The shipping container industry saw a collective slump of 10% in 2009, the worst in the industry’s 54-year history. In the depths of 2009′s downturn, one wondered how the companies would recoup their losses even in five years. Fortunately, that gloomy outlook has dissipated and the container shipping industry is looking bright again. So is maritime containers leasing, with shipping lines short on cash from the downturn and a strong future, the shipping companies fill their container needs by leasing containers from companies, like Textainer, Triton, Cronos, Florens, TAL Intl., CARU and all the others that frequent our events.
The flip side for the portable storage and second hand container industries is that the high demand for maritime container leasing means that the shipping industry is hanging on to the equipment, longer, repositioning more empties and dedicating the new production solely to increase the maritime container fleet. On top of that “slow steaming” requires more ships to service the same trade routes and consequently there is a need for even more containers. The current shortage of containers to the maritime industry is equivalent to about two years of production. Furthermore, it doesn’t help that the container manufacturers have realized that they can manage financially without optimizing production by way of raising their prices.
As a result the supply for the portable storage and second hand container trading industry dried up rapidly during 2010 and the early part of 2011, and prices for containers have risen.
The peak season for the container shipping industry runs from June through October as we all know. Typically, container inventories start to build up at the end of the holiday season, and in previous years, the resale departments of the maritime leasing companies start to call their customers in early to mid January asking how many containers they plan to buy in the coming year. That’s not something that is happening in 2011. On the contrary, the shipping lines and container leasing companies are trying to keep as many of their containers for maritime leasing as they possibly can. The supply situation in the United States is made even worse by the virtue of the US Dollar being weak and the exports high. This is something we welcome from a national economic prospective but not when making a living from buying, selling and renting out storage containers.
So that’s the background to the current container shortage, here are some of the effects on companies operating in the portable storage industry. First of all, those companies that are heavily dependent on trading will have a very though time maintaining their business. If there is nothing or limited inventories to trade, there is no revenue and if trading is the only activity, then there is no business. It is reasonable to expect that there will be a consolidation among the trading companies; the small undercapitalized trader will eventually run out of supply. As a pure trading company in the container industry, it is difficult to find alternative equipment to trade. One can get involved in reefer containers, tank containers and other specialty equipment such as lifts and trailers but this type of equipment requires more capital and more importantly, technical knowledge that isn’t easily acquired. As a result of the transparent industry, non existence of exclusive distributorships and representations there is no value in buying a small container trading company and those that don’t survive will just have to wind down.
The medium size trading companies that can take larger positions and add value to the equipment by making repairs and doing repositioning will do better. Keep in mind that there will still be damaged units, units in odd places and other minor quantities available for sale from the shipping lines and maritime leasing companies.
Most likely we’ll see some of the smaller portable storage companies struggle as well. During the economic downturn most of them seem to have survived by virtue of reducing their rental fleets to generate cash. That cash has been spent to pay for operating costs to allow the companies to stay alive. As the economy improves across the country, these companies are now faced with a situation in which they have neither cash to grow nor containers to grow. If the revenue from their rental fleets isn’t large enough for the companies to generate positive cash flow, they’ll have to look at diversifying which requires capital or divest and exit the industry.
Our industry giant, Mobile Mini, is dealing with an extremely low utilization but is not selling containers to a large extent. The more pronounced the container shortage gets the better this strategy seems to be as Mobile Mini will be ready to meet new demand when the economy improves. If the current container supply situation is to be more or less permanent I believe we’ll see a number of smaller portable storage companies being offered for sale within the next 12 to 15 months. These companies are those that lack the critical mass to generate positive cash flow from rental operations and have had to rely on trading to support that cash shortage.
Now there are some bright spots. As the container prices have moved up and supply is scarce we’ll eventually see an opportunity to raise rental rates. Secondly, a company with cash in hand can purchase portable self storage containers, such as the ones PODS, 1800PackRat and Units and others use, to diversify its fleet. These containers are more
expensive than ISO containers but the supply is reliable. You place an order with any of the manufacturers and 10-12 weeks later you have your shipment. With these types of containers in a fleet, the portable storage company can continue to grow in its existing market segment as well as expand into segments that don’t want the more rigid ISO container.
In addition, for the companies that have sufficient cash flow and that can maintain their existing rental fleets, there will be opportunities to acquire smaller local competitors which mean a larger market share and more control of local rental rates.
Prices for storage containers have increased rapidly during the last 12-15 months. On the other hand, prices for portable storage fleets have declined substantially over the last three years. When pricing portable storage rental fleets, more and more emphasis is made on the yield the rental fleets generate and prices for companies are set more on basis of the cash generated than a per container value. It is at times difficult to comprehend how the rental fleet pricing is declining while the container prices are going up. Theoretically, in a perfect market situation, a container on rent should be worth as much as the sale container plus value added as well as the amount of cash generated from an average rental term. We don’t see that clearly in this new market environment.
Now, in our highly fragmented and erratically supplied industry there is never a perfect market situation therefore there is always an opportunity around the next corner.