ZIM Integrated Shipping Services - 20-F annual report 2023

As a result of some of these factors, including cyclical fluctuations in demand and supply, container shipping companies have experienced volatility in freight rates. For example, the comprehensive Shanghai (Export) Containerized Freight Index (SCFI) increased from 818 points on April 23, 2020, with the global outbreak of COVID-19, to 5,047 as of December 31, 2021, but as of December 31, 2023, was 1,760. In 2022 and 2023, freight rates have significantly declined due to reduced demand as well as the easing of both COVID-19 restrictions and congestion in ports, and this trend may change again depending on future supply and demand curves, bottlenecks around the world and other factors. Furthermore, rates within the charter market, through which we source most of our capacity, may fluctuate significantly based upon changes in supply and demand for shipping services. The severe shortage of vessels available for hire during 2021 and the first half of 2022 has resulted in a significant increase of charter rates and longer charter periods dictated by owners, however, since September 2022, charter hire rates have been normalizing, with vessel availability for hire still low. Charter hire rates in 2023 have fallen to pre-COVID-19 levels on average, as additional capacity entered the market and increased pressure on charter rates. See below  “ – We charter-in most of our fleet, which makes us more sensitive to fluctuations in the charter market, and as a result of our dependency on the vessel charter market, the costs associated with chartering vessels are unpredictable.”

The spike in freight rates and related charges during 2021 and the first half of 2022 has resulted in increased scrutiny and enforcement actions by governments and regulators around the world, including the U.S. President Biden's administration and the FMC, as well as the ministry of transportation in China. In the U.S., the Ocean Shipping Reform Act of 2022 (OSRA) signed into law in June 2022 mandates a series of rulemaking projects by the Federal Maritime Commission (FMC) and in February 2023 the FMC published a final rule that prohibits the collection of detention and demurrage from U.S. truckers and consignees on import, which may affect our ability to effectively collect these fees from our customers, heighten the risk of civil litigation against us and adversely affect our financial results. If we are found to be in violation of the applicable regulation, we could be subject to various sanctions, including monetary sanctions.

We may also incur additional compliance costs relating to existing or future ESG requirements, which have recently intensified and are expected to intensify in the future, and which could have a material adverse effect on our business, results of operations and financial conditions. Such costs include, among other things: reduction of greenhouse gas emissions and use of “cleaner” fuels (including LNG), imposition of vessel speed limits, changes with respect to cargo capacity or the types of cargo that could be carried; management of ballast and bilge waters; maintenance and inspection; elimination of tin-based paint; development and implementation of emergency procedures and disclosure of information relating to ESG matters, including climate change. For example, on November 1, 2022, new amendments to the MARPOL Annex IV entered into effect and introduced new energy efficiency and CO2 emissions requirements relating to Existing Ship Energy Index (EEXI) and Operational Carbon Intensity Indicator (CII) for both new and existing vessels. Compliance with the new regulation involves additional costs and the implementation of optimization strategies such as slow steaming, which may increase our vessels’ voyage transit times. Environmental or other incidents may result in additional regulatory initiatives, statutes or changes to existing laws that could affect our operations, require us to incur additional compliance expenses, lead to decreased availability of or more costly insurance coverage, and result in our denial of access to, or detention in, certain jurisdictional waters or ports. Also, on March 6, 2024, the Securities and Exchange Commission issued a rule requiring registrants to disclose certain information regarding climate-related risk scheduled to phase in starting in 2025. For further information on the environmental regulations we are subject to and ESG (sustainability), see “Item 4.B – Business Overview – Regulatory matters – Environmental and other regulations in the shipping industry.”

Many governmental bodies have adopted, or are considering the adoption of, international, treaties, national, state and local laws, regulations and frameworks to reduce greenhouse gas emissions due to the concern about climate change. These measures in various jurisdictions include the adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. In November 2016, the Paris Agreement, which resulted in commitments by 197 countries to reduce their greenhouse gas emissions with firm target reduction goals, came into force and could result in additional regulation on shipping. The IMO has been developing a comprehensive strategy on reduction of greenhouse gas emissions from ships. In addition, several non-governmental organizations and institutional investors have undertaken campaigns with respect to climate change, with goals to minimize or eliminate greenhouse gas emissions through a transition to a low- or zero-net carbon economy.

 

Further, on January 1, 2024, a new emissions trading system entered into effect by the European Union, setting a cap on the total amount of greenhouse gases we are permitted to emit when sailing to or from EU ports. See – “Regulatory Matters – European Union requirements.”

We operate in various jurisdictions and may be subject to the tax regimes and related obligations in the jurisdictions in which we operate or do business. Changes in tax laws, bilateral double tax treaties, regulations and interpretations could adversely affect our financial results. The tax rules of the various jurisdictions in which we operate or conduct business often are complex, involve bilateral double tax treaties and are subject to varying interpretations. Specifically, on December 20, 2022, the OECD published an implementation package for Pillar Two model rules. The Pillar Two rules were introduced to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. While Pillar Two model rules are not intended to be applied to international shipping income, other sources of our income may be affected as a result of Pillar Two entering into effect. Pillar Two legislation has been enacted or substantively enacted in certain jurisdictions in which ZIM operates, and the legislation will be effective for ZIM and ZIM’s subsidiaries, or the ZIM Group, for the financial year beginning  January 1, 2024. Following our assessment, the Pillar Two effective tax rates in most of the jurisdictions in which the ZIM Group (or the Group) operates are above 15%. While we do not expect any potential exposure to Pillar Two taxes, we may be subject to additional and/or higher tax payments as a result of this regulation, whether due to any amendment or due to the absence of applicable safe harbor exemptions to the ZIM Group.

Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East, and we may not be able to obtain adequate insurance if events escalate further. The Israeli government currently provides compensation only for physical property damage caused by terrorist attacks or acts of war, based on the difference between the asset value before the attack and immediately after the attack or on any cost of repairing the damage, whichever is lower. Any losses or damages incurred by us could have a material adverse effect on our business. Further, due to the Israel-Hamas war, a special war risk insurance premium was levied on our chartered vessels calling Israel’s territorial water and ports. We have applied a war surcharge on our customers in an attempt to offset the cost associated with the payment of this war risk insurance premium, however, there is no assurance that this surcharge will enable us to mitigate the possible increased costs in full or at all.

We are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement to disclose the compensation of our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers on an individual, rather than on an aggregate, basis. Nevertheless, regulations promulgated under the Israeli Companies Law 5759-1999 (the “Companies Law”) requires us to disclose in the notice convening an annual general meeting (unless previously disclosed in any report by us prepared pursuant to the requirements of NYSE or any other stock exchange on which our shares are registered for trade) the annual compensation of our five most highly compensated officers on an individual basis, rather than on an aggregate basis. This disclosure will not be as extensive as that required of a U.S. domestic issuer. For information regarding reliefs relating to general meetings for companies whose securities are traded outside of Israeli, see “Item 6.C – Board practices – Amendment to Companies Regulations (Reliefs for Companies whose Securities are Traded Outside of Israel), 2000”.

Our ability to pay dividends is limited by Israeli law, which permits the distribution of dividends only out of distributable profits and only if there is no reasonable concern that such distribution will prevent us from meeting our existing and future obligations when they become due. See “Item 8.A – Consolidated statements and other financial information – Dividends and dividend policy” and “Item 6.C – Board practices – Amendment to Companies Regulations (Reliefs for Companies whose Securities are Traded Outside of Israel), 2000”.

As of December 31, 2023, we operated a fleet of 144 vessels and chartered-in 95.0% of our TEU capacity and 93.8% of the vessels in our fleet. For comparison, according to Alphaliner, our competitors chartered-in on average approximately 44% of their fleets as of the end of 2023 (in accordance with the Alphaliner December 2023 Report). During 2021 and 2022 we have entered into several strategic long-term charter agreements, including two strategic agreements with Seaspan for the long-term charter of ten 15,000 TEU and fifteen uniquely designed 7,700-class TEU LNG (liquified natural gas dual-fuel) container vessels to serve ZIM’s Asia-US East Coast Trade and other global-niche trades, with 14 vessels already delivered to us. We have also entered into an eight-year charter agreement with a shipping company that is an affiliate of our largest shareholder, Kenon Holdings Ltd., according to which we will charter three 7,700-class TEU LNG dual fuel container vessels, with one vessel delivered to us. Furthermore, in February 2022 we announced a new chartering agreement with Navios Maritime Partners L.P. for a total of 13 vessels (including five of which are secondhand), ranging from 3,500 to 5,300 TEUs each, of which two newbuild vessels and all five secondhand vessels were delivered to us, and in March 2022 we announced we have entered into a seven-year charter transaction for six 5,500 TEU wide beam newbuild vessels with MPC Container Ships ASA and MPC Capital AG, of which three vessels were already delivered to us. We expect the rest of the vessels to be delivered to us during the remainder of 2024. See – “Our vessel fleet – Strategic Chartering Agreements”. During the second half of 2021 we have completed the purchase of eight secondhand vessels, ranging from 1,100 to 4,250 TEU, in several separate transactions, for an aggregated amount of $355 million. In February 2024, we completed the acquisition of an additional three secondhand 10,000 TEU vessels and two 8,500 vessels that we already chartered by exercising an option to acquire them for approximately $129 million, so that on March 1, 2024, we owned a total of 14 vessels of our operated fleet, including one vessel we already previously owned prior to these acquisitions. See – “Our vessel fleet”.

In addition to containerized cargo, in an effort to respond to increased demand for car carrier services, and specifically to the increase in vehicle exports from China (and electric and hybrid cars in particular), we also transport vehicles (such as cars, buses and trucks) via dedicated car carrier vessels westbound from Asia, and primarily from China, Japan, South Korea and India. Currently, we charter 16 car carrier vessels and we have expanded the volume and our range of services to include additional calls to ports in Europe, the Mediterranean and South America. Despite the uncertainty caused by the geopolitical situation, the outlook for the car carrier industry remains relatively positive thanks to modest fleet growth in 2023 and slight increase in demand for light vehicles. In 2024 car carrier fleet growth is estimated to be more robust, with an anticipated increase of approximately 6.5% capacity by year end.

We have a highly diverse and global customer base with approximately 32,600 customers (which considers each of our customer entities separately, including in instances where the entity is a subsidiary or branch of another customer, or on a non-consolidated basis) using our services. In 2023, our 10 largest customers represented approximately 13% of our freight revenues and our 50 largest customers represented approximately 28% of our freight revenues. One of the key principles of our business is our customer-centric approach and we strive to offer value-added services designed to attract and retain customers. Our strong reputation, high-quality service offering, and schedule reliability has generated a loyal customer base, with 9 of our 10 top customers in 2023 having a relationship with the Company lasting longer than 10 years.

 

We have focused on developing industry-leading and best in class technologies to support our customers, including improvements in our digital capabilities to enhance both commercial and operational excellence. We use our technology and innovation to power new services, improve our best-in-class customer experience and enhance our productivity and portfolio management. Several recent examples of our digital services include: (i) ZIMonitor, which is an advanced tracking device that provides 24/7 online alerts to support high value cargo; (ii) eZIM, our easy-to-use online booking platform; (iii) eZQuote, a digital tool that allows customers the ability to receive instant quotes with a fixed price and guaranteed terms; (iv) Draft B/L, an online tool that allows export users to view, edit and approve their bill of lading online without speaking with a representative; and (v) ZIMGuard, an artificial intelligence-based internal tool designed to detect possible misdeclarations of dangerous cargo in real-time. Furthermore, we have formed a number of partnerships and collaborations with start-ups for the development of multiple engines of growth which are adjacent to our traditional container shipping business. These technological partnerships and initiatives include: (i) “ZIMARK”, a new initiative in cooperation with Sodyo (in which we made an additional investment in 2022), an early stage scanning technology company, aimed to provide visual identification solutions for the entire logistics sector (inventory management, asset tracking, fleet management, shipping, access control, etc.) This technology is extremely fast and is suitable for multiple types of media; (ii) Our investment in and partnership with WAVE, a leading electronic bill of lading based on blockchain technology, to replace and secure original documents of title; (iii) Our investment in Hoopo Systems Ltd. (“Hoopo”), a provider of cutting edge tracking solutions for unpowered assets, as well as our new agreement to deploy Hoopo’s tracking devices on ZIM’s dry-van container fleet; (iv) Ship4wd, a digital freight forwarding platform offering an online, simple and reliable self-service end to end shipping solution, that is initially targeting small and medium-sized businesses importing and exporting from the US, Canada, the far East and Israel; (v) our investment in Data Science Consulting Group (DSG), a leading technology company specializing in Artificial Intelligence based products, solutions and services, developer of e-volve, a holistic AI governance and decision management system, and our co-creator of a center of excellence for the development of AI tools for the maritime shipping industry; and (vi) 40Seas, an innovative fintech company serving as a platform for cross-border trade financing, in which we have made an equity investment in addition to extending an approximate $100 million credit facility, with an option subject to both parties’ agreement to increase this credit facility up to $200 million. To support and enhance our commercial partnerships and investments in technology companies, we have formed a ZIM team of professionals that specializes in the ecosystem of investing and collaborating with early-stage technology companies, and function as a “corporate venture capital”, or CVC, dedicating a substantial part of their time to such CVC activities. The members of this CVC team support ZIM’s portfolio companies throughout the life cycles of their businesses, starting from identifying promising startups which are synergetic to ZIM’s business, conducting due diligence over potential investments, negotiating investment and commercial agreements with ZIM’s portfolio companies, and supporting them in additional investment and commercial transactions and in their operations, often by holding board membership positions in such companies.

During the second half of 2021 we have completed the purchase transaction of eight secondhand vessels, ranging from 1,100 to 4,250 TEUs each, in several separate transactions, for an aggregated amount of US$ 355 million with all purchased vessels delivered during 2021 and 2022. In February 2024, we completed the acquisition of an additional three 10,000 TEU vessels and two 8,500 TEU vessels that we already chartered by exercising an option to acquire them, so as of March 1, 2024, following these purchases, in addition to one vessel already previously owned by us, we owned 14 vessels in our operated fleet. We may purchase additional secondhand vessels if we evaluate that such purchase is more suited to our needs than other available alternatives.

 

We charter-in vessels under charter party agreements for varying periods. Our charter rates are negotiated and predetermined at the time of entry into the charter party agreement and depend upon market conditions existing at that time. As of December 31, 2023, all of our chartered vessel agreements consist of chartering-in the vessel capacity for a given period of time against a daily charter fee, while the crewing and technical operation of the vessel is handled by its owner, including 3 vessels chartered-in from related parties. Subject to any restrictions in the applicable arrangement, we determine the type and quantity of cargo to be carried as well as the ports of loading and discharging.

 

As of March 1, 2024, our operated fleet included 150 vessels (134 container vessels and 16 vehicle transport vessels), of which 14 vessels are owned by us and 136 vessels are chartered-in. Our owned and chartered container vessels had a capacity of 703,380 TEUs. As of March 1, 2023, this operated fleet included 24 new-build vessels out of a total of 46 new-build modern vessels long term chartered by us, with an additional 22 vessels expected to be delivered to us during 2024. Further, as of March 1, 2024, approximately 74.8% of our chartered-in vessels (84.5% in terms of TEU capacity) are under long-term leases with a remaining charter duration of more than one year, as we continue to actively manage our asset mix.