Lloyds List 24 October 2007 by Brian Robinson
“A container never dies,” according to Adrian Dunner, the man in charge of container lessor TAL International’s Trader division, which markets containers that have expired from the prime fleet.
What Mr Dunner is alluding to is the fact that after 10 or 12 or more years being used to ship cargo around the world, containers have second, third, fourth… sometimes more lives than a cat… as second tier shipment vehicles, storage containers and a multitude of other uses. The world container fleet is today around 20m teu, with about 55% being owned by shipping lines and 45% by leasing companies, a number that has changed from the historical 50/50 split.
The number of containers that expire from the fleet every year is not known precisely, but is generally said to be about one million, and maybe slightly higher. What is known with more certainty is that about 3m teu of new boxes are added each year, so the phase out amount of 1m teu hangs together with a 10% fleet growth. Container manufacture rates, prices and location play an important part in the retirement and sale decision process. Container manufacture is today almost 100% in China.
There are currently about 20 factories with annual capacity of 5m teu, but most are working at below capacity. Supply is almost totally elastic, with increases from one working shift to two and then three always possible.
This situation has brought about stability in container prices with a 20ft box costing around $2,000. There has not been much deviation from this for the past couple of years. Stability in new container prices means that asset management decisions about when equipment can be expired are made more rationally.
Why containers are expired is a multi-faceted conundrum involving supply, demand, economics, logistics and geography. Rarely do containers reach the end of their book life — other factors come into play that dictates the economics. Container shipping has never been a balanced business. Trade routes have always been out of kilter, but the China syndrome of the past decade has brought about one enormous imbalance as opposed to many smaller imbalances, which were sometimes able to compensate each other.
Containers that deliver Chinese products to western countries are mostly positioned empty back to Asia. Something like 75% of boxes are moved back empty, and a sizeable number of those that are loaded carry low value cargo that makes a contribution to, rather than meeting shipping costs.
This issue is further complicated by the fact that many locations to which Chinese loaded containers are consigned are — particularly in the US — hundreds of kilometres from a port, meaning that the trucking, stevedoring and shipping costs of an empty box back to Asia can amount to hundreds of dollars.
The third element in the equation is damage. Containers are used in a harsh, salt-laden environment and, although they are manufactured of rust resistant steel, they do get damaged, and repair costs can again amount to several hundred dollars.
The result of these issues is effectively that every time a container is unstuffed, an algorithm is run to determine what should happen to it next. If no return load is available, the owner adds transport and shipping costs to damage costs, compares this with book value and then compares this with the cost of buying a new box in China.
For example, and an extreme one, the empty container is in the US mid-west and has damages amounting to $500. The cost of getting the box back to the US west coast is say $400, stevedoring costs $100, and shipping slot costs — arguably if it is a line’s box — $150. Total: $1,050. If the container is 10 years old and depreciated to less than $1,000, the issue is whether an old box in poor condition in a location where it is not needed ought to be traded for a new box where it is needed. Usually the answer is yes.
Furthermore, the large number of mergers and acquisitions that have occurred among carriers and lessors over the years has resulted in multi-coloured fleets with a variety of decals and logos. Phasing out the old and buying new also solves this issue and keeps the fleet newer.
These decisions being made every day result in a million or so boxes coming onto the after-market every year, but where do they all go?
The number of containers that have been retired from the mainstream fleets and absorbed in the after-market over the past 40 years is many millions but still there seems insatiable demand.
There is a vibrant market and an extensive network of dealers to keep the business going.
Keith Harvey, at UK-based Container Trading, has been buying and selling boxes for more than 20 years. He explains that he usually buys in batches of 20, 30 or 40, and pays a fixed price per container.
There is, he says, “an element of ‘pot luck’ with respect to condition. But I have worked with the people that I buy from for many years and we have built up a degree of trust.”
Mr Harvey says that the number of suppliers has reduced over recent years because owners have set up their own divisions to market their disposal equipment. “But many operators do not have the organisation or infrastructure in place to use containers in master leases when they come off initial term leases, so we are able to obtain a good supply.”
Having bought a batch of containers, he splits them into two broad categories: those suitable for shipment of cargo and those suitable only for static storage, the prime criteria being the condition of the floor and cross members. If the undercarriage is in decent condition, the containers are sold to freight forwarders and others involved in shipments to locations where the return of the box is difficult or unlikely.
Currently there is good demand for project cargo to the oilfields and coalfields of Siberia, but over the years boxes for shipments ‘one way to nowhere’ has created ongoing demand. Parts of Africa and the Middle East have been good markets for many years and continue to be so.
Mr Harvey says he pays about $1,000 for a 20ft, but adds that “it is subject to supply, which in turn is subject to the number of shipping boxes coming into a location and the imbalance ratio.
“Benelux is the cheapest in Europe because supply is greatest but, for instance, Scotland and Scandinavia are more expensive because they have smaller supply and decent export traffic. Prices in the US tend to be on the higher side because whilst supply in many parts is ample, demand is also high.”
Containers that are not suitable for shipment cargo are used for domestic storage, and this segment seems also to have an insatiable appetite. Everybody has seen containers being used for storage on construction sites and major engineering projects but stores, supermarkets, hotels, farms and many, many other such operations, also use them.
Attracted by their abundance, strength, durability, affordability and adaptability, some architects and designers around the world are seeing containers as the basis of cheap, innovative accomodation.
London-based Urban Space Management has used containers in many projects and says: “Containers are an extremely flexible method of construction, being both modular in shape, extremely strong structurally and readily available.
“Container ‘cities’ offer an alternative solution to traditional space provision. They are ideal for office and workspace, live-work and key-worker housing. Container cities do not even have to look like containers! It is a relatively simple matter to completely clad a building externally in a huge variety of materials.”
Short-life sites can have container cities that simply unbolt and can be relocated or stored when land is required for alternative uses. This alternative method of construction has successfully created youth centres, classrooms, office space, artists studios, live/work space, nursery and retail facilities.
This phenomenon for using containers as storage and more sophisticated applications has spawned a whole new sub-industry of purpose-built containers imported from China, often slightly ‘down spec’d’ in terms of paint and other areas.
There is usually no problem with getting containers loaded one way from China to US or Europe, and a ‘new’ box can be landed at destination for something less than $2,500. Most container depot operators around the world trade in containers to supplement their income and to keep their workshops busy. Some simply buy containers when the opportunity arises, because a unit to be sold is sitting in their facility, but others actively seek out container purchases and often make extensive and sophisticated modifications.
Conversions into offices, sports pavilions and toilets are a major source of income for many depot operators. Ron Stiff has been in the depot business in the UK for many years, but over the last seven has diversified his interest and operation more towards container modifications and domestic hire of these. He says that business is good to the point where, “the conversion and hire operation will turnover more than £1m this year, but we no longer rely on containers coming out of the marine fleets.
“Now we buy directly from China with security cowls, that we used to fit over the locking bars ourselves, already in place and designed to be within ISO so that the containers can be used for shipment from China”.
The depot that Mr Stiff works from in West Thurrock, Essex, has moved away from being primarily a storage and repair facility and now, in addition to the domestic container operation, has a stack of 300 containers available for short and long term storage.
Customers range from individuals to major companies who use the facility for document archiving, and with elaborate tracking and retrieval facilities being offered to customers.
The US has also seen much development in container mini storage sites with facilities springing up throughout the country and using both ex-marine and specially-designed boxes. TAL International recognised 10 years ago that a crucial part of its asset management business was maximising returns on containers retired from the fleet. Trader, a division to deal with this part of the business, was established and Mr Dunner says it now handles over 50,000 containers per year and “is the largest company in the industry dedicated to maximising disposal values”.
Mr Dunner says that TAL has three options when a container comes off-hire. To fix it where it is and lease it, to reposition it back to Asia, or to retire it from the fleet. All containers that are retired are handed over to Trader, which then makes the “best economic decision for them”.
“They may sell it ‘as is where is’, they may position it to a better location or they may have some repairs or modifications carried out to enhance value and then sell it.”
Mr Dunner says that the average age of TAL containers that are retired from the fleet is 13 years, up from the common 10 -12 years. “We keep them in the fleet as long as possible because they earn revenue and a 13 year-old box has pretty much the same value as a 10 year-old.” TAL International uses its Trader expertise to offer a service to its shipping line customers that do not have the resources to maximise return on boxes when they reach retirement age.
If a shipping line has 5,000 or 10,000 or 20,000 containers that it is considering retiring, TAL will purchase them at an agreed price whilst they are still being used for cargo carrying. The containers stay in the possession of the line and TAL charges a daily lease rate.
During the following year or so, as the containers are returned to depots, Trader takes over control of the boxes, the lease rate stops and Trader disposes of them as they do any other box. Mr Dunner describes this as a ‘buy and lease back’ arrangement.
“It is good for the line that does not see this activity as part of their core business because they realise a profit, keep usage of the container for the short term and have a simple and orderly retirement from the fleet.”
Trader also purchases containers directly from shipping lines and others for onward sale. Mr Dunner stresses that TAL sees itself as being in the asset management business and this type of operation is at the heart of asset management. “Trader operates through a network of 240 depots/sale locations worldwide, which provides good logistics saving potential to the shipping lines,” he says