ISRAELI ocean carrier Zim will be heavily exposed to the transpacific spot market for a second year in a row, but this time around, the odds look like much less of a gamble.

Zim will have only 35% of transpacific volume under contract for the annual period from May 1, 2024 to April 30, 2025, leaving 65% on spot. That’s only slightly less exposed than the prior contract year, when it had 30% under contract, 70% spot. Before 2023, the split was 50-50.

“You know, the easy avenue is to lock in as much as you can and secure contract volume at low rates and then do what you can on spot,” said Zim chief financial officer Xavier Destriau in an interview with Lloyd’s List following the company’s 1Q24 earnings call.

“The more difficult avenue, if you’re not happy with the rates shippers are willing to pay to commit to volumes, is to say: ‘OK, you don’t meet my minimum requirements. Let’s talk again in the spot market.’

“That is a more challenging decision for us to make, but we feel it is the right decision,” Destriau said.

When Zim disclosed its 70% spot exposure in 2023, the forward outlook for spot rates was dire, raising questions on whether the carrier’s spot rates could match its contract coverage.

Then luck intervened, in the form of Houthi attacks in the Red Sea, which ironically, were meant by the Houthis to hurt Israeli shipping businesses but ended up juicing their returns. Spot rates for all liner operators rebounded in 1Q24 on longer voyage distances around the Cape of Good Hope, and spot rates have spiked yet again in recent weeks on stronger demand.

According to Destriau, “Based on where rates are starting today, and even with rate erosion —which there most probably will be — we feel the spot market will outperform what we would have made in the contract market over the next 12 months.” He said Zim’s transpacific contract rates did increase year over year, but only “by single digits”.

The transpacific is by far Zim’s most important trade, accounting for 41% of 1Q24 volumes, with the carrier’s presence poised to increase further as higher-capacity newbuildings supplant smaller ships that roll off existing charters.

With so much at stake in the spot market, the outlook for Zim hinges on three factors: how long the Red Sea remains closed, how long it takes for relentless new ship deliveries to overwhelm transport demand, and how long the recent surprise surge in import demand persists.

Red Sea diversions, newbuildings, and demand resilience

The worst-case geopolitical scenario for container shipping spot rates (albeit the best-case scenario for humanity) is that Israel and Hamas agree to a ceasefire, it leads to a lasting peace agreement, the Houthis agree to stop attacking commercial ships, container lines swiftly return to the Red Sea, effective vessel supply surges, and spot rates collapse.

The counterarguments to this thesis: Even if there is a ceasefire, it does not mean the Houthis will stop attacking ships, so safety issues could remain. And even if the security threat does cease, liner operators may not switch all their routes back to the Red Sea.

There were cases of Asia-Europe services switching to the Cape of Good Hope as a capacity management strategy even before the Houthi attacks. There is now a much greater need for capacity management, given ongoing newbuild deliveries, and importers have already adjusted timetables to account for the longer routes.

Asked about these two counterarguments, Destriau responded, “We tend to agree that a speedy resolution of Red Sea disruptions is now a remote scenario. It is no longer the scenario we think is more likely. And yes, clearly, how liners would react vis-à-vis this change in market dynamics also remains to be seen.”

Nevertheless, Zim executives believe newbuilding capacity will create downward pressure on spot rates even if the Red Sea disruptions persist.

During the quarterly call, Zim chief executive Eli Glickman said, “We maintain the view that the industry will face a more challenging second half of this year irrespective of the duration of the Red Sea crisis, as more newbuilds, particularly large-capacity vessels, are delivered.”

Destriau told Lloyd’s List, “Even if the situation in the Red Sea was to extend beyond 2024 into 2025, there is still a surplus of capacity that will be delivered between now and the end of this year, and that extra capacity will put some sort of pressure on supply-demand dynamics. That’s a fact.

“The one thing that might temper that is whether the spike in demand we are seeing now is purely peak season starting early, or whether it is a combination of a bit of that, but also, more importantly, restocking after a prolonged period of destocking.”

In the latter case, he said, “the second half could indeed be better than we anticipate”. In the former, “volumes will start to fade at the same time more capacity comes in, which will play out negatively for freight rates”.

1Q24 rates up 42% vs 1Q19, pre-pandemic

Zim reported net income of $92m for 1Q24 compared to a net loss of $58m in 1Q23 and a net loss of $147m in the fourth quarter of 2023.

It carried 846,000 teu in the latest period, up 10% year on year and 8% quarter on quarter.

Average rates (including contract and spot) were $2,904 per feu in 1Q24, up 5% year on year and surging 32% quarter on quarter. Average rates in the latest period were up 42% versus 1Q19, pre-pandemic.

Both Maersk and Hapag-Lloyd increased their full-year guidance during their latest quarterly announcements, hiking the bottom end of the guidance range, but keeping the top end in place. Zim went a step further, upping both the bottom and top ends of its guidance range.

On March 13, Zim guided for full-year adjusted earnings before interest, taxes, depreciation, and amoritsation of $850m-$1.45bn. It now estimates full-year adjusted ebitda of $1.15bn-$1.55bn, an increase in the range midpoint of $200m.

It previously guided for full-year adjusted earnings before interest and taxes of -$300m and $300m. Its new estimate for full-year adjusted EBIT is zero to $400m, also increasing the range midpoint by $200m.

“The bear case, from a financial perspective, has likely been avoided in 2024,” said Glickman on the conference call. “The outlook for the remainder of the year has improved. We now expect freight rates to remain higher for longer than originally anticipated.”

Heavy trading in Zim stock

Zim is the ninth-largest ocean carrier, measured in capacity, but punches way above its weight on Wall Street. Its NYSE-listed stock boasts the highest daily trading volume, measured in value, of any container liner operator in the world.

The fact that Zim continues to be extremely spot-centric should only add to its appeal as a volatile trading vehicle allowing bets on geopolitical events.

Shares hit a new 52-week high on May 14 and flirted with that high on Monday. The stock’s roller-coaster ride continued on Tuesday in more than double average volume.

Shares initially sank after the earnings announcement, falling as much as 10.3% in the morning.

Zim reported a strong turnaround in 1Q24, higher full-year guidance, and a renewed dividend, yet investors were likely disappointed by the earnings miss. Zim reported adjusted earnings per share of $0.75, well below the consensus of $0.98 (a consensus that included a $1.22 per share estimate from Jefferies).

Zim’s shares then partially recovered in the afternoon, ending the day down 4.8%.