Evolution in the World of the Container Trader as the venerable Container Enters its 70th Birthday i
Written by; Richard Butcher - Managing Director European Markets Bulk Container Group Inc
The World of Containers and The Challenges being Faced
Well it’s that time of year again when we start to look at the world of shipping – and as the Global Container looks to turn 70 next year – it seemed very appropriate that our last white paper of 2019 should address some of the biggest issues which the Container Market is facing. We have seen some major challenges across the Global market over the last few years from Over Capacity on main trades, Environmental Restrictions – demands for lower CO2 footprints and cleaner burning fuels, Carriers facing financial issues as consolidation and competition continues to hammer the markets, global trade wars between the world’s largest Economies, while larger vessels that keep coming off the building blocks. Other areas of change have been occurring within the industry as the adoption of newer technologies to help stream line business models these have included :-Block Chain, Digitalization, Crypto Currencies and Smart Contracts all aimed at reshaping areas within the global supply chain. So, as we watch the rather archaic industry being dragged towards change let me take this opportunity to outline the way in which our Company Bulk Container Group is implementing change across the world of container trading.
So let’s start by tackling one of the biggest hurdles that the Whole Container Industry suffers from and revolves around the $21.0billion financial black hole of Empty container Repositioning, equipment dwell times and the ever growing stockpiles of unsold container inventory a $9.5 billion problem and the rationale around this industry white paper.
The Global Container Sector
What would the world of shipping be like if the Genius Mr. Malcolm Mclean had not created the first generation container back in the 1950’s by revolutionising the way conventional cargo was loaded, handled and shipped all over the world his creation has totally changed the world of trade – those initial days many were sceptical about whether this rather conventional looking box could in fact change the way shipping was being handled.
“Spin Forward to today’s Global Market”
Well it would be interesting if Mr. Mclean could visit the world of trade which his steel box has transformed creating a global supply chain that has become almost totally reliant in the utilization of his amazing steel Box. As we move towards 2020 the container will turn 70 years old and although there have been many variations over the years from varying sizes, to different construction methods, adoptions of design types, and the introductions of new composite and lighter materials all aimed at handling and carrying different cargo mixes, allowing for greater capacity and weights to be moved, we are now starting to see the adoption of the SMART Container which can provide their operators and customers the ability to keep in touch with their cargo and container as they move across today’s busy supply change patterns.
However, the creation of the container has also created its own unique problems, of course as the world of trade has increased the Ocean Carriers and Leasing Companies have been continually expanding their fleets of containers with over 17 million units in circulation but the management and flow of these containers during their operational lives has put additional financial strains on all of these major operators.
Coupled to the overall global trade the Ocean Carriers have all focused on becoming the dominant players in the world of containers and this has seen larger vessels being introduced (22.000 + teu’s) as these goliath vessels need feeding with cargo and containers its led to millions of Containers being produced to meet demand and in many cases the Corporate ego’s within these remaining Ocean Carriers have not stopped the production and deployment of larger container equipment fleets. With every new vessel being deployed the Global Ocean Carriers are usually commissioning large orders for containers as these are normally written into their overall finance deals that have been made with the Construction and Financial institutions.
Global Imbalance creating Mountains of Containers
Much debate around the world of containers and the flow of traffic across the major trade routes – with tremendous imbalance situations occurring across the whole supply chain -there are very rare times that a balance between Import loads matched back to export loads occur – of course the carriers global equipment control teams try and find a happy balance in terms of the flow of containers -but they continue to fight an uphill battle as the commercials teams continue to take bookings to capture market share and achieve optimal capacity on these large next generation container vessel.
The Ocean Carriers Logistics teams empty repositioning of equipment continues to be a major burden to the operators as these moves create the following issues :-
Increased Operational Costs (Empty Repositioning costs / trucking / Rail / Feeder Vessel Costs / Terminal Charges / Fuel consumption of the vessels / Administrative charges / Insurance and Daily Leased Per Diems all eat away at the Carriers bottom line results.
Increased CO2 Footprint across their Supply Chain
Those Containers that do not get repositioned sit for months on end in Empty Storage Depots again incurring the following costs: -
o Storage Charges
o Damage Occurrences
o Lease Per Diems
o Administrative Charges
Carriers also cannot always predict the booking patterns that are created and to respond they also hold substantial numbers of containers in safety stocks – again creating drains on their operating margins.
Of course, there have been several initiatives to address and focus on container repositioning and over the years we have seen the Ocean Carriers adopt the following methods to try and resolve these financial burdens from: -
The Common Grey Container Fleet (Adopting Equipment Pooling, of course cost reductions can be achieved via merging equipment fleets – overall container numbers can be reduced, internal departmental costs can be reduced and common IT platforms can provide a modicum of savings – but ultimately container volumes continue to create headaches and although initial savings can be achieved it doesn’t really resolve the problems.
Container Exchange Platforms have also been introduced looking at providing direct interchange opportunities for Carriers and Freight Forwarders to share and look at taking additional equipment to fulfil bookings and try to establish a balance of trade positioning.
Advanced IT Technology Platforms have been designed to evaluate the overall traffic flows – trying to achieve more efficient equipment utilization – and of course these Tech Solutions can generate cost savings and some benefits.
Repositioning Technology can provide visibility on demand patterns to predict imbalance trends however these solutions only scrape the surface and struggle to provide the Carriers to offset the huge costs involved in their container positioning.
Although these models have created some relief to the markets – they struggle to solve the growing problem that face the Industry as $21billion dollars in re-occurring empty repositioning that is being felt across the whole Container Markets.
To compound these issues the question must revolve around the container itself and the fact that :-
Containers are built to last!
Containers are very strong in design and build using the latest in Corten Steel, Bamboo Flooring, more durable paints preventing corrosion coupled to overall integral strength of these units have created a highly durable and long lasting container with the good service and maintenance these units can be used in a service / cargo life of up to 20 years (although the majority of today’s leading Carriers keep these in service for around 168 Months while the leading Leasing Companies look at an average of 120 months) .
Of course, containers can last significantly longer, and the Operators will look to squeeze as much operational life out of the equipment. When looking at main trade routes the average container will circum-navigate around the globe around 5 times per annum – 56% of the time those units are being moved empty in terms to meet repositioning requirements.
So what solutions can be adopted to help resolve the question of Empty Repositioning when the Lines have not started to adopt the container as a disposal asset we shall explore these areas later in this paper.
Both the Carriers and the Leasing Companies have similar agendas to ensure that their equipment is designed for durability let us first look at why the Leasing Companies seek longevity of their assets:-
The Global Leasing Companies
With the highly competitive container sector – leasing Companies have faced many financial challenges – the high level of capital investment in terms of establishing a global container pool is considerable – the cost of new equipment can vary significantly depending on a number of factors :-
Costs of Raw Materials / Steel / Wood
Production Costs (Labour / Work Force)
Global Trade can impact whether containers will be built
Leasing Companies ultimate goal is to achieve maximum financial returns on these deployed assets :-
As lease per diems have been falling annually -containers are being leased out for $0.30 – 45 cents per day (gone of the days when Leasing rates could fetch $1.50 -1.65 per day and 40’s could fetch between $1.75 and $2.25).
Depreciation of these units have been pushed to the first 5 to 6 years and the balance of the equipment’s life will provide a modicum of financial returns.
The Investors look to the tail end / end of life residuals that are being placed on these units and this is where new challenges can be faced.
At their end of life period – when the Lines off hire these they will look to recoup some of the excessive damage back in payments from the lines – the majority of the leasing companies will hold back on actually repairing these units rather looking to sell them in the current state they are off hired in and would rather pocket these charges.
The Leasing Company usually try and tie these units into long term agreements (5 years) and then try and renegotiate them towards the end of these lease agreements to ensure they get maximum utilization of these units.
The Ocean Carriers Approach!
Of course, the Ocean Carriers look at operating their own container fleets (in addition to the equipment they source from their Leasing Company vendors). The Carriers look at running their equipment for longer time frames than those operated by the leasing companies. Their internal fleets are serviced and maintained to a slightly higher level than those they lease. The Carriers look to achieve an average life of around 14 to 15 years whilst also looking at the back-end residuals that will sit on the carrier’s asset balance sheets.
The Carriers also tend to look at the current market prices and like the leasing companies will tend to acquire new equipment when prices are low, and the manufacturers have a glut of capacity across their factories.
Although most lines tend to have an even balance of owned and leased equipment most have different strategies when coming to fleet disposal -and this is where my paper starts to focus on the Global Trading Markets.
Enter the World of the Container Traders (The Traditional Methods)
With the life of containers being extended and new inventory starting to come on stream on an annual basis the problems keeps escalating – the market still do not consider the Shipping Container as a disposal assets – however when considering that most Carriers and Leasing Companies are obtaining fairly competitive prices at the time of manufacturing they are usually obtaining fairly good pricing for their equipment – coupled to the fact that at end of life they tend to put a value on these units of anywhere up to 60% of the book value – (Of course the true costs of these units over their operational life’s must embrace the following elements :-
Maintenance and Repair Costs
Empty Depot Storage Costs
Administrative and Associated Costs
Relevant Technology Charges (Track and Trace Components)
So when taking those operational costs into consideration is the end of life residual still as relevant as the those operational costs can far exceed the asset value –(of course Operators will never really consider these and base those as the cost of doing business and should be incorporated into the overall freight rates that are achieved on every physical move.
So, what is the current traditional practice that the Ocean Carriers and Leasing Companies adopt when looking at equipment disposals.
Let’s first look at the activities normally associated with the end of life “Off Hiring of a Leased Container.
*Ocean Carrier’s (Equipment Control System will generate a list of Containers / Units that are nearing their end of lease agreement terms – those at around 120 months will be targeted.
*The Equipment Control System will usually notify the Container Leasing Company that a batch or series of equipment will shortly be off hired.
o Usually notice is provided to the leasing company at around 2 to 3 prior to the physical off hire takes place.
o These Off Hired Units still might be in the supply chain – and again depending on what trade services and end in-land location provided by the shipper will normally determine where these units will end up from a Geographical location – and the only notification that the Leasing Company will be provided as a notification / EDI Off Hire Message that will normally contain the following details
Lease Agreement #
Approximate off hire date
o The Leasing Companies might well have the opportunity of requesting which depot these are off hired at within a set geographical region. (This will be the only input the Leasing Company might provide)
o Usually Carrier and Leasing Companies share common depots as they then can provide Leased equipment in the event of the Carrier having booked short falls.
* The Leasing Company will then only be notified when the empty container is returned to that depot – of course the condition of the equipment has not yet been assessed.
* The Equipment can be processed in the following ways:-
o Off Hired put into a Waiting Inspection Stack
o Inspected @time of arrival (Damage report created)
o Container will then be put into a damage / awaiting authorization stack.
o Off-Hired Inspections will then be conducted, and any excessive damage incurred to that equipment will then be assessed and agreed for repair payments.
o The leasing company will usually in 90% of the cases do not spend the money on the physical repairs.
* The Depot will start to bill the leasing Company in accordance to their agreed contractual terms on a daily per diem until those units are sold or leave their facilities.
SO How Do the Trader’s Get Engaged
The Container Leasing Companies then enter a mode of preparation of course they will have a window of time that they will approximately know when containers will come into a specific region / depot and they will start to alert there regional sales teams in those markets to kick drive their sales efforts. The usual chain of events can be plotted:-
*A list of Containers that will be scheduled can be circulated to the local depots -the Depot Operators will usually get a first dib on all inbound containers. The Container Depots usually will look at picking the cream of the crop – while others will quickly asses the cost of the repairs against the price the leasing company requests (usually under bidding and being able to patch and repair these units at their own internal costs – whilst then passing these units on at a slightly higher price to the Public or to 3rd Party Traders. Margins can be good if bought at the right prices.
*Some of these Units might well be patched / repaired and leased out as temporary storage, while others might be converted into temporary portable buildings and either sold or leased out.
*Sales Lists will be generated and circulated to all local traders / general connections that a series, type, container years / Manufacturing details will be inbound and that these will be available for inspection @ a specific facility. Estimated pricing will be provided / but these numbers might fluctuate once the container has been off-hired and damage reports provided – as this might impact the market value of the equipment. These lists might be sent in the following formats: -
o Excel Report
o Email Format
Traders will engage and will pick inventory depending on the local requirements.
The balance of equipment that is left unsold will sit on the Leasing Companies books as assets, but this is where things get tricky and I shall touch on these areas a little later into this paper.
The Ocean Carriers Equipment Disposal Methods
The Ocean Carriers have a very similar approach they will look at offer hiring their 12 to 14 year old containers and these again will be dispatched to a certain region and eventually be located to the depots – some of the lines will look to sell at a depot level, Traders, and some have developed their own trading platforms which provide visibility and details on stock, types, sizes, locations, general condition and price. Of course, they also rely on the local markets to sell and dispose of their old aged units.
Trading of these Containers Can Create Headaches
However, both the carriers and leasing Companies have a major problem as a good 60% of their off-hired equipment sits unsold in depots in locations across the globe -as I have already raised this unsold stock costs the industry over $9.5 Billion per annum –
Depot and Storage Charges
Damage and repairs to the equipment
Any empty Repositioning of Equipment
The majority of inventory can sit idle in depots for months not being sold – of course you will hear that these assets sit squarely on the financial books of both the Lines and Leasing companies but at what point of time do these assets soon become a financial burden to the various CFO’s that have the arduous task of reconciling their company books.
So What is The Answer to the Age Old Problems of Unsold Inventory?
Well the Asset Owners cannot always predict the market trends during the life of the container there will be periods when assets values can significantly fluctuate when the costs of new equipment increases the Carriers and Leasing Companies will tend slow down on acquiring new units and keep their aging units longer in service – creating potential short falls in the 2nd hand markets which create potential peaks in their asset values.
So what creates these Market Trends:-
*Overall Raw Materials costs can significantly change and of course the leading Manufacturers will look at increasing their costs exponentially which already mentioned will impact the cost for new units and drive a potential shortage in some markets for the pre-owned equipment. (Subsequently raw material prices can also reduce which leads to potentially lower manufacturing costs and the demand to replace with new equipment is higher) this ultimately creates a potential surplus of containers across their sphere of operations. These will impact the price of the 2nd Markets.
*The Top Chinese Manufacturing Companies are also looking at moth balling some of their main manufacturing plants in China which will slow the production – their goal to reduce operational costs and drive the price of new equipment higher (as new box costs are at an all time low) with excess production prices struggle to achieve higher prices. (Simple Macro Economics coming into play).
*Equipment which comes off hire is usually linked to a trade so boxes can be dropped off usually at the last port of discharge and then onwards to their final Inland point of Destination – thus equipment tends to stock pile in certain geographical locations – creating a potential Glut in the market and driving the 2nd hand prices lower.
Regional Sales Equipment Management Teams will work on selling these units but predicting trends and demand is not what they understand, and they are totally reliant on what a local market can absorb and what 3rd parties might be available within these locations to sell the equipment / units.
This is usually multiplied as they will not be the only carrier / leasing company that might be off hiring their units in these geographical zones – which again to hamper pre-owned values, flood a market and create mountains of unsold containers (Chicago in the Mid-West) is a prime example of these mountains of unsold stock.
So How Can these Mountains of Container Be Reduced !!!
The Owners of these Assets have the following dilemma’s to consider: -
DO we Sell our Units in an Over Stocked Region at Loss (Lowering costs?)
DO we sit and wait for the local Markets Recover?
DO we look at moving the MT Units to a higher demand Area (While taking a financial hit in terms of the Transportation (Even if you can get an empty Pick Up Order – these are hard to figure Out?)
DO we scrap these Units and take book value for the scrap?
At WHAT Point do the Groups CFO’s start to exert pressure on their Sales / Fleet Disposal to move these units and get these operational costs down and free up much CASH FLOW!!!
The Future is a little Brighter as New Techniques are being Introduced
OK so far our paper has painted a rather dark impression on the state of the Global Fleet Disposal Markets but there is light at the end of that dark tunnel. Our approach is related to the way in which the equipment is operated during its Operational life. So, let’s introduce the Model that “Bulk Container Group bring to the rather archaic markets.
Predictive Market Trends
We are taking a digital approach to define market trends and conditions, we use advanced analytical modelling to identify key buying trends – working with our ever growing client base -we can identify trends and pricing points on a global level.
Which Markets Are the Most Buoyant?
Indicative Pricing for the Assets
Supply Requirements for Equipment Types
Customers Ready to Purchase!
We have designed a logistics approach to solving the problems of the mountains of unsold inventory, at this stage we cannot share all our content due to its sensitive nature – but our modelling is already helping our Vendors and Growing Customer with a their inventory management and fleet disposals – helping to create a true “WIN-WIN Scenario”.
We are also working on ways to streamline the whole trading process that will embrace such areas as :-
Digital Smart Contracts
Digital Trading - Trusted, Secure, Permanent
Two factor authentications
One click trade and logistics
Artificial Intelligence and Predictive Modelling
Demand forecasting and Dynamic Routing
Market & industry Analytics
Big Data Analytics
These will all form a large part of our Generation 1.0 Trading Platform which is being introduced during 2020.
We are also channeling more focused services to our clientele in developing our Customer First Approach in terms of the levels of services that we shall offer :-
Premium Economy Class
Our pricing and service models will be geared to provide varying levels that our diverse mix of customers are seeking -and the level of services and products that will be offered will certainly reflect in our tiered class approach.
SO WHAT IS THE CONCLUSION TO THE CHANGING WORLD OF CONTAINER TRADING
ll at the start of this paper – we painted a rather grim and financial worrying position that the majority of today’s container Operators are facing – declining margins, fierce competition, escalating costs, and unsettled economic times – but one thing is certain the Container is the common dimminator – as it enters its 70th Birthday but that venerable old container that Malcolm Mclean introduced all those years ago has stayed the course of time – and for the foreseeable future perhaps in 70 years’ time we shall look back and still see that nothing this side of teleportation will replace that age old piece of equipment. But it’s how we recycle and find new uses for these classic pieces of equipment will become the challenge. Yes, the Lines and Leasing Companies will continue their replacement processes but due to the sheer design and construction old equipment will continue to thrive. Do we eventually go to a full one stop recycled unit that can be deconstructed and reconstructed on a one-way trip is that going to replace all that wood and steel that form most of today’s containers? Well our paper is not aimed at answering that subject but rather how to economically reduce empty stock piles, evaluate the process of moving unsold stock to high demand areas, analysis and predict market trends well ahead of anybody else – providing the lines and leasing companies more cost effective and optimal times to dispose of their assets. While looking at introducing newer units in their fleet cost reductions can be achieved. Our model is looking to shake up the way container assets are used we seek to reduce that horrendous $9.5 Burden that all operators annually share.
So is your company ready to move to that next level of procurement and fleet disposal – the BCG Model is geared to provide that level of sophistication and service on a global level. Our analysis of today’s markets are that many traditional traders are very one-dimensional looking at their local domestic markets and this is not a bad thing as we look to monopolise these traders by providing whole sale pricing, but we look to deliver out services on a global model embracing both our Vendors and end commercial consumers and that is where we shall see the major differences.
We welcome your comments and views and of course this paper opens up the subject – but if you’re a trader, a leasing company, an ocean carrier or large end user of pre-owned or new containers we believe our model is aimed at working with and supporting -we do not see conflicts rather alignments and partnerships.
About the Bulk Container Group Corp
BCG Corp -is a leading North American based Digital Container Trading Company, having developed their own unique blend of trading, while looking at ways to improve operational processes to provide a more automated and scientific model in what is a highly traditional and rather archaic process. We believe in bringing value to the Ocean Carrier and Container Leasing Companies that we serve. We believe that our Blend of Management, Technology and response to help solve the $21billion of empty Repositioning while really narrowing our path on that Global $9.5Billion question of unsold container inventory. For more information on Bulk Container Group – Please visit our site – www.bulkcontainergroup.com
About the Author
Richard Butchers Contact Details
Richard A Butcher
Managing Director & Senior Adviser to the Board,
Bulk Container Group Europe Ltd,
63 -66 – Hatton Garden,
5th Floor, Suite 23,
London EC1N 8LE
UK Cell Phone +44 (0) 750 3337188
UK Office +44 (0) 203 4759 924
UK Fax +44 (0) 207 1833 073
Email – firstname.lastname@example.org
Website – www.bulkcontainergroup.com
Skype Address – richardbutcher2020
WhatsApp - +44 (0) 750 3337188