From an operational perspective, container leasing is estimated to be about 60% to 70% more expensive than ownership. So what makes leasing so attractive, despite the high cost?
The answer can be summed up into one word: flexibility.
Although leasing is far more flexible than owning, it is not the only flexible option out there. In this article, we’ll explore the benefits of container leasing over owning, as well as the Container xChange one-way lease option.
Some thoughts on container owning first
For companies who only need 1 or 2 containers for storage on their premise, then ownership is the right route. Especially great is when there is the need to have a mobility aspect- so they double as both storage and cargo transportation apparatuses. Don’t forget that you, as the container owner, are responsible for storage costs! If you need to modify them (more than just a paint job of a brand logo) or to convert them into something else, then ownership fits as well.
Owning is more economical when you need containers for an indefinite period, use them frequently, need to somehow customize them, and perhaps don’t need too many of them. With frequent usage, we also imply that the demand is constant and forecasted to remain at that constant high. For example, carriers try to hedge the risk of fluctuating demand by both owning and leasing.
Now let’s talk money $$$
Buying a container can typically cost you from $1,400 to $5,000 depending on the location, type or quantity. You can buy new or used, with the used ones obviously fetching prices at the lower end of that spectrum (even lower depending on the state of the container). And as always with ownership, comes the full responsibility.
Even when you have the upfront capital to make the purchase, consider the alarm to your shareholders when they see your lowered profit margins. Those containers sitting on your balance sheet might make more sense as an operating expense lessening your tax liability and not creating the panic that a sharp cut to profits (from a sizable capital investment) would- especially when you’d like to operate a large fleet.
When container leasing makes more sense than owning
You need containers but don’t have the money upfront… No worries if you don’t have the large lump sum of cash at hand, container leasing could be the way to go. No huge upfront costs- you’re simply renting containers at an affordable rate. These rates are based on the many factors, e.g. the market rate, quantity needed, location, etc.
Going back to forecasting demand. When there is a temporary surge in demand or when you can’t predict the long-term demand with confidence, then container leasing is probably the better option.
Size matters… and container leasing companies know it
Leasing companies own the largest share of shipping containers in the world and they are essentially a financial logistics tool in business to lease out the rights to use them. Approximately 52% of the global fleet of containers are owned by 13 global leasing companies.
During the last recession, many container owners were forced to sell containers and the leasing companies were there to scoop these up. Leasing companies also offered lease-back options where the carrier sold the container to the leasing company and the containers were left with the carrier to keep using under a new lease agreement. Thus, many major shipping liners utilize container leasing companies for this reason as well.
Newly manufactured containers are also purchased by leasing companies. In 2017, they were the buyers of 55% of newly built container purchases.
Types of container lease agreements
Any lease agreement comes with standard obligations from the lessee. Like returning the equipment that you basically “borrowed” in the same condition (more or less) that you received it in. Usually, the leasing company covers wear and tear to an extent, such as replacing stickers. Of course, leasing agreement conditions vary and are dependent on many factors. The next sections below, however, provide a simple overview of the basic types of lease agreements.
|Agreement||Duration||Maintenance and Repair||Drop-off Location|
|Master Lease||variable||Leasing Company||restrictive|
|Long-Term Lease||5-8 years||Lessee||super restrictive|
|Short-Term Lease||greater than 6 months||Lessee||super restrictive|
|One-way lease||variable||Lessee||shipper’s desire|
Master lease agreements provide the most flexibility- but naturally, it comes at a higher price. Some perks include a long list of pick-up and drop-off locations from which you can mix and match. By storing containers at the lessor’s depot, you save on storage fees. While you still have those hefty fines for drop-offs in disallowed locations, your options are much more numerous. Also, as opposed to the container quantity and rental rates which must be defined beforehand, these are flexible under a master lease. Thus, your container demand forecast doesn’t necessarily have to be spot on. Carriers that require super large fleets and unpredictable demand usually enter into this type of leasing contract. Also, as an added benefit of the higher cost, the leasing companies take the burden of repair, maintenance and repositioning.
Far less flexible than the master lease, a long-term lease is the favourite of leasing companies. A contract is agreed upon for a fixed amount of time as well as a predetermined quantity of containers and delivery schedule, leaving the leasing company with little to do once the containers are signed over. The lessee bears the costs of repair, maintenance and repositioning. Though term definitions vary, most leasing companies define long-term leases as between 5 and 8 years. Containers are usually brand new and many long-term lease agreements come with a negotiable clause which allows rental rates to be negotiated after a few years in light of depreciation and market volatility.
We can relate this to a “rent-to-own” concept. This comes in different options. For example, a standard rental rate and a balloon payment at the end, or a higher rental rate that accrues the final purchase price. Naturally, the total amount of money spent on this option is greater than flat out buying containers- but the option you may take when you don’t have the cash on hand. One downside to this is that if you don’t pay within the terms, you could lose the right to buy it. For smaller-sized companies, operations and projects, perhaps this lease agreement is not ideal.
Short-term container leasing is usually charged at higher rental rates. Similar to hiring a car, it’s great for turn around trips. One setback here, other than the higher cost, is the minimum time you must comply with to use the containers. Often times leasing companies don’t want to lease out containers for less than 6 months.
So what do you do then when… you only need to borrow a small number of containers? Or perhaps it’s a large number of containers, but it’s only a one-way trip? Or maybe you only need containers for short periods of time?
Well, that’s where the one-way container lease option comes in.
By using the xChange platform- the only digital platform that provides repositioning solutions- smaller business can realize their container moves and connect to leasing companies that they would otherwise not have access to. This is an alternative to leasing companies when more flexibility is needed as well.
Transaction speed is another vital issue for businesses to consider. With a blanket contract, you don’t need to make a cluster of different negotiations with different companies. One contract creates 100’s of container move possibilities.
Leasing companies are on the platform as well, as due to the nature of world economics and trade imbalances, there are consequently container volume imbalances.
For instance: looking at the quantities of imports and exports, it makes sense that containers are always needed to get goods out of China to, say, the US or Europe. And once they are in Europe it becomes a problem to get them back to China, as China does not import as much as they export.
Example scenarios where one-way container leasing makes sense
Let’s revisit the master lease. Even if the leasing company’s customer returns the container to the pre-defined depots, that doesn’t mean that the container is in a desirable location.
What do we mean by desirable here? Desirable means that the container is in the position to be filled with cargo needing to be transported to a location in which it can be used again promptly. When a business doesn’t have any customers in that particular area that want to ship the container out, then it is left it the undesirable location to accumulate storage costs.
The container has reached the end of its life and its left in is a location where no one wants to buy it or where the sale price is too low. Repairs are high and it might not prove worthwhile to fix up the container. It could make more economical sense to reposition the container to a location in which you could fetch a considerably larger price.
When a leasing company’s customer goes bust, they’ve got containers scattered all over the world; empty. The Hanjin bankruptcy is a prime example of this scenario.
A more regular case is when a leasing company needs a one-way move to get brand new containers from the container manufacturer to its customer.
In locations where carriers or leasing companies are unable or unwilling to provide boxes or only offer them at very high rates, therefore sourcing containers on your own and leasing them for one-way use is the best or only option.
In order to avoid unexpected demurrage and detention costs, one-way leasing makes sense as you are not obligated to move and/or return the containers to and from the carrier within a certain time frame. Loading times, customs clearance, drayage, port congestion etc. should be taken into account when planning the shipment. Demurrage & Detention charges can quickly escalate to hundreds of dollars per day.