For Global Ship Lease, Small Is Beautiful — And So Is IMO 2020

The ship charterer Global Ship Lease Inc. GSL reported higher earnings and revenue for the third quarter of 2019 when compared with the same period last year. GSL also said it is optimistic about its future prospects, pointing to a paucity of orders for new ships — particularly for smaller ships — and continuing growth in global trade despite the U.S.-China trade war.

GSL's increase in revenues reflects its acquisition of the 19-ship fleet of Poseidon Containers in November 2018.

Operating revenue in the third quarter ending Sept. 30, 2019, was $65.9 million, compared to $35.9 million in the same period last year. Net income was $9.9 million in the third quarter of this year, compared to $3.9 million in the third quarter of 2018. Adjusted EBITDA was $39.9 million in the third quarter this year compared to $23.6 million in the third quarter of 2018.

GSL announced it has just contracted to purchase two 2002-built 6,650-TEU ships, which are to be delivered in December 2019 and January 2020. That will bring its total fleet to 43 containerships. The capacities of those ships range from 2,207 TEUs to 11,040 TEUs.

The company's customers include CMA CGM, Mediterranean Shipping Co., Maersk, COSCO, OOCL, ZIM,  Hapag-Lloyd and others.

George Youroukos, executive chairman, noted that the company owns neither the smallest ships deployed in regional trades nor the very largest ships, which are dependent on trade out of China. Instead, it focuses on trade lanes responsible for "70% of global container trade and which typically grow more reliably and more quickly than the big East-West trades which you tend to read about in the newspapers."

Youroukos said much of the investment in new ships by other companies has been on the largest containerships: those with capacity of up to 23,000 TEUs.

"The market for our fuel-efficient, in-demand vessels has remained strong, and with a minimal number of viable containerships currently sitting idle, we have continued to command strong rates on term charters," he said.

Thomas Lister, chief commercial officer for GSL, said demand for container transport is expected to grow 2.5% in 2019 and 3.7% in 2020.

"Transpacific trades get all the headlines thanks to the trade dispute between the U.S. and China, but China-U.S. trade actually makes up only 6.7% of the global volume pie," he said, and "cargo being imported by the U.S. from other Asian countries rather than from China has grown faster than cargo flows from China have shrunk."

"Like everyone else, we would be delighted by a constructive outcome between the U.S. and China," Lister said, but "in the meantime, trade tensions have actually stimulated trade and further stimulated demand for mid-size and smaller ships."

He said 70% of global container volumes are on intermediate and intra-regional trades, like the intra-Asia trade lanes, and that is where GSL's ships tend to be deployed.

"While sentiment in the containership sector remains under pressure from the ongoing US-China trade tensions, the trade lanes in which our vessel classes primarily operate have been largely unaffected and continue to show growth," Youroukos said. "This same negative sentiment has contributed to a continuing modest or zero orderbook for our vessel classes, projecting negative net vessel supply growth in the coming years."

"We have once again acted opportunistically to purchase on attractive terms two vessels with charters in place that we believe have significant asset value and charter rate upside in a strengthening IMO 2020 environment," he said, referring to the two 6,650-TEU ships GSL will take delivery of in December and January.

He also argued that IMO 2020 — the requirement promulgated by the International Maritime Organization that beginning next year ships use low-sulfur fuel or equip their vessels with exhaust scrubbers — will "further increase the competitive advantages of our fuel-efficient fleet."

Ian Webber, CEO of GSL, said that during the third quarter the company "took advantage of the strong market fundamentals and our extensive 2019 chartering activity, which increased our contract cover significantly, by executing a $268 million long-term debt refinancing and a $55.2 million common equity offering, GSL's first common equity offering since our IPO more than 10 years ago."

He said that allowed the company to reduce leverage and cost of capital and increase its strategic and financial flexibility.

"Paradoxically, negative sentiment and trade tensions have been a good thing, at least for the mid-size and smaller container ship classes focused on by GSL," Lister said. "This is really a supply story — idle capacity is minimal, scrapping of marginal ships is increasing, and most importantly, the orderbook is under control."

He explained that in 2007, the containership capacity on order (as measured in TEUs) amounted to more than 60% of the global fleet, whereas today it is just 10.6%.

He believes that because of the higher cost of low-sulfur fuel needed to comply with the IMO's low-sulfur mandate, shipping companies next year will slow their vessels to reduce costs, "triggering a further reduction in effective supply."

A reduction in speed of one nautical mile per hour by the global containership fleet would effectively reduce supply by 6.7 percent, he said.

Lister said GSL's fleet is attractive because many of its ships have high capacity for refrigerated containers and were built in shipyards in Korea, Japan, Taiwan and Europe, which he said are viewed more favorably by charterers than ships built in China. Nine of GSL's larger ships are wide beam "eco" ships, which consume less fuel and have greater stability, improving load factors. Eleven of its ships are geared with onboard cranes, allowing them to call ports with limited shoreside infrastructure.

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