Shipping stocks start to sink

Softer demand and a big increase in capacity mean that 2024 is “shaping up to be a car crash” for the container shipping industry, commentators have warned. Consultancy Drewry has forecast a 93 per cent decline in operating profit for the industry this year, falling to $20bn (£16.3bn) compared with $296bn last year.

Next year will be even worse, as growth in capacity could push rates so low that shippers record a collective loss of around $15bn, Drewry’s head of research Simon Heaney said. Carriers’ average margin fell to 14.4 per cent in the second quarter of this year, compared with 55 per cent a year ago, he added.

This has knocked $135bn (£111bn) off the valuation of the 11 biggest listed shipping lines in the past 18 months, according to research company Alphaliner. There are now just three companies with a market cap of more than $10bn, compared with seven in May last year.

A.P. Møller - Mærsk (MAERSK.B), the second-biggest shipping line by market cap, announced plans to cut 10,000 jobs and bring its workforce below 100,000 after its third-quarter operating profit dropped by 94 per cent to £538mn. It also cut capital spending and said it would review its share buyback programme. “Since the summer, we have seen overcapacity across most regions,” chief executive Vincent Clerc said. “Given the challenging times ahead, we accelerated several cost and cash containment measures to safeguard our financial performance.”

The company is forecasting a decline in volumes of between 0.5 per cent and 2 per cent for the final quarter of the year, which would mean its ocean division would suffer an operating loss of around $1bn for the period, UBS analysts said. Maersk's shares have dropped in value by around 23 per cent since the start of the year. 

Rate expectations

The rate for shipping a 40-foot-equivalent container unit (FEU) from China to northern Europe has slumped to $1,055, but cost more than $5,000 a year ago and $15,000 in late 2021, according to Freightos – a global e-booking and payment platform. Although current rates on this trade lane are just 5 per cent below pre-pandemic norms, the subsequent capacity increase has meant many lines are already operating in loss-making territory and will struggle to implement planned rate increases, the company said.

Global port throughput has now fallen into negative territory for only the third time since records began in 1979, according to Heaney. On the previous two occasions (in 2009, after the global financial crisis, and in 2020 during the pandemic) demand roared back in the following year but “the hangover from the pandemic and a fragile global economic recovery that has skewed towards services”  [rather than goods] has meant this looks less likely next year.

Although container traffic grew at a rate of about three times gross domestic product (GDP) between 2000 and 2009 as manufacturers outsourced more production to China, the unwinding of that trend and a greater role for services has meant container traffic growth is likely to undershoot GDP over the next four years, Drewry predicted.

“This prolonged period of low to no demand growth... couldn’t have come at a worse time from a carrier perspective”, given the huge amount of investment they have poured into upgrading their fleet, Heaney said.

The scale of purchases has been huge – the order book for ships currently stands at 27 per cent of fleet capacity, having peaked at 30 per cent earlier this year, according to Stephen Gordon, managing director at Clarksons Research.

The recent decline is because ships ordered a couple of years ago are now coming into service. In the first nine months of this year, container ship fleet capacity has grown by 5.7 per cent and could reach as high as 6.9 per cent by the year-end, Gordon said. He has forecast a similar level of capacity growth next year when deliveries peak, and a further 5 per cent growth is expected in 2025.

In capacity terms, more than 2mn twenty-foot-equivalent units (TEU) will be added this year, around double the historic average, according to Freightos’ head of research, Judah Levine. Next year, three million TEUs will be added. Not all of this will actually come into service, though, as shipping lines are using several techniques to try to limit the supply-demand imbalance.

One method has been to push back ship deliveries – Heaney thinks that shipowners will only take delivery of four-fifths of vessels scheduled for arrival over the next few years.

“This prolonged period of low to no demand growth... couldn’t have come at a worse time from a carrier perspective”, given the huge amount of investment they have poured into upgrading their fleet, Heaney said.

The scale of purchases has been huge – the order book for ships currently stands at 27 per cent of fleet capacity, having peaked at 30 per cent earlier this year, according to Stephen Gordon, managing director at Clarksons Research.

The recent decline is due to the fact that ships ordered a couple of years ago are now coming into service. In the first nine months of this year, container ship fleet capacity has grown by 5.7 per cent and could reach as high as 6.9 per cent by the year-end, Gordon said. He has forecast a similar level of capacity growth next year when deliveries peak, although a further 5 per cent growth is expected in 2025.

In capacity terms, more than 2mn 20-foot-equivalent units (TEU) will be added this year, around double the historic average, according to Freightos’ head of research, Judah Levine. Next year, three million TEUs will be added. Not all of this will actually come into service, though, as shipping lines are using several techniques to try to limit the supply-demand imbalance.

One method has been to push back ship deliveries – Heaney thinks that shipowners will only take delivery of four-fifths of vessels scheduled for arrival over the next few years.

Binned liners

Another is scrapping older vessels, something analysts were forecasting would step up this year but has yet to materialise. Drewry expects 150,000 TEU of capacity to be demolished this year, and for this to increase fourfold to 600,000 next year.

Scrapping ships has not been as easy because of the changing nature of fleets, Levine said. Many new ships coming into service are much larger and will be deployed on the busiest routes, which should lead to a “cascading” of older vessels onto quieter lanes.

“But if the demand isn’t there, it makes it more difficult to move larger ships into second-tier lanes, and some of the smallest vessels are the oldest ones,” he added.

A third way is to let ships idle. Although Maersk’s Clerc argued that there has been “no noticeable uptick in ship recycling or idling” so far, Alphaliner figures suggested that there were more ships being parked up towards the end of the quarter.

As of 9 October, some 315 ships with a capacity of 1.18mn TEU were deemed inactive, around 4.3 per cent of the container ship fleet. This was a 20 per cent increase in idled capacity in a period of just two weeks.

The problem for container lines is that idling is expensive as the vessels are not built to be turned off, says Alan Murphy, managing director of Sea Intelligence. “Once you turn them off, it’s three months and a couple of million dollars to turn them on again. You can lay them up for six months outside of Singapore and keep the engines running... but that’s still very costly,” he added. “And you’re paying the entire bill, and everybody else reaps the reward to the same degree as you. And that’s the problem. Nobody wants to be the fool that’s paying for everybody else’s party,” Murphy said.

Given current delivery schedules, he does not expect demand to meet rising supply levels until 2028. “We would need to see 10, probably close to 15 per cent of the global fleet laid up,” he said.

Liners are also slowing sailing speeds as a way of removing capacity and enforcing more so-called “blanked sailings”, where scheduled sailings are removed and one service is rolled into two to ensure that vessels remain filled. “We anticipate that blank sailings will be a regular feature, as they have been for quite a while now,” Drewry’s Heaney said.

However, given the added scrutiny that carriers now find themselves under from both sides of the Atlantic, “carriers are perhaps unsure about what they can and can’t get away with in terms of blank sailings,” he said.

The US passed a law to increase oversight of shipping liners last year given the excess profits made during the past two years and the European Union scrapped shipping liners’ exemption from antitrust rules last month.

However, one reason for this move is that the new rules are limited – they don't cover the 'big three' alliances run by the nine biggest shipping lines, for instance – so the impact of this move is likely to be limited, Heaney argued.

Moreover, the charge that shippers exert undue control over pricing is weakened by the fact that freight rates are now plummeting to levels where liners are once again losing money, Murphy argued.

“I do believe it’s a relatively competitive market and I don’t see there’s any strong arguments for collusion.”