A Freight Glut Is Coming. Shippers Are in for a Long Haul.
Remember the supply-chain snarls? Cargo ships anchored for weeks outside the ports of Long Beach and Rotterdam?
That all seems so 2021 now—not least to the shareholders of big shipping companies such as A.P. Moeller-Maersk (ticker: MAERSKA.Denmark) and Hapag-Lloyd (HLAG.Germany).
Oceangoing container freight is an unsung hero of the globalization age. Before its invention in 1956, shipping could account for half or more of the price of international goods, says John McCown, a senior fellow at the U.S. Center for Maritime Security. Today it’s more like 2%.
Shipping costs were also an underestimated factor in postpandemic inflation. Container rates jumped sevenfold in the 18 months prior to September 2021, which notionally added 1.5 percentage points to global inflation in 2022, according to the International Monetary Fund. Not a small number.
Shippers’ bottom lines and stock prices rode the boom. “The industry made unfantasized-about profits,” McCown says.
The bust followed just as swiftly. Rates are back down to 2019 levels. Maersk shares have fallen 40% from a peak in January 2022.
Worse is probably yet to come, with durable goods spending flattening in the U.S. and Europe and merchants looking to unload inventories before placing fresh orders to Asia. China’s exports plunged more than 14% in July from a year ago.
“The destocking cycle will go on into Q1 or Q2 of next year,” says Sathish Sivakumar, head of European transport research at Citi. “That means more downside in freight rates.”
Panama Canal’s Jam
The industry gave way to irrational exuberance during its boomlet, commissioning new ships on an unprecedented scale. Vessels on order will add 30% to global container freight capacity over the next three to four years, says Niels Rasmussen, chief shipping analyst at Copenhagen-based trade group Bimco. Two privately owned companies, Swiss-based Mediterranean Shipping Company and CMA CGM in France led the extravagance—but everyone will struggle with the glut.
Bulk shipping, which carries commodities, boasts a different cast of characters than container freight. Price trajectories have been similar.
Container shippers do have ways to staunch their financial bleeding. The lucrative trans-Pacific routes are dominated by three alliances, which can informally coordinate on trimming the number of sailings or “slow steaming,” reducing ships’ speed to save on fuel and cut the frequency of deliveries. Vessels could slow down by up to 25%, infuriating customers but bolstering finances, Rasmussen estimates.
“It’s a cartel that has great appreciation for what can happen when capacity becomes constrained,” McCown summarizes.
Most of the new ships in the pipeline are cost-efficient monsters of the deep, larger than an aircraft carrier and carrying up to 18,000 20-foot containers. They’ll replace smaller, fuel-guzzling craft. Shippers normally mothball 5% of their fleet every year, offsetting the coming supply bulge, McCown says.
Still, no less an authority than Maersk CEO Vincent Clerc sees choppy seas ahead. “Most of the orders are still in the shipyard, so we have a long haul in front of us,” he told journalists while reporting a 70% drop in year-over-year earnings before interest, taxes, depreciation, and amortization, or Ebitda, for the second quarter of 2023. “We will need to adapt to the new market situation over the next 18 months.”
Bad news for Maersk and its competitors is good news for most of the world, which waits with bated breath for inflation to fall and central banks to cut rates before they cause recessions. Powell, Lagarde & Co. can at least count shipping costs as cooled for a while yet.