Box pricing in limbo

Although prices for new dry freight containers appear to be holding up, they remain relatively hypothetical, given the sluggish market

This year is proving to be very different for the container manufacturing industry and also very different to past recessionary periods that have affected the sector. Despite the sharp drop in container output, new equipment prices have not collapsed, as would have undoubtedly occurred under the same circumstances in years past. Just about every downturn to have previously hit container shipping activities has been characterised by a rapid drop in box prices as manufacturers undercut their cost of production in order to stimulate demand and keep production lines open.

Although this was done mainly out of desperation, and compromised the longer-term survival of some factories, it usually attracted some renewed business and so staved off complete factory shutdowns.

However, the world’s container manufacturing industry has resisted such action this time around and, instead, opted to shut down much of its capacity. The only factories to have stayed in operation are those involved in reefer, tank and other specialised production, with all volume output of standard dry freight units halted since October 2008. Such a wholesale closure was spearheaded by the two leading box manufacturers, CIMC and Singamas Holdings — which control over 70% of global capacity between them — and was soon adopted by the entire industry. As a result, 2009 is likely to be the first year when standard box production will fall to virtually nothing.

This collective decision to stay inactive is one consequence of the long-running consolidation process that has reshaped the box building industry during the past decade. Most manufacturers are now of a sufficient size and strength to be able to sit-out a lengthy downturn, a situation that is very different to that several years back when the sector was highly fragmented.

A break in output is also warranted because production ran at record levels during the preceding two years, with many factories operating close to their maximum twin-shift potential. This also occurred at a time when substantial new capacity was being brought on stream, necessitating an overhaul and/or rationalisation of some older facilities. However, little of this could be accomplished earlier when the majority of factories were still working flat-out.

However, another crucial factor was the dramatic rise in material costs — and finished container prices — that occurred in 2008 and resulted in a peak during the summer months. The cost per tonne of Corten Steel climbed particularly fast between January and August, when it rose by over 70% to exceed US$1,000 for the first time, while most other materials/components used in container manufacture increased in price too. Chinese labour rates also rose and together these factors pushed up delivered container prices by more than 30%, to $2,650 per 20ft in August 2008. This was higher than at any time in more than 10 years.

The inflation of 2008 followed a period of over 18 months (up to end-2007), when standard box pricing had been relatively stable and prices remained within the $1,800-2,000 per 20ft range.

Corten Steel represents over 50% of the cost in a standard container, and its unprecedented price rise in early 2008 forced further margin cuts on container manufacturers. This is apparent from a comparison of the $700-plus rise in steel cost per 20ft calculated for January-August 2008 with the more modest $600 increase in its finished price. If this was not already critical, many box builders went on to purchase substantial extra steel throughout the summer of 2008, when it was at its most costly, because demand still appeared strong. The subsequent collapse in demand left all major manufacturing groups with big surpluses of Corten Steel, bought at the highest price. Although much of this had been taken as an option, with payment terms deferred, it has to be used up before any further (lower priced) stock can be acquired from Bao Steel or other Chinese steel-producing mills. Therefore, as new container prices weakened with the initial onset of the economic recession, box builders were soon facing the prospect of producing containers at below-cost and so opted to close their facilities and lay-off staff. Guiding their action was a calculated break-even point of around $2,350 per 20ft, which would have to be maintained until all the premium-cost steel was consumed — if losses were to be avoided.

Unsurprisingly, no mainstream container buyer would pay that much even in late 2008, while material costs were by then declining again. The price of Corten Steel had already dropped back below $600 per tonne before the year-end and has since steadied at approximately $500 per tonne. This represents a three-year low and is less than half its former peak.

The cost of most other box building materials — including plywood, paint, corner castings and door gear — have also fallen, as well as labour and plant management costs, which are reportedly back to their pre-inflationary level of two years ago. This overall cost reduction has lowered the break-even price for manufacturers to less than $2,000 ex-works per 20ft.

However, the average "quoted" (20ft) price remains close to $2,100 ex-factory for volume business, even though it still represents a largely hypothetical figure. In reality, it is too low for the manufacturing side — still saddled with high-priced Corten steel from last year — and much too high for buyers, which require a substantial incentive to commit to any investment in the face of the continuing low demand.

This current theoretical pricing level has not changed significantly since late 2008, after falling initially by 20% from its high in August 2008. It is expected to hold until demand improves again.

Some factories have continued to produce containers for trading purposes — including resale or use outside the primary transport market — with these usually selling for more than $2,100 per 20ft this year. However, the numbers involved are very small and in decline, with prices also coming under pressure as the availability of used box equipment has soared in recent months. Most container owners are selling their older equipment in order to cut the massive surplus and so help free up depot space in China and elsewhere. This is further eroding the newbuild sector.

Prices have also decreased in the secondary market, with the average price for a 20ft unit down 20% since late 2008, to $750-850 for containers aged 10 or more years, even if the 40ft equivalent price is reported to be holding up better at $1,050-1,250.

In contrast to the dormant state of standard box manufacture, some reefer/tank production has been maintained. There has also been a greater fluidity of pricing, due to the more rapid turnover of high-priced steel purchased earlier in 2008. Much of this had already been used up on reefer/tank production carried out before early 2009, in contrast to the dry freight sector.

Companies building reefer and tank containers have thus — by virtue of their continued production — been able to benefit more immediately from lower material costs.

Delivered reefer prices also peaked during summer 2008, when they almost surpassed $19,000 per 40ft high-cube. Since this time prices have also fallen by at least 15% to about $16,000 per unit. A disproportionate share of this reduction has been borne by the reefer box manufacturing side, as its construction costs have fallen by almost 30%. The average price per 40ft high-cube reefer body was close to $8,000 by Q3 2009, compared with over $10,500 paid a year earlier.

Much of this drop was attributable to cheaper-priced steel. The highest grade steel used in reefer construction (SUS 304) is now less than half as expensive as in early 2008, at well under $2,000 per tonne, with the cheaper (and more popular) muffler specification priced at under $1,000 per tonne. Reefer builders have also benefited from the recent drop in Corten Steel prices as over 1.5 tonnes of this material is required for the frame/post sections of a 40ft high-cube reefer of traditional build. A further 2.5 tonnes of stainless steel is typically used for panel, floor and inner lining — up to 80% of which is usually muffler grade. By comparison, around 3.1 tonnes of Corten Steel is consumed per standard dry freight 40ft high-cube and 1.75 tonnes per 20ft.

Reefer box producers, in common with their dry freight counterparts, experienced some erosion in their profit margin during 2007-08, when the cost of steel and other materials rose much faster than finished equipment prices. Some, but not all, of this lost profitability has been regained since the price-fall of 2009, although it has been more than offset by losses in productivity and a general lack of continuous business. In contrast with 2007-08, when the world’s four established reefer-building sites — two operated by CIMC and one each by Maersk Container Industry and Singamas — were consistently operating at two shifts or even greater, none have been able to maintain single-shift working throughout 2009. Reefer output in 2009 is forecast at less than 50% of 2008 volumes.

Reefer machinery prices have held steadier, although these too are coming under greater pressure due to the availability of cheaper materials and increased competition amongst suppliers. The four established builders of reefer machines are finding trading difficult in 2009, with production down across the board and short-time working common place.

This follows several years of relatively strong production and stable pricing. The average price per 40ft machine is currently put at $8,000, compared to an average of around $8,500 in 2008.

The cost of tank container production has fallen sharply as well, as this too is determined largely by the price of stainless steel. The material favoured for most tank production is of very high-grade (SUS 316), which commanded a price of $7,000 per tonne or greater during much of 2007 and into early 2008. That resulted in a surge in the average delivered price per 20ft tank to $30,000 throughout this period — its highest point in almost two decades and almost twice the level quoted five years earlier.

However, new tank prices weakened in H1 2009, with the average price paid per 20ft down 25% to under $23,000. The accompanying cost of stainless steel had more than halved to below $3,000 per tonne since the summer months of 2008.

Essentially closed, it will be interesting to see what happens to pricing and competition when the recovery heralds a return to box manufacturing activities.

Recent quarterly material and standard container (ex-works) prices* (US$)

1Q-2008 2Q-2008 3Q-2008 4Q-2008 1Q-2009 2Q-2009

Corten Steel (per tonne) 650 850 900 600 500 480

Timber Floor (per m3) 625 640 650 600 600 600

20ft 2,200 2,400 2,550 2,200 2,100 2,100