The Changing Tides of the Shipping Industry

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 and Hapag-Lloyd.

The Unsung Hero of Globalization

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%.

The Underestimated Factor of Postpandemic Inflation

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.

From Boom to Bust

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.”

A Glut of New Ships

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 vs Container Freight: An Industry Overview

The world of shipping is diverse, with both bulk shipping and container freight playing unique roles in transporting commodities. Despite their differences, these sectors have shared a similar trajectory in terms of pricing.

Strategies to Stem Financial Losses in Container Shipping

Container shippers have found ways to alleviate their financial struggles. In the lucrative trans-Pacific routes, three alliances dominate, allowing them to coordinate informally and reduce the number of sailings. By implementing techniques such as "slow steaming," where ships reduce their speed to save on fuel and decrease the frequency of deliveries, vessels can potentially slow down by up to 25%. While this may frustrate customers, it significantly bolsters the financial health of these shippers, as estimated by Rasmussen.

The Influence of Capacity Constraints

McCown succinctly describes this dominant alliance as a "cartel" that understands the consequences when shipping capacity becomes constrained. By strategically managing capacity, they are able to leverage the market conditions to their advantage.

The Arrival of Cost-Efficient Giants

To offset the impending supply surge, shippers are gradually replacing their smaller, fuel-guzzling vessels with larger, more cost-efficient monsters of the deep. These new ships, larger than an aircraft carrier and capable of carrying up to 18,000 20-foot containers, are poised to reshape the industry. McCown explains that shippers traditionally retire approximately 5% of their fleet every year, which will help balance the forthcoming influx of supply.

Turbulent Waters Ahead

Vincent Clerc, CEO of Maersk - a prominent player in the industry - acknowledges the challenges that lie ahead. Although most ship orders are still in the shipyard, he emphasizes that there is a long journey ahead for the industry. Speaking about Maersk's year-over-year earnings before interest, taxes, depreciation, and amortization (EBITDA), which experienced a significant 70% drop in the second quarter of 2023, Clerc states that they must adapt to the new market situation over the next 18 months.

A Silver Lining for the Global Economy

While this news may be unfortunate for companies like Maersk and its competitors, it offers hope to the wider world. As we eagerly await a decrease in inflation and central banks' rate cuts to prevent recessions, the cooling of shipping costs provides some respite. Powell, Lagarde & Co. can find solace in this temporary relief.