The cost of shipping containers from China to northern Europe has fallen by two-thirds this year – but the shipping giants have potentially mistimed capital purchases yet again
The great freight rate rise, which saw the cost of shipping containers soar more than 10-fold on major trade routes, is now unwinding with as much momentum as it began. Importers the world over will be celebrating as one cost pressure dissipates, but the shipping industry is now scrambling to manage an influx of new ships just as demand drops off.
The cost of shipping a 40 foot (ft) container from China to the US West Coast has dropped by 84 per cent since the start of April to $2,470 (£2,154), according to the Freightos Baltic Index. The rate is 86 per cent lower than the same period last year, but still 80 per cent higher than in October 2019, before the onset of the pandemic.
Shipping containers prices for routes between China and northern Europe began their decline in January, inflation concerns having pricked the demand bubble somewhat earlier on this side of the Atlantic, Freightos’ head of research Judah Levine said.
The rate for shipping a 40ft container to Europe has dropped by two-thirds on both a year-to-date and 12-month basis, to $4,861. This is, however, still around three and-a-half times higher than pre-pandemic levels.
“We’re definitely seeing the beginning of the big unwind,” Levine said, arguing that the hit to disposable incomes from higher inflation is one factor and the shift in spending from goods to services is another. Moreover, as lower demand leads to a decline in the volume of goods being shipped, the congestion issue that has dogged major ports around the world has eased, freeing up more vessels. This additional capacity is placing further downward pressure on rates even during the peak pre-Christmas shipping season, with September rates lower than those in July for the first time in five years.
In January, just under 14 per cent of the global container shipping fleet by capacity was stuck outside ports, according to Emily Stausboll, a market analyst at shipping data firm Xeneta.
“That’s fallen to just over 8 per cent now,” Stausboll said.
Prior to the pandemic, only around 3 per cent of the container fleet was typically held up at ports due to congestion, she added.
Contract rates – those agreed with larger customers typically covering 12-month periods – are also in decline, although these typically lag spot rates. A Xeneta index tracking contract rates from China to Europe recorded its biggest ever month-on-month drop of 8.3 per cent in October, although it is still 64 per cent higher than in January 2022.
The perfect storm
Little wonder, then, that container lines remain on track to record huge profits this year – the world’s most profitable line, Maersk (DK:MAERSK.B), is forecasting earnings before interest and tax of $31bn this year, a 57 per cent increase on the $19.7bn earned last year. The FactSet consensus forecast for Hapag Lloyd (DE:HLAG) is for Ebit growth of 83 per cent this year to €17.2bn (£14.8bn).
Combined, the world’s biggest container shipping lines have made over $400bn of Ebit since mid-2020 and are on track to earn $275bn this year alone, shipping consultancy Drewry said. This figure is forecast to fall back to $100bn in 2023.
Armed with excess capital, shipping lines have gone on a buying spree, ordering scores of new vessels.
Ships with a combined capacity to carry 2.6mn 20ft-equivalent container units (TEU) are due to be delivered to customers next year, which would represent a 34 per cent year-on-year increase, according to Drewry.
However, with demand only forecast to grow by a meagre 1.9 per cent, this is likely to place extreme pressure on rates. Simon Heaney, Drewry’s senior manager of container research, said the big container lines are likely to pull a number of levers to limit supply growth.
The easiest would be to delay deliveries. Shipyards hardly ever deliver 100 per cent of vessels on time – between 2008-2020 they only ever exceeded a rate of 90 per cent on three occasions. In June, Drewry was forecasting a delivery rate of 88 per cent next year, but it recently scaled this back to 60 per cent.
Another is to send older, less fuel-efficient ships to be broken up. Drewry expects about 600,000 TEU, or around 2.5 per cent of the existing fleet, to be scrapped – the second-highest figure on record.
“After years of almost zero demolitions we believe it’s going to come back with quite a bang in 2023,” Heaney said.
More ships are also likely to be sent into dry docks for repair and maintenance work.
But even after all of these measures are taken, though, capacity will increase by 11 per cent next year, according to the firm’s forecasts.
Stephen Gordon, managing director of the research arm of shipbroker Clarksons (CKN), doesn’t think the net increase in supply will be overwhelming but he agrees it will be elevated – at 7.3 per cent, supply will grow at almost double the 3.7 per cent rate of increase over the past three years, he said. He expects a record 2mn TEU to be delivered next year, rising to 2.5mn TEU in 2024.
“The only thing that scares me more than a shipping line without money is a line with money,” said Alan Murphy, founder and chief executive of research and advisory firm Sea-Intelligence.
Although the number of global container shipping lines has halved in recent years and the sector has consolidated, Murphy fears they’re making the same mistakes again.
Shipping lines have a history of boom and bust, spending on new vessels when times are good only for them to sink fast once the market has turned.
“I’m on the record six months ago as saying the shipping lines have learnt their lesson [and] they’re not going to destroy their own market, but they are,” he added.
Mutiny on the bounty
Some politicians have accused the lines of anti-competitive behaviour in a bid to keep profits artificially inflated.
In March, US Democratic senator Elizabeth Warren wrote to the nine major shipping firms that form the three big global alliances – 2M, Ocean Alliance and THE Alliance – arguing they had taken advantage of anti-trust exemptions “to protect their price-setting power”.
Murphy is sceptical, though – although he thinks shipping lines took full advantage of post-pandemic shortages by hiking surcharges, this wasn’t a crisis of their making, he argued. The clogging of supply chains were due at least in part to a lack of resilience in inland infrastructure in the US, which couldn’t cope with fairly modest increases in demand for goods, he said.
Moreover, the current slump in pricing shows shipping lines “don’t have the power through the alliances to set market rates”.
Drewry’s Heaney thinks carriers “have waited too long to stop the rot and unquestionably have ceded bargaining power to ascendent shippers” during the next round of long-term contract negotiations.
“Rates, even though falling, were just too tempting to turn down,” he said. “In our view, the groupthink among carriers has been to milk those profits for as long as possible.”
The decline not only in rates but in volumes means that importers should be in for an easier ride this Christmas. Halfords (HFD), which struggled to source enough bikes last year, reported “good availability across the group” with stock levels in line with expectations, it said in a September trading update.
Sandy Chadha, chief executive of Supreme (SUP), an Aim-traded manufacturer and distributor of staples such as batteries, bulbs and vaping equipment, said “everything seems to be a lot smoother and easier” this year.
Last year, the company had to scramble and move goods by air and rail as vessels filled. This year, the rates it is being quoted have come down by about 80 per cent, although the depreciation of the pound against the dollar means imports are generally around 20 per cent more expensive, he said.
One tool the container lines are already employing is an increase in ‘blanked’ sailings, or the cancellation of a scheduled sailing to make sure that vessels continue to leave Far Eastern ports fully laden. This is important, as lines typically need utilisation rates above 90 per cent to remain profitable, Murphy said.
However, the increased scrutiny the industry faces after years of excess profits means this is a tool to be used with caution.
“Any whiff that carriers are curbing potential trade and doing damage to national economies for their own benefit is going to be pounced upon,” Heaney said.
