Remember the chaotic scenes at the ports of Long Beach and Rotterdam, with cargo ships stranded for weeks? That was so 2021. However, those memories linger for shareholders of major shipping companies like A.P. Moeller-Maersk and Hapag-Lloyd.
Oceangoing container freight is an unsung hero of globalization. Historically, shipping could account for more than half of the price of international goods. But with the invention of containerized shipping in 1956, that figure dropped dramatically to just 2% today, according to John McCown, a senior fellow at the U.S. Center for Maritime Security.
The recent surge in shipping costs has also played a significant role in post-pandemic inflation. Container rates skyrocketed by seven times in the 18 months leading up to September 2021, contributing 1.5 percentage points to global inflation in 2022, as reported by the International Monetary Fund.
These circumstances proved extremely lucrative for the shipping industry, which experienced unprecedented profits during the boom. However, this period of prosperity was short-lived, as rates quickly returned to 2019 levels and companies like Maersk saw their shares tumble 40% from their January 2022 peak.
Unfortunately, the worst may be yet to come, as durable goods spending levels off in both the United States and Europe. In efforts to reduce inventories before ordering new goods from Asia, merchants are anticipating a slowdown. This is evident in China’s year-on-year export decline of more than 14% in July.
Sathish Sivakumar, head of European transport research at Citi, predicts that the destocking cycle will continue into the first or second quarter of next year, resulting in further declines in freight rates.
During the boom, the industry succumbed to irrational exuberance and overcommissioned new ships on an unprecedented scale. In the following three to four years, vessels currently on order will increase global container freight capacity by 30%, says Niels Rasmussen, chief shipping analyst at Copenhagen-based trade group Bimco. While Swiss-based Mediterranean Shipping Company and CMA CGM in France were the leading contributors to this extravagance, all players in the industry will struggle to cope with the looming glut.
Clearly, the once prosperous shipping industry is facing turbulent waters ahead.
Bulk Shipping Faces Similar Challenges as Container Freight
Bulk shipping and container freight may have different characteristics, but they share similar challenges in terms of pricing. The trajectory of prices has followed a similar pattern for both sectors.
Strategies to Combat Financial Losses
Container shippers have devised ways to mitigate their financial losses. In the lucrative trans-Pacific routes, three alliances dominate and are known to coordinate informally. One way they can reduce costs is by trimming the number of sailings or implementing “slow steaming” measures. This involves reducing the speed of ships to save on fuel and decrease the frequency of deliveries. According to estimates by Rasmussen, vessels could potentially slow down by up to 25%. While this might frustrate customers, it can significantly strengthen the companies’ finances.
Understanding the Power of Capacity Constraints
McCown sums up these alliances as a “cartel” that highly acknowledges the impact of limited capacity. When capacity becomes constrained, it has the potential to drive up prices and create more favorable market conditions.
The Rise of Cost-Efficient Vessels
To address fuel consumption and gain cost efficiencies, most companies have invested in new ships that are significantly larger than aircraft carriers. These massive vessels can carry up to 18,000 20-foot containers and are considered more economically viable than their smaller counterparts. As part of their fleet management strategy, shippers usually retire around 5% of their fleet each year, which helps counterbalance the upcoming surge in supply.
Challenging Times Ahead
Despite these measures, the CEO of Maersk, Vincent Clerc, remains cautious about future challenges. Clerc emphasized that most of the new ship orders are still in the shipyard, indicating a long road ahead for the industry. Maersk reported a significant decline of 70% in year-over-year earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second quarter of 2023. Clerc believes that the industry will need to adapt to the new market situation within the next 18 months.
While the situation may be unfavorable for Maersk and its competitors, it brings some relief to the global economy. The world anxiously awaits a decrease in inflation rates and central banks cutting interest rates to prevent recessions. Fortunately, shipping costs remain relatively stable for the time being, giving policymakers like Powell and Lagarde one less concern to address.