Two large equipment leasing subsectors whose performance is closely tied to global trade volumes -- containers and containerships -- have recovered meaningfully since the 2015 downturn, Fitch Ratings said. Despite some uncertainties on the horizon, including the potentially negative effects of recently proposed U.S. tariffs, the recovery in these leasing markets is likely to persist through 2018.

The downturn in the container leasing sector in 2015-2016 was driven by below-average trade volumes, a decline in steel prices and elevated lease expiration levels, as well as the bankruptcy of a major shipping operator, Hanjin Shipping Co. These factors led to lower utilization levels, lease rates and container prices. According to Harrison Consulting, the price of steel and dry-freight containers fell by approximately 55 percent for the six-year period following the financial crisis through the recent downturn (2010-2016).

In 2017 and year to date, the container market has corrected, driven by lower inventory levels from the four major container manufacturers, leading to increases in lease rates and container prices. The hot-rolled coil steel index rose 4.6 percent in 2017 and is up 25 percent YTD. Steel prices are the main driver of container prices and could further appreciate as a result of the U.S.'s proposed tariffs of 25 percent on steel.

Container lessors own and manage intermodal transportation equipment such as dry and refrigerated containers. Intermodal combines two types of freight transportation, such as truck and rail. The industry's five leading players -- Triton International Limited, Florens Asset Management Company Limited, Textainer Group Holdings Limited, Seaco Asia Pte. and Seacube Container Leasing Ltd. --collectively accounted for 78 percent of the leasing market share in 2017 based on fleet size in 20-foot equivalent units (TEUs), according to Drewry Shipping Consultants Limited. As evidence of the recovery, Triton's net income was $353.5 million in 2017, compared with a $5.8 million loss in 2016, while Textainer's net income was $20.7 million in 2017, compared with a $57.9 million loss in 2016. Utilization levels improved for both firms in 2017.

The containership leasing industry is more fragmented than the container leasing industry. Market leaders in 2017 were Seaspan Corporation, Shoei Kisen Kaisha, Ltd., Costamare Inc., Dohle Group and Danaos Shipping Co. Ltd., according to Alphaliner Monthly Monitor. Containerships require significantly more capital investment than containers, and excess capacity pushed down containership values in 2015 and 2016, leading to substantial impairments. However, since the downturn, lower containership orders, coupled with higher scrapping levels, have driven up asset values and charter rates. For example, Seaspan recently noted that containership charter rates for 4,000 TEU panamax vessels improved to $9,000 per day in January 2018, compared to an annual average rate of approximately $7,700 per day in 2017 and an average rate below $5,000 per day in 2016.

Despite favorable trends for container and containership lessors, Fitch's global sector outlook for shipping companies remains negative in 2018. Shipping companies are generally of low credit quality and have shown limited adherence to capacity discipline. Furthermore, as noted in Fitch's latest "Global Economic Outlook," the recent step-up in U.S. protectionist measures could escalate into a global trade war. A contraction in global trade would likely result in reduced container throughput that would lower demand for container and containership leasing. Despite these risks, the favorable backdrop of strong global GDP growth should support the container and containership leasing markets in the near term.