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Peacock reviews leasing market
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LESSORS • THE COVID-19 PANDEMIC HAS AFFECTED ALL SECTORS OF THE CHEMICAL SUPPLY CHAIN, INCLUDING TANK CONTAINER LEASING COMPANIES, AS PEACOCK CONTAINER REPORTS
CHEMICAL MARKETS AROUND the world showed a lagged response to the impact of the Covid-19 outbreak due to the nature of order cycles. Tank container lessors are at the end of this chain and operators needed time to get clarity on market direction and volumes. From March to May, inefficiencies and imbalances due to lockdowns and blank sailings supported lessors’ utilisation rates. While some markets – particularly the automotive sector – were impacted significantly early on, this was offset by other product flows such as isopropyl alcohol for use in hand sanitiser, which spiked.
For tank container lessors, then, the impact of Covid-19 was muted during the first six months. Where there was impact was through delayed projects as lessees postponed the collection of new equipment. But with the market slowly normalising and supply chain efficiency improving, lessors are now seeing more rational behaviour and decisions being made by customers as more information becomes available and capacity needs become clearer.
OUT OF THE CRISIS The road to recovery is still unclear, however. As Peacock Container says, it is difficult to tell if the market has seen the bottom or whether it is still heading down. There has been improvement in some regions but, again, it is unclear if this is sustainable demand or just restocking of inventories. Government support packages have created a false sense of demand, leading to a spike in underlying volumes in the short term, some of which may disappear on the withdrawal of that support. The US elections in November seem to be a key moment as it is unlikely that the support packages will be cut before then, but the desire to keep them in place after the election will wane.
At the time of writing, Covid-19 cases are increasing again in Europe and the possibility of a ‘second wave’ creates yet more uncertainty. The main determining factor here will be the way in which governments respond. Will there once more be blanket lockdowns or will they be more surgical to help ensure economies remain open?
Peacock believes that, within the next six months, demand will stabilise and improve in line with overall economic development in both Europe and the US. In the medium term it remains unclear how long the recovery will take, though Peacock believes it will be a considerable time before markets are back to pre-Covid levels. In the long term, the fundamentals of the tank container market remain strong. Improved efficiencies, a modal shift and the increasing focus on safety and sustainability all work in support of the tank container market.
SUPPLY-SIDE FACTORS In the tank container leasing market, there is a clear split between standard and non-standard tanks. Standard 20-foot tanks with a capacity of 24,000 to 26,000 litres are the workhorse for most operators and constitute the bulk of the world fleet. There has been overcapacity in standard tanks for a few years now and this has not been changed by the Covid-19 crisis, though there has been greater discipline among lessors in terms of new orders over the past eight months, which is a positive development.
The underlying driver for this excess capacity is a disconnect between actual demand levels and the volume of capital looking for a return. Recent low interest rates and central bank behaviour have resulted in declining returns on almost all traditional investment routes and the long-term cashflow dynamics of the tank container sector have looked attractive.
PEACOCK’S COMPOSITE SWAP TANKS CAN
In addition, historically low newbuild prices, reflecting the declining price of nickel as well as government support for tank building, convinced many to buy into the market, which had a potential upside in rising asset prices. Although explainable from an investment perspective, such rationale is disconnected from the fundamental demand drivers of the tank container market and the chemical industry.
For new entrants, with typical investment horizons of five to seven years, the focus has been on volume and utilisation. Asset lifecycle return was a secondary concern. Tank containers have a technical life of 20 years and are often depreciated on that basis. Maintenance and repair management becomes more significant as tanks age and this is a key issue in asset lifetime returns. Short-term investors have limited incentive to include future maintenance and repair costs into lease rates or to develop platforms that can service tanks up to the end of their useful lives.
This combination of excess capacity, low interest rates and capital focused only on medium-term returns has had a material negative impact on lease rates for standard tanks, making it hard for traditional lessors with more mature fleets to maintain utilisation at healthy levels. The easiest solution for them has been to add new, more favourably priced units to decrease average book values. But this further added to overcapacity and added to margin pressure.
With plenty of tanks in the market and many lessors open for business, new customers had no problem leasing large numbers of tanks at attractive rates. Competition at the operator level also intensified as more players joined the market. From a risk/reward perspective the balance seems to be distorted as newly established customers with limited balance sheets pay almost identical lease rates to those of long-established well capitalised lessees.
SPECIALS ARE SPECIAL Non-standard tank markets require a longer investment period. Developing a value-adding platform, acquiring in-depth equipment knowledge and building a diverse customer portfolio for these tanks goes well beyond traditional investment horizons. As a privately owned company Peacock is one of the largest owner/manager tank lessors in the world. The company has been active in the leasing market for almost 35 years and the current shareholders have been with the company for over 15 years. Such a long-term commitment allows for a strategy with a focus on sustainable business in line with the full life cycle of tanks containers.
Peacock’s fully owned fleet numbers some 7,000 tanks with an average age of six years and including both standard and non-standard tanks. For many years now the focus has been on value adding services and long-term relationships with customers. Peacock advises its customers on product-tank compatibility, can support arranging logistics as well as offer fleet management services for third-party owned tanks. The combination of the diversified fleet and the progressive value adding approach has resulted in a diversified customer portfolio of large and medium sizes chemical production companies, end-users and operators.
The full ownership model allows for an agile approach towards customers. Combined with an efficient structure, a young but well educated and experienced team, Peacock offers a flexible and competitive package to the market. Over the recent years the management team was strengthened by people with backgrounds and experience in chemical engineering, commerce, IT and finance. This combination has created a team focused on creating efficiencies, innovative solutions, and sustainability together with customers and other stakeholders in the supply chain.
WHAT’S NEW AT PEACOCK As an example, Peacock was the first tank container lessor to add composite swap bodies to its fleet. These tanks are 40 per cent lighter and are better insulated compared to stainless steel tanks. Certified for carrying most liquid chemicals and foodstuffs, these tanks can significantly lower the carbon footprint for operators and chemical manufacturers.
In recent years Peacock’s team has also performed several temperature studies for products loaded in tank containers. Together with leading technical universities it was able to simulate heating and cooling profiles within tanks under various conditions. Follow-up studies are currently ongoing as Peackock continues to roll out projects with customers to increase efficiencies and reduce costs for transport and heating processes.
Peacock is also investing in the added value that digitisation can offer. A significant part of its swap body fleet is now equipped with telematics systems to allow customers to monitor location, product temperature and product levels within the tank via an online portal. Further integration into SAP, Oracle or other ERP systems is possible, which creates a truly real time and transparent supply chain for chemical and foodstuff producers.
Lessors certainly need some scale to create efficiencies and build profitable businesses, but with funding costs declining, a platform’s cost efficiency driven by automation, as well as its capability in creating sustainable value for its customers through digitisation and innovation is gaining importance. An approach that includes managing tanks over their full lifecycle will maximise benefits to all stakeholders over the long term. The fundamentals remain strong and with a long-term view Peacock remains optimistic about the opportunities ahead. peacockcontainer.com
