Container lines set to hit $ 100 billion jackpot

All experts have said ocean spot rates will decline in the second half of the year. The second half has now started. Not only are spot rates not going down, they are continuing to rise.

Much higher than expected H2 spot rates, combined with double-digit gains for contract rates, will equate to line profits on an unprecedented scale.

On Monday, UK consulting firm Drewry predicted that container shipping lines would post total profit before interest and taxes (EBIT) of $ 80 billion this year, and “if freight rates exceed expectations for the rest of the l year, we wouldn’t be surprised to see an annual profit of around $ 100 billion.

It is the opposite mirror of the industry’s past long-term performance.

McKinsey & Co. estimated in a report released in February 2018 that carriers “have destroyed over $ 100 billion in shareholder value in the past 20 years.”

Container lines annual return on investment (ROIC) percentage 1995-2016. WACC = weighted average cost of capital (Chart: McKinsey & Company, February 2018. Sources: Capital IQ, CPAT, McKinsey analysis)

Lars Jensen, CEO of the consultancy firm Vespucci Maritime, commented: “In essence, it can be said that in just one year the industry will have made up for 20 years of losses.

Spot rates continue to rise

The carriers implemented another round of general fare increases (GRIs) on Thursday. GRIs are now arriving every two weeks, with more to be available on July 15. S&P Global Platts’ daily All Kinds Freight Rate (FAK) estimates for the East Asia coast jumped $ 1,000 per forty foot equivalent unit (FEU) on Thursday, the day GRIs hit 8,100 $ per FIRE, a new record. Platts’ FAK Asia-West Coast valuation increased from $ 800 per FIRE that day, to $ 6,600 per FIRE. Platts also noted that the additional charges on top of the FAK base rates have brought some Asia-US all-inclusive rates above $ 20,000 per FEU.

Drewry’s base spot rate estimate is much higher than Platts’ estimate. Drewry’s weekly estimate for Shanghai-Los Angeles rose 7% last week, to $ 9,165 per FEU, with the Shanghai-New York rate up 5% to $ 11,719 per FEU.

Freightos Baltic Daily Index rate assessments reveal how higher spot rates are at the start of the second half of the year compared to what they were in H2 2020 – a period when rates were already extremely strong.

During the first half of the year, transpacific spot rates more than doubled compared to the previous year. At the start of the second half of the year – at a time when the traditional high season has yet to begin – Asia-East Coast rates are 1.9 times higher than they were at the end of last year and 3.9 times higher than at the end of 2019, according to Freightos.

Rates in dollars per FIRE, excluding premiums. Blue line = 2021 YTD. Orange line = full year 2020. Green line = full year 2019. Graphic: FreightWaves SONAR (To learn more about FreightWaves SONAR, Click here.)

Asia-West Coast rates are 52% higher than at the end of last year and 4.7 times higher than rates at the end of 2019.

Rates in dollars per FIRE, excluding premiums. Blue line = 2021 YTD. Green line = full year 2020. Orange line = full year 2019.

Outlook for the second half of the year

“I raise my hand. I was one of those who thought the rates would go down and I wasn’t the only one, ”said George Griffiths, editor of Global Container Freight at S&P Global Platts, in an interview with American Shipper. “I had thought that the rates would go down after the Chinese New Year. Here we are six months later and the rates are still high and increasing.

“I would now be surprised if we saw a significant downside before the end of this year,” Griffiths said.

“The demand we’re seeing right now is totally unprecedented and we haven’t hit peak season yet. Everyone plans well in advance, which is why we are already seeing people loading shipments before Christmas. For the next quarter, we expect rates to stay fairly bullish if they don’t go up further – and certainly not down from where they are now, ”Griffiths said.

Patrik Berglund, CEO of the rate data platform Xeneta, said in an interview with FreightWaves last week: “If you look at what we’re facing right now: a holiday season, a peak season at the start. , hurricane season, Golden Week, inactive tonnage of just 1% down from 10% 12 months ago – I’m having a hard time seeing how that will improve in the short term.

Outlook for 2022 and beyond

Berglund also sees demand exceeding supply in 2022, which is “bad news for the customer”.

Drewry predicts that the EBIT of the container-liners sector will fall by just over a third next year, to a level which still represents an “amazing performance by historical standards”.

Drewry sees a risk on the supply side of increasing orders for new builds for delivery from 2023. However, he added, “Even as carriers are getting back to type and the current craze for new construction ends the cycle of upswing in 2023, they will have made so much money between 2020-22 that they will be in place for years to come. They could potentially make as much profit in that window as they could have hoped for in a decade or more. “

And it is far from certain that new construction will have the same effect on cruise ship earnings as in previous cycles.

Carrier alliances can limit future rate cuts by canceling crossings, known in the industry as “cancel” or “cancel” crossings. Maersk CEO Soren Skou said in his company’s latest quarterly call: “On the backlog issue, what really matters to us is the capacity we deploy versus the demand we have. The number of ships in the world doesn’t really matter. It is the number of ships deployed that counts.

Griffiths said: “Everyone had said this [carrier capacity management] was a pipe dream, but we saw in 2020, at the very start of the pandemic, when demand plummeted, carriers pulled the crossings out of the loops. It is now a proven measure. If carriers understand how to use zero departures, we will eventually see fares go down, but I would be skeptical whether they would go back down to the levels we saw in 2019. ”

As Berglund said, “Yes, it’s a cyclical industry… [but] shipping companies finally know how to make huge sums of money. Why would they allow overcapacity to reproduce? ”

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