Windfall profits, cargo congestion, freight rate inflation, fleet expansion acceleration – welcome to life in the global marine cargo supply chain circa May 2021.
It’s also a continuation of that life from mid-2020, when the sudden spike in transpacific trade caught every link in that chain off-guard after 2020’s first-half pandemic torpedo hit the world’s container cargo fleet.
So in a highly competitive, volatile marketplace that has been suffering from chronic overcapacity issues and cutthroat freight rate erosion, marine cargo carrier life has been pretty good of late.
The container cargo market, according to Simon Heaney, “has never been so hot.”
Spot container shipping rates have jumped 200%; ocean liner company share prices are up 300%, according to the senior manager for container research at U.K.-based marine consultancy Drewry. Container shipping sector annual gross profits are also set to hit approximately US$47 billion.
“You have investors piling in … carrier profits taking off to new heights and you’re seeing asset values rising very steeply,” Heaney said. “Virtually every metric that you look at shows the same vertical trajectory.”
Heaney’s comments were part of Drewry’s May 6 ocean shipping update.
But the flip side of that container carrier bonanza is supply chain management.
Productivity in moving container cargo from ships into the rest of the North American supply chain has been poor for months.
Danish Ship Finance’s most recent shipping market review described the global container market as “bordering on chaos during the fourth quarter of 2020 and into the first quarter of 2021.”
One cargo congestion example given during the Drewry market update noted that door-to-door delivery of a container bound for California’s Port of Long Beach that was shipped from Tianjin, China, had taken 92 days.
As chronicled in previous BIV stories, reasons for the acute cargo congestion at North American ports range from labour shortages caused in part by the pandemic, container scarcity resulting from shipping disruptions in the early part of 2020, lack of warehouse space and bottlenecks up and down the supply chain.
Heaney added that an overall dearth of accurate metrics to monitor supply chain efficiency, container availability and warehousing space is also undermining cargo movement productivity.
He said the average wait time for ships to unload at the Port of Los Angeles is still hovering at around a week.
The ongoing container shortages and port productivity crunch along North America’s West Coast multiply complications and costs for freight forwarders, truckers, shippers and, ultimately, consumers.
“In this environment … carriers are pretty much granted a charter to continue pushing freight rates without too much accountability,” Heaney said. “Which I think is a dangerous situation, and it puts cargo owners obviously in a really tough spot.”
Meanwhile, the consolidation of the ocean carrier sector from around 20 major lines five years ago to 10 that account for 85% of container capacity today has increased shipping capacity discipline and firmed up freight rate integrity.
Alan Murphy, founder and CEO of Denmark-based Sea-Intelligence, said those factors, along with improved shipping and supply chain communication processes, will further insulate the industry from the wild container freight rate fluctuations that at times in the past five years have driven those rates to below cost on the transpacific and other major trade lanes.
“So … I don’t think we’re ever going to get back to below-cost rates, which we saw in 2016.”
Murphy added that the danger for carriers in reaping the COVID marketplace windfall is that it will spark an impulsive surge in mega-container shipbuilding orders that would again tip the supply-demand equilibrium back to overcapacity.
Recipients of the 2020 ocean carrier business windfall, which has picked up momentum in 2021, include the corporate parent of Vancouver’s Seaspan Corp. Atlas Corp. (NYSE:ATCO) recently reported a first-quarter earnings increase of 21.1% to US$238 million compared with Q1 2020. Seaspan generates the lion’s share of those earnings. The world’s largest lessor of container ships has also added a staggering 41 ships to its fleet in less than five months.
A.P. Moller-Maersk (CPH:MAERSK-B), the world’s largest container shipping company, reported Q1 net profit from its ocean division of US$2.7 billion, which was almost equal to its profit for all of 2020.
Forecasts for the rest of 2021 show few signs of the container-shipping bonanza slowing any time soon.
Drewry estimates a 15% increase in container shipping activity for Q2 2021 and an overall upside increase of approximately 10% compared with 2020.
Container shipping sector profit from 2020 through 2022 could hit US$87 billion, according to Nilesh Tiwary, manager of Drewry’s maritime financial research.
And that, he said, “will be completely new territory for the industry if they manage such a profit” because operating earnings for the sector in the five years prior to 2020 were approximately US$13.5 billion.
Seaspan management appears to be little concerned about future overcapacity in the container shipping sector when the market inevitably hits a downturn. Neither is it much worried over the prospects of ocean carriers opting to invest windfall profits in building their own ships rather than lease them.
During Seaspan’s May 4 earnings call, president and CEO Bing Chen said the rapidly expanding company remains confident that the long-term “fundamentals of supply and demand are still healthy.” He pointed to projected increases in global trade over the next three to four years as reasons to remain confident in the stability of those fundamentals.
The International Monetary Fund has forecast global GDP to increase by 5.5% in 2021 and another 4.2% in 2022. •