It is only a short time since over-capacity was dogging the industry
The supply chain snarl-ups that have led to a hike in shipping rates may be adding to inflationary pressures but they’ve led to bumper profits for the world’s shipping lines.
Container shipping firms stand to make an aggregate profit of about $150bn (£109bn) this year, according to consultancy Drewry. That sum is about $41bn more than their cumulative profits for the preceding 20 years.
Asian shipping lines such as Taiwan’s Evergreen and Yang Ming Marine Transportation (TWN:2609), and South Korea’s HMM (SK: 011200) are making earnings margins in excess of 50 per cent of revenue, according to Nilesh Tiwary, who heads Drewry’s financial research division. Major global shipping lines such as Maersk (DEN:MAERSK-B), Hapag Lloyd (GER:HLAG), Cosco Shipping (CHI:601919) and CMA CGM, which have more multi-year agreements at contracted rates agreed in advance, are making margins of about 30 per cent.
“We’ve seen regulators breathing down their necks for evidence of unethical behaviour and lines are very much on the defensive at the moment,” said Simon Heaney, senior manager of container research at Drewry. “In our view, they are not to blame for this crisis. They’re just the very lucky winners,” he said on a webinar last week.
The shortfall in shipping capacity began as a result of Covid-19 last year. As manufacturing and logistics activity in China slowed in the first quarter of 2020, fears initially grew of a massive decline in trade. However, employment protection and stimulus measures kept millions of people around the world in work (or at least getting paid for it), while lockdowns triggered an online ordering boom that boosted demand for goods shipped from China. Shippers and ports have struggled to keep pace, while one-off incidents such as the temporary blockage of the Suez Canal or closures of Chinese ports due to Covid-19 outbreaks have compounded the problem.
Globally, shipping rates have trebled since the start of the year – to $10,215 per 40ft-equivalent unit (FEU), according to the Freightos Baltic Index. Rates on some of the busiest routes are much higher, though. The cost of shipping between Asia and the US West Coast is up 330 per cent to $16,749 per FEU, while between Asia and northern Europe the increase is 569 per cent, to $14,492.
Ports are a significant part of the problem. Observing social distancing meant working at limited capacity last year and they have now become chokepoints.
Weighing up the problem
Globally, there are currently 649 vessels anchored outside ports waiting to unload, compared with 250 at the start of the year, according to logistics company Kuehne & Nagel (SWI:KNIN). The biggest backlogs are at ports in China, Singapore and at the Ports of Long Beach and Los Angeles in the US. Constraints at the latter led to a price surge that led some lines to reallocate vessels, Erik Devetak, chief product and data officer at Xeneta, a shipping data company said. “If you have a congested port in the States and the prices become incredibly high – right now, people are talking about $20,000 – you’re better off taking a ship that goes to Europe and put it through the loop to the US, even if it’s parked in front of Los Angeles for two weeks. It takes that much longer to go to Europe [so] it’s still more profitable.”
The pressure on ports means shipping lines with delayed schedules unload boxes but often do not wait around to reload empty containers. This means many portside warehouses are overflowing. In the UK, Brexit has also slowed customs clearance and contributed to a shortage of the heavy goods vehicle drivers needed to clear ports. Shipping rates have eased slightly in recent weeks, but it’s difficult to tell whether this is the result of a reduction in demand for durable goods or just a seasonal slowdown, with all deliveries due before Christmas having already set sail, Devetak said. Either way, rates are unlikely to come down significantly until the current congestion clears, he added.
That could take up to 18 months, said Braemar Shipping Services (BMS) chief executive James Gundy. Some companies have chartered dry bulk vessels typically used to transport commodities to ship empty containers back to source markets in Asia in a bid to ease blockages, but this has only served to push up prices in that market. The Baltic Dry Index, which measures the cost of transporting dry bulk goods, is up 241 per cent year-to-date. “We’ve seen no real investment in the dry cargo bulk fleet in the last 10-12 years,” Gurney said.
Reinvesting returns
The shipping lines are using the huge profits they are booking to reinvest, according to Drewry’s Tiwary. An analysis of cash-flow statements of 11 major shipping lines found that of the profits generated since the beginning of last year, they’ve used $43bn to pay down existing debt, compared with $6bn for dividends and $2bn for share buybacks.
They’ve also embarked on mergers and acquisitions, snapping up logistics companies to gain greater control over the delivery of goods to end customers and they’ve spent $2bn on new containers to ensure they can continue shipping goods from the Far East.
They have also opened new credit lines to fund newer, more environmentally friendly fleets. Hamburg-based Hapag Lloyd has raised more than $1.7bn this year in green financing to fund the construction of 12 new ultra large container vessels, each capable of carrying 23,500 twenty foot-equivalent units (teu), with engines that can run on liquefied natural gas as well as conventional shipping fuel. In August, Copenhagen-based Maersk ordered eight large 'carbon neutral' container vessels capable of carrying 16,000 teu that will run on methanol.
A record $37.7bn of orders have been placed by shipping lines in the first nine months of the year, according to Stephen Gordon, managing director of the research arm of shipbroker Clarksons (CKN). Vessels on order will have a capacity of 5.6 million teu, or about 23 per cent of the global total. This is an increase from just 8 per cent a year ago.
Drewry expects its average global shipping rate, which combines the volatile spot rate with longer-term contract rates, to increase by 6 per cent next year. However, all of this additional capacity means rates from 2023 onwards could plunge. For now, the industry seems unconcerned, Heaney said. “They’re going to make three years of unthinkable profits and as such be desensitised to such trifling concerns.”
