reduce carbon emissions in shipping to 40% lower than 2008 levels by 2030. There are also new standards being proposed and are being discussed on a rolling basis through 2023. The risk for containership companies is in ordering a ship and having it not meet these emissions standards. However, I am not an expert. I do not know how large of an impact this will have on the future orderbook.

Some Vitards have speculated that this will have next to no effect, while others believe there will be a moderate effect. Shipbuilders may use alternative fuels, simply reduce speed on older ships, or as Trade Arabia suggested on previous regulation MEPC 75, may only accelerate the timeline to salvage older vessels (at least for Dry Bulk). Freightwave has a great article about the Containership Cycle which should be read.

u/Cryptojags has also informed me that much of the orderbook is filled with ships that will be powered via LNG. These modern ships will almost certainly meet any new environmental regulations that are introduced in the next couple years.

Freightwave discussing green ships

UN IMO setting new standards

TradeArabia article

Speculation from Vitards on the effects of environmental regulation

Catlin’s article discussing green ships

$ZIM’s Earnings Presentation and transcript discussing order-book to fleet and capacity of ships (see slide 11)

Mintzmyer discussing contract length in a lengthier video DD

Hapag-Lloyd’s peak season surcharge notice

Freightwave on the Shipping Cycle

Catlin’s Market Update

Freightwave on Shipping Rates, customer-facing

Offshore Energy comparing market consolidation from 2005

Hellenic Shipping on LNG powered ships

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DD continued in comments